Kitty Ussher is the Chief Economist at the Institute of Directors (IoD). What's her view on the payment culture in UK companies and how it affects businesses and the broader economy in the UK? 

In the latest edition of Good Business Pays TV, Terry Corby interviews Kitty about the IoD's views on payment culture, as well as the role Directors, Boards and the Government have in ensuring fair payment practices.
For more information, including company payment data, resources and campaign information, visit goodbusinesspays.com

Well, hello and welcome to Good Business Pays TV, where we talk to leaders of business about fast payment, and we also talk to leaders of the major business organisations about their views on payment culture.

And we are lucky to have with us today Kitty Usher, who is the Chief Economist for the Institute of Directors.

So, Institute of Directors, we may all think we know what it is and what it does, but could you tell us a bit about the IOD and then also about your role at the organisation, please?

Yes, well, the IOD has been around a long time.

We're formed by Royal Charter that was granted way back in

and we're a membership body for business leaders, typically directors of businesses.

But what isn't always understood is that those business leaders actually aren't necessarily of sort of FTSE

companies, global companies, although we do represent some individuals who operate at that level.

But typically they're running smaller businesses all the way from sole traders, which represent maybe

of our membership, all the way through to larger companies employing hundreds of people with turnovers in the definitely the 10, sometimes hundreds of millions.

The average member of the IOD is probably running a medium-sized business that's unlikely to be publicly listed, although some of them are perhaps listed on AIM, and it's across all sectors of the economy and all regions of the United Kingdom and nations of the United Kingdom.

And we also have in some parts of the world a growing international membership as well.

Final thing to say is that our members join us individually.

So it's not sort of corporate memberships And they mainly join for support in their own professional development.

We offer a very broad range of trainings, sort of CPD support for those people who want to get better at running their own firms.

And we're also a national area, a center of expertise for corporate governance issues.

So how to get your board structures right and make sure that your company is as resilient as possible.

And I work in the policy team because we also have a role to represent the views of our membership to government and also the other way around to make sure that our members, you know, have the best possible chance to interpret what on earth is going on at a national level in Whitehall and also in the economy as a whole.

And what are the sort of, we used to sort of say when I was in consulting, what are the things that keep these people awake at night?

What are the top issues for those people that are your members in these medium-sized companies especially?

Yeah we have a pretty good market research tool if I say so myself and we're really proud of our ability to sort of understand what the pain points are and what our members are exercised about.

At the moment, and it's been pretty consistent for the last year or so, there's 3 main themes that are emerging.

1 is just general concern about the business environment, the UK economy, which is understandable given the shocks and disturbances that we've seen in recent years.

Second is, well second and third, our cost of energy, obviously since the wholesale market price of energy has soared coming out of the pandemic.

And also skills shortages, our members of course finding it really, really hard and still do find it really hard to get the talent that they need.

So those 3 issues have been the sort of top 3 pain points recently.

After that you get you know very important but perhaps usual concerns around the level of taxation and compliance and regulation costs, the sort of red tape issues.

And then underneath that there are some really important issues around infrastructure and access to finance.

And, you know, perhaps relevant to this conversation, we do track difficulty obtaining payment, which is an important enough issue to be measurable.

But in terms of list of priorities, I wouldn't say it's top, although obviously there are individual concerns that affect individual firms at different times.

Yeah I would say I suppose cash flow is sort of the oxygen for every business isn't it really and payments and late payments and slow payments, which is the bit that we try and speed up at Good Business Pays, isn't a top issue.

It kind of underpins a lot of other things like, you know, the cost of doing business, especially for those middle companies.

We often hear it could be the medium sized companies that are squeezed in the middle between a large company that they're supplying and smaller suppliers that are supplying them.

That gap, the gap, cash flow gap between stuff they have to buy and produce and sell on sometimes and when they get paid for that.

Do you hear that at all, those companies in the middle?

Of course, and you're absolutely right, you can't run a business at all if you haven't got cash coming in.

So you know the fact that it's not the top pain point doesn't mean that it's not essential for business as usual.

In terms of who's getting squeezed by what, I mean to the extent the larger firms are paying more slowly than suppliers, smaller suppliers are expecting to get paid and you know desperately need to get get get paid fast of course there's an issue there.

Well-run businesses who have got used to the kind of rhythm of what they can expect from which customers and clients at what time, obviously will be able to manage that.

