Purpose, Philosophy and Nation-Building
Indigenous Economic Development: The Philosophy
The purpose of this module is to examine the purpose of Indigenous economic development and how it should best be done. The key elements of the philosophy are: Sovereignty; Nation Building; Own-source Revenue; Focus on Internal Factors; The Time is Now; The Path to Success is Difficult; and The Need for Partners.
Nation Building
Nation building is the process by which Indigenous nations strengthen their “capacity for effective and culturally relevant self-government and for self-determined and sustainable community development.” Nation building is a necessary condition for strong economic development – without nation building, attempts at economic development are unlikely to be successful.
Separation of Politics and Business
The separation of business and politics allows leaders to focus on what they do best and generates trust in the ability of Indigenous communities to carry out their many tasks. While the separation of business and politics is critical, it is also important to recognize that Indigenous businesses are creations of the community and have been given access to community assets. There is thus an expectation that Indigenous businesses are accountable to their community. The community must also understand the financial needs of their business and ensure these are provided.
Business Purpose and Structure
Economic Development Corporations
EDCs are used extensively by Indigenous communities to manage their economic activities. There are, in general, three types of activities that can be pursued by EDCs: (1) community services; (2) community benefits; and (3) wealth creation. No single activity is the best – each one involves trade-offs. These trade-offs generally revolve around a desire by community members for immediate services and benefits versus a desire to create long-term wealth by earning and re-investing profits.
Indigenous and Non-Indigenous Businesses: Similarities and Differences
All businesses have employees, customers, and financial resources and must maintain some minimum level of profitability to be sustainable. Beyond that, however, businesses differ in numerous ways. Indigenous businesses have some unique characteristics compared to their non-Indigenous counterparts, including the nature of ownership and management, the products or services that are provided, the customer base being served, and the values that underpin the business.
Limited Partnerships
Limited partnerships are widely used by First Nations and by a few northern municipalities to structure their businesses. Limited partnerships are used because they achieve three key goals: they allow Indigenous communities to operate businesses outside their boundaries; they allow Indigenous businesses to earn income that is exempt from taxation; and they limit the liabilities of the owners.
Business Operations
Business Charters
A business charter is a document used by an Indigenous community to delegate business authority to its business interests (typically through an Economic Development Corporation (EDC)). Although it is written in legal language, a business charter is largely a political document that outlines the relationship between a community and its business interest. A business charter is effectively a business constitution – an agreement the political leadership has with itself and the EDC on how both will act.
Building a Board of Directors
The selection of the directors for a company is the shareholder’s job. Creating a strong board of directors does not just happen on its own. Having a well-thought-out plan for choosing the best people to be directors makes it more likely that the board works well, and the business is successful. This module sets out a six-step process for building a high-performance board of directors. The key elements of this process include understanding the needs of the business, actively searching for high-quality candidates, and effectively integrating new directors by giving them significant and meaningful roles on the board.
Board Decision Items
The board of directors makes key decisions for its organization. These decisions are typically based on recommendations provided by management. It is important that the board be provided with the information it requires to make an informed and unbiased decision. The tool used to achieve these objectives is the board decision item (BDI). BDIs have six elements: Issue; Background and Rationale; Options, Analysis of Options; Recommendation; and Next Actions.
Investment Decision Process
This module lays out a step-by-step process for evaluating potential business opportunities. The process includes the following steps: criteria development (e.g., financial viability, management, growth potential, strategic fit, and community benefits); opportunity identification; quick screening; preparation of an Investment Highlight Memo; preparation of a Term Sheet or LOI; due diligence; preparation of an Investment Decision Memo; and the formulation of definitive legal agreements.
Basics of Valuing a Business
Business valuation is a critical step in the evaluation of an existing business, whether it is being sold or purchased. The goal of this module is to provide people with sufficient information on business valuation so they can be intelligent consumers of the business valuation information presented to them by others (e.g., management or consultants). There are three primary valuation methods: Asset Value, or the value of assets minus liabilities; Discounted Cash Flow (DCF), which calculates the present value of future cash flows; and the EBITDA Multiple method, which determines a business’s value by applying an industry- and company-specific multiple to a company’s earnings.
Dividend/Distribution Policy
Dividend/distribution policies are necessary because businesses almost always earn profits. Once profits are earned, a decision must be made as to how much is retained in the business and how much is paid to the shareholders. In the case of Indigenous businesses, the shareholders are often Indigenous communities. Paying a dividend or making a distribution invariably has trade-offs. To strike the right balance and to ensure that shareholders and the business retain each other’s trust, it is important to acknowledge and understood these trade-offs.