Y2K -- Again!
TMF Yvonne mobilises shareholder power.

I've trod this path before. I'm coming back this time to dispel the comforting perception that Y2K is a "computer" problem, somehow distinct from "investment." By January 2000, it will be a headline-grabbing issue for businesses and their shareholders alike.

Computers are tools, which companies utilise to get jobs done. The better the job is done -- designing new products, controlling production plant, monitoring inventory, keeping accounts, maintaining payroll records and the like -- the more successful the company will be. Continuing success also demands a policy of proactive response to any perceived threat. All these factors create the company's competitive edge and produce the profits that pay dividends and generate long-term growth in the share price.

Right now, most companies are feeling some effects from the current worldwide economic contraction. However, we've had bear markets and recessions before and emerged from them. Under normal circumstances, things would work themselves out in time. But 15 months hence -- when the global economy might still be unsteady on its feet -- companies (and government departments), anywhere in the world, could be thwacked behind the knees by Y2K.

The assault may not come from in-house computer systems, which could be perfectly compliant. No business is an island. Each has suppliers, customers, product or service distribution networks, bankers.... In turn, all those entities are themselves part of a chain: each supplier has suppliers, distribution networks, bankers, etc.

Certain US banks are already threatening to sever links with institutions that are not making sufficient progress, Y2K-wise, and litigation will be the resort of many a complacent corporation in year 2000 -- a smoke screen to divert attention from their insular lack of awareness. Demonstrating a more positive attitude, some global enterprises that have resolved the Y2K problem in their own domain are now collaborating with suppliers to ensure that they, in turn, are equally compliant.

It's taken a while for the light to dawn, but well-managed businesses are now fully aware of the need to ensure that every entity to which they are linked is as compliant as possible. There's a growing sense of urgency, too. Indeed, it is on the private sector that we must pin our hopes. Their imperatives are far more pressing than those of any government, notwithstanding politicians' speeches.

I suspect it may have been the leverage of Qualiport company Unilever that finally goaded the UK government into formulating a Y2K plan of action. Tony Blair himself, in a keynote speech, implied that the back-breaking straw was "a letter from Unilever warning that it could cause a worldwide recession."

Before you dismiss this as scaremongering, heed the example which Tony Blair went on to give of "an aluminium smelting plant in New Zealand, where a programmer had failed to allow for the leap year in 1996. The plant worked perfectly well until the end of 1996, but then, at midnight on 31 December, this small computer fault caused the plant to shut down completely. Shortly after... a sister plant failed in exactly the same way. It took one million New Zealand dollars to get them started again."

Leap year 1996 was far from being a global problem -- it affected a couple of smelting plants in New Zealand. With due respect to that country, its impact on the global economy is limited. But imagine this type of failure replicated, simultaneously, around the world and across the spectrum of business activity. Believe it or not, it's reported that some programmers are not even aware that 2000 is also a leap year. Unilever weren't exaggerating the potential havoc this problem could cause.

To put the ramifications in perspective, consider how many components go to make up a car. They come from umpteen different suppliers, based in a dozen countries. If a single part is not at the assembly plant on time (and everyone now works on just-in-time inventory!) the track grinds to a halt. For want of a brake-shoe, cars are lost -- and the ripples spread far and wide. Other component suppliers have to put their production on hold; assembly-plant workers get laid off; local shops suffer from the cutback in spending; dealers with no stock lose trade....

The main UK coordinator of Y2K business response is Action 2000. In July, they launched a laudable project: Pledge 2000. It calls on British businesses to affirm that they will take positive action -- rather than legal action -- to tackle the Millennium Bug in their organisations. Participants are committed to sharing information, helping other firms in their supply chains and avoiding legal action where possible. Among the first big names to sign up were Unilever, Sainsbury's, IBM, Cadbury-Schweppes and British Airways.

Contrast this with a UK government project: a crash training course for Y2K bug-exterminators. The project has fallen short of its target of an army of assassins: only a few score thus far. I'm not sure where the recruits were expected to come from. A short course wouldn't be of benefit to a person who hadn't already got IT experience. There can't be many of those currently out of work, and, if they are employed, what company would be willing to release any of its IT personnel for a few months? Bureaucrats don't seem to have got the measure of this particular problem.

As investors, our prime concern is the long-term vision and profitability of companies we have a stake in. Much thought went into building the portfolio, but what is the avail of careful analysis -- rooted in history with projections based on the past -- if the Foolish caveat "past performance is no guarantee" is forgotten? The historical rules will be rewritten in January 2000. Either a company will be ahead of the competition because it was far-seeing and well prepared for Y2K, or it'll be beyond the pale.

I don't doubt that the Wise are sharpening their pencils in anticipation of January 2000. With 20-20 hindsight, they'll be able to tell you exactly why company X, Y or Z fell foul of the Y2K bug. But today, when it could have a positive impact, I don't hear them saying much about the corporate unpreparedness they've unearthed. Which, I guess, means the task falls to us Fools.

It would be a good idea to probe all the companies in the portfolio. Use a search engine (e.g. external website Yahoo! UK & Ireland) to locate the corporate Web sites and find e-mail addresses. Then despatch an e-mail pointing out that you are a shareholder and asking:

(a) if the company has signed up to Pledge 2000, and if not, why not; and
(b) if the company is satisfied that it and all its contacts are Y2K compliant.

Maybe a spur could be added to the missive? Suggest that a response within 10 days would be appreciated so that it can be posted on the Motley Fool message boards for the benefit of other shareholders. I'll quiz the sixteen UK companies in my portfolio and will post their responses on the British Shares message board.

The litmus test of a sound investment is the company's competitiveness. We should perhaps consider divesting ourselves of any company that can't convince us that it's as prepared as possible for Y2K. I'm uneasy with corporate statements like: "We have a dependency on the millennium programmes of... our suppliers." That's at odds with the proactive attitude of the companies who are actively ensuring that their suppliers won't let them down. Indeed, I'd propose that any Foolish analysis of a company would be incomplete without a close look at its Y2K readiness.

Yvonne Ravenhall (TMF Yvonne)