The difficulty comes is if there's a sharp change in what you're expecting because then obviously that throws out your cash flow planning and you know the longer the payment terms obviously the risk of that increases.

Now payment culture which is something that we talk about, is, we think, determined by the directors of companies.

But how do you think Well, first of all, the first question, I guess, is what do you understand?

Do you understand the term payment culture, or what do you understand by the term payment culture which is something that we talk about is there such a thing and that if there is such a thing as payment culture how do you think it happens?

Well I think particularly larger firms face a business decision as to what their policy will be around payment terms.

Obviously, it's not illegal to have longer payment terms, so they do face a choice.

So they want to decide whether to sign up to the prompt payment code, for example, whether they want to be the type of organization who think it's core to their values, I guess, to pay fast, or whether that's not a concern and they're simply continually maximizing the individual sort of advantage, contract by contract to their own business.

So I mean, payment culture, I guess, encompasses all of that.

You make a choice about to what extent you're going to behave in a certain way.

And of course that is a business choice, but I think increasingly, and this is a tribute to the work that good business pays and others have done, it is at least a conscious decision, I think.

And there are issues of, you know, supplier management policy and reputational risk that do come into the balance and not just reputational risk in the public arena, which I'm sure we'll come on to talking about, but also just within the industry, whether a firm has a reputation of being a good payer or a bad payer is increasingly a business concern.

In fact, probably always has been a business concern as well as, you know, that a paying company needs to take account of because sometimes people have a choice who they decide to contract with and it will be relevant.

Yes, and we often talk about slow payment, which is, you're right, It's not illegal to have a 90 or 120 day payment.

And companies can accept those terms if they want to.

What what is also worrying is late payment.

Even if you've signed a 90 day payment contract, if it's not there on the 91st day you're then into late payment and that isn't hopefully a matter of choice yeah maybe it's bad systems or something broken in the system but 1 in 4 invoices in large companies are paid late.

If you've seen that figure, but that's 25% of a large company's invoices, which would be thousands of invoices a week, has a lot of money and a lot of suppliers waiting for payment.

Well, you're the expert on the actual data but that would sound very worrying and particularly since that's outside the contract terms presumably and it would seem to me that that perhaps takes advantage of the fact that the cost to a smaller supplier to actually take a case is so prohibitive that in everyday business larger companies can sort of get away with not paying on time and therefore maximizing their own cash flow.

What I thought was particularly interesting in the early months of the pandemic was quite how much of a problem that became just for a short period of time, because presumably, I mean it's quite rational in a sense for everybody to try and hoard cash in an extraordinary crisis situation.

But that I think just shows how much discretionary ability particularly larger firms have to decide not to pay, even though they know it's against the contract terms that they've already signed for their own short-term business interests.

Thankfully that then did unwind as things settled, but it shows that there is the potential to cause real harm and make a conscious choice to do so.

Yes and we've now got the benefit of course with the, I think it was 2017 that the payment performance regulations came in, we've got the benefit of 5, 6 years almost of payment reports.

We don't actually see a huge difference in behaviour over time.

If you look at individual companies, what we see is if there is a big change, an external change, which might be leadership, ownership, an intervention from an organization, perhaps like ours, that's called them out in the in the newspaper or something, then there's a change.

But apart from that, there isn't a lot of change.

Good ones tend to remain good, which is where we come back to payment culture, and of course, the role of directors, because ultimately, it is the people at the top, the CFO and sometimes the CEO, that kind of makes that decision, you know, somebody decides in an organisation.

Yes, it does appear to be a business choice.

And I'm really glad that you mentioned the payment publication regulations from 2017, which are hugely welcome, because it gives those smaller suppliers who we predominantly represent I guess the ability at least to have to check on a client or a potential client and sort of work out what payment culture they're therefore dealing with which helps them to plan and make their own choices.

There are fundamental problems though, and I think you've sort of touched on this in the question that you're asking.

The first 1 is that there isn't high enough awareness of that service.

Our data shows that less than 10% of our members even heard of it and so obviously you haven't heard of it you're not going to check it.

But secondly the ability of a smaller company to take on a larger company who have a sort of systematic policy that isn't as good as it should be, we might say, not best practice, is extremely limited.

And that's now evidence, we now have the paper trail for that, because there hasn't been a shift in the average time taken to pay since more visibility was enabled through these new regulations.

I think the government's own data shows the average time taken to pay has remained stable at 37 days in aggregate, if you had to sort of pick 1 data point to describe the whole situation.

And that hasn't changed, even though there's been more visibility.

So there's something, you know, you can see that they've kind of got the kind of germ of a good idea in increasing accessibility of the data but it's not really exercising the power that it could and so you know we have a number of ways that that we think the power of that data can be used more effectively to spur change so that you know despite the wonderful work that organizations like Good Business Pays and other campaign groups are doing, it won't need you to do it because the system itself will generate that type of pressure and in particularly using the media I think to call out slow payers would be really effective.

And I think that the other I suppose slightly worrying statistic is that since 2017 when the reporting system was put in place, there were 10,000 companies, according to Bayes, that should be reporting.

And around 9,000 have reported during that time, 9,000 out of the 10,000.

But today, only a little over 5000 reported.

So what we're seeing is a trailing off of larger organizations even bothering to report, in part because no one's ever kind of gone to prison if you like for breaking the statutory rule of actually reporting their figures in the first place.

Nothing happens with the figures, no one's going to chase after us, so nothing happens and we won't bother.

Very worrying and an extremely important point.

It's all very well regulating and making it illegal not to do something but then if you don't follow up and enforce, what's the point frankly?

On that point then, so what, I know you've made a number of recommendations to the government around the proposed changes or strengthening 1 might call that of the current regulations but there's a there's a sort of balance of scales 1 being I suppose enforcement and the other 1 being encouragement, right, so the sort of carrot and the stick approach to making change happen, because what we're talking about here is a cultural change, a behaviour change.

I'm not sure I'd characterise it like that actually.

I think if you have a regulation that requires anyone to do anything, including companies, and that's then law.

So if to the extent that that is not being complied with, then the government needs to enforce it, and that's a kind of hygiene factor, I think.

So there needs to be sufficient investment, And I can't see it's a massive investment on the scale of everything government does to do some kind of cross-check to make sure that all those firms that are in scope are indeed reporting.

And then presumably there's penalties laid out in the regulations for those that don't.

So that will, if that was done, that would probably have quite a quick impact.

I think the second question, which I don't think is a balance against that, is about encouragement and using the power of that data.

And I think this can be done with a relatively modest investment into the actual website and the actual data that's produced.

So now, A, if you know the website exists, you can go and type in the name of your client or potential client, and it'll produce a sort of list of reports, which you then have to sort of click several times to get through and try and work out what it is and has there been an improvement and what does that actually mean for me, which is quite onerous if you're trying to run a small business, particularly since you don't know it exists.

So a relatively small investment to produce something much more sort of media accessible so that the company feels the pressure without the small business having to do anything, I think would be hugely impactful.

So what we've asked for is that government should produce a sort of top 10 ranking of best payers and worst payers and that that should be routinely released to the media and therefore discussed in Parliament.

And this aggregate figure that's been sort of stuck at 37 days should also be routinely updated, say twice a year, so that the democratic system can hold ministers to account and say, you know, why is it still 37?

That means there's a large number of people who are paying more slowly than that.

And then there are some, so those 2 things we think would have a massive impact without those company leaders that we represent actually having to do anything because you'll get it the front page of the mirror or whatever you know here's the bad pay as well or at least the business pages and that will have an immediate effect in the boardroom without anyone having to know where the website is apart from the journalists.

And I think then there's a sort of second tier improvements to the type of data that needs to be reported, in particular reporting on the value of contracts that are paid more slowly or outside contract terms.

Because at the moment, you could game the system.

So if you're a large company and you have, say, a large number of relatively small invoices and then a couple of really big chunky ones, you could pay all the small ones really quickly.

And that would massage your data response.

But actually, in terms of value, you're not really behaving responsibly and so if you were if there was more information on value versus volume I think that would be useful as well for smaller firms.

So none of this really costs a huge amount of money and it doesn't require legislation, it just requires a determination by government to really get the most out of the process they've already started to get greater visibility.

Yeah, it's really good actually, good, good thinking.

As an economist as well, I'm interested in your view of, we did a report called Who Cares?

And what we were interested in is companies that have hit the buffers that have failed.

So some of those big retail chains like Topman and Wallace and Debenhams and then Flybee, Midas Construction, big companies that have gone west, if you like.

And what we wanted to do was we wanted to look at the payment performance of those companies in the 3 years before they folded.

And in that report, Who Cares?, which is free to download on our website, he says plugging it, you can see that each of those companies was paying almost twice as long as their competitors who still exist.

And in the last 6 months to a year, you see a sort of hockey stick jump up where payment times get even longer.

So, we pull the black box out of the sea, if you like, and say, what happened there?

And so, we see bad behavior, bad payment behavior and culture in companies that are failing.

And so, I'm just wondering now, Do we look at those companies that are taking a long time to pay and that are paying late now and say to small businesses, be careful, check the credit reference agency of this large company that you might want to sign a contract with?

Well, I mean, it's up to anyone to say that.

What I wouldn't want to do is create a situation that actually precipitates a sort of run on the bank type problem with a firm by having unfair rumors circulating, if actually it's just an issue of internal payment culture that can be fixed.

But I think what your research has done is highlighted something extremely interesting in that you know there does seem to sometimes be a correlation between paying more slowly and being in severe financial difficulty which of course makes logical sense.

So I mean I see no, as an economist, I see no issue with that information not being in the public domain because it does give perhaps a red flag to those who then want to enter into effectively credit arrangements with these firms.

Of course, what it might mean is that it sort of condenses the sort of internal crisis period or internal concern period because it becomes more public more quickly.

But that in itself might incentivize others to kind of get this under control.

So I think you've raised a sort of interesting correlation and we've joked in the past I know about how if you were a hedge fund you might want to be very very aware of what's going on in some firms using this data set.

And so there's no particular reason why it shouldn't be out there so that other companies can make their own choices?

I think the other question I wanted to ask, particularly given your role at the IOD, is that what we have found is that when we go to the very top of a company, to the CEO, and we're currently about to publish the late and slow list for September, the late and slow watch list.

So that's the worst payers, latest and slowest.

I'm writing to the CEOs, which I normally do 4 months before, 3 months before to say, is the situation.

What I do find is that in many cases, the CEOs are not aware are not aware that their company is as bad.

If you want to use that term as paying as they are, because it's down in the engine room of the company and they're distant from it.

And when they find out, quite often it will change before they even land on that list.

And so and I when I started this organization, I said, we've got to get the conversation away from the boardroom table and onto the kitchen table to some somewhat human conversation around what's fair and what's right.

And and as the Institute of Directors, of course, you are an organization made up of these very people that make these decisions and are affected by those decisions as well and I'm just wondering if there is any way that the the Institute can play a role in terms of connecting the individuals rather than the organizations around this because as I said when you get to the individual level, they're quite often surprised and it's a tech fix or it's process fix or it's a something fix because they don't really want to be putting small businesses out of business.

Implicit in your question is that we're representing the directors or CEOs of the slow-paying companies.

I mean I don't know exactly but I'm pretty clear that our interest in this is in the suppliers which is why we want it to work better.

So as a advocacy group, on behalf of our members, we are very, very clear that we want the system to work properly.

We want payment to be faster, because we think that's what we're here for, that benefits our community.

I'm very encouraged actually, if you're contacting CEOs of the larger companies, and they are by definition the larger ones, because those are the companies that are in scope of the regulation, that it's spurring change because that sort of supports the hunch that we have that if you had greater visibility, greater reputational sort of risk and pressure, we think it should happen through the media as well as through organisations like yours just because it's swift and fast, that it can spur change.

And there's another sort of relevant consideration which is the government has recently consulted among a number of other things to require in their corporate governance disclosures and annual reports require large companies to report on payment practices, which would at least mean that large company board directors are checking their annual report with this data in it because they ultimately are the ones that have to sign it off.

So if it's not a conversation happening in the boardroom at the moment that you know would really support that recommendation because it would it would make it more likely for those conversations to take place in order to get the visibility in the right part of the organisation.

So, I mean, all of this is encouraging because what's happening is it's becoming more of a is it a cross-business kind of cultural issue?

And I think where you and I certainly agree is it needs to become more firmly part of the national conversation and more loudly and that that can actually be done relatively easily and we'll certainly be making that case to government over the months ahead.

Well and that's it actually, we've made it part of the conversation, we're continuing that with companies and with government and that's all we can do and Then we need to leave it to people to sort out their own businesses.

So thank you for being part of that conversation, Kitty Usher.

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Interview with Kitty Ussher, Chief Economist, Institute of Directors