Excellence in Leadership March 2009 by Chartered Institute of Management Accountants

E x ce l l e n ce i n Lea d e r s h ip

issue 10 2009 £12

Excellence in Leadership Strategic Risk Management Put your house in order Indesit’s Andrea Giubboni on why risk management should start at home

Special delivery Pitney Bowes’ CFO Michael Monahan tells us how to manage risk effectively amid rapid change

Plus: RSA’s Caroline Ramsay on the new carbon trading scheme BBC’s Zarin Patel on choosing the right outsourcing provider

Strategic Risk Management issue 10 2009 CIM010_Cover.indd 1

24/3/09 14:15:56

C7617 Coda Excellence AD A4

12/5/08

5:38 pm

Page 1

The number crunching financial software with added bite Financials has always led the way, with its powerful unified ledger accounting delivering significant benefits to our customers. And because it is designed to be integrated with your other business systems, it really can be a catalyst for business-wide change. So when it comes to the crunch, you can count on CODA.

Visit: www.coda-financials.co.uk Email: ukmarketing@coda.com or call 01423 509999 and see how CODA can eat through your workload FREE breakfast seminars throughout 2008 - Financial Software Evaluation

Please visit www.coda-financials.co.uk for details of events in your area. www.coda-financials.co.uk CIM010_000 Advert.indd 1

20/3/09 08:24:32

Company insight

Foreword

EXCELLENCE IN LEADERSHIP Strategic Risk Management

Cut costs, not corners Welcome to the latest edition of the CIMA (Chartered Institute of Management Accountants) Excellence in Leadership portfolio. Business risk is rather like the British weather – it is constantly changing and nobody can be absolutely sure what is going to happen next. In this issue, which marks CIMA’s 90th year anniversary, we look at the role of strategic risk management in this increasingly unstable economic climate and what can be done to keep from under the storm clouds. Confidence – or lack of it – has been a hot topic recently and it is essential that organisations retain the support of their stakeholders. When economic conditions deteriorate, there is a danger that businesses will lose focus on the importance of communication, both within their organisation and externally. Media pundits are predicting an increase in negative voting as boards tackle contentious issues such as remuneration, capital increases and the adoption of anti-takeover measures. In response, Richard Carpenter of corporate reporting and online communications specialists Merchant Group provides advice to help companies keep shareholders onside (p.44), while Paul Brasington, chairman of the British Association of Communicators in Business, warns that failure to employ a regular two-way dialogue with staff and customers could lead to reputational damage in the long term (p.48). In the wake of banking failures, executive remuneration has been singled out for media scrutiny. Margaret Woods, associate professor of accounting and finance at the University of Nottingham, provides an illuminating insight into the performance related pay structure used by the National Basketball Association in the US and how similar frameworks could be used in the UK to create a more level, risk-adjusted playing field (p.32).

Moving into the finance function, Andrea Giubboni, FD at Indesit Company, argues that only the CFO has the skills to put in place a risk management system (p.8). On a micro level, Michael Monahan, EVP and CFO of Pitney Bowes, describes how the company’s ERM strategy has led to faster, more informed decision making (p.24). On a more radical tangent, James Fleck, dean of the Open University’s Business School, contends that risk management thinking has a long way to go in terms of evolution. The professor of innovation dynamics takes a helicopter view of risk evaluation and how

‘It is essential that organisations retain the support of their stakeholders.’

Carbon Reduction Commitment and what impact it will have on large companies (p.72). As businesses focus on ways to emerge from the downturn fighting fit, Alison Platt, business development director at Bupa, looks at how they can keep hold of their most talented employees (p.64). Keeping the finance function lean is another essential part of business success and Zarin Patel, CFO at the BBC, looks at the key challenges and benefits of using outsourcing and offshoring to cut costs (p.68). With such a heavyweight collection of experts, I very much hope that this issue will pack a punch for its readers. ■

the Western approach could be enhanced by incorporating a wider range of techniques from around the world (p.40). Of course we must not lose sight of the dangers associated with climate change. Two of CIMA’s research specialists, Gillian Lees and Helenne Doody, look at the main challenges ahead and how CIMA’s new strategic scorecard can help companies embed climate change risk into their strategy (p.18). On a similar theme, Alexa Michael, another member of CIMA’s research team, looks at social and political risk and how the development of a corporate risk catalogue can improve the way companies respond to these challenges, while Caroline Ramsay, UK finance director at Royal Sun Alliance, discusses the

Charles Tilley, CIMA chief executive

Your feedback is important. If you have any thoughts about the articles covered in this issue or suggestions for features that we could address in future editions, please do not hesitate to contact the editor: michaeljones@spgmedia.com. To download selected articles published in Excellence in Leadership, please go to www.excellence-leadership.com

Excellence in Leadership

CIM010_Foreword.indd 3

23/3/09 17:39:59

Contents

Excellence in leadership Strategic Risk Management

Put your house in order For Andrea Giubboni, risk management starts at home, with good organisation and communication.

Just in time As Eastern ideas join Western thinking, The Open Universityâ&#x20AC;&#x2122;s James Fleck clocks the evolution of risk management.

Crunch time Andrew Campbell and Stuart Sinclair warn that executives need to think creatively to avoid being bitten by the financial crisis.

Conserve energy Caroline Ramsay of the RSA explains why leaders should not make light of the Carbon Reduction Commitment.

Excellence in Leadership

CIM010_Contents.indd 4

23/3/09 17:53:16

ExCEllEnCE In lEAdErshIP

Excellence in leadership Strategic Risk Management

IssuE 10 2009 £12

ExCEllEnCE In lEAdErshIP Strategic Risk Management

Foreword

Charles Tilley, Chief Executive, CIMA

Vital statistics

Reforming risk strategy

Put your house in order

Communicating risk

44 Question time

Social and political risk

12 Cause and effect

CIMA’s Alexa Michael looks at how to integrate social and political risk into management decision making.

48 Seize the opportunity

17 Optimise investment in risk assessment

Aon Solutions

Climate change

As senior executives are quizzed by stakeholders about the health of their investment, Merchant’s Richard Carpenter finds out what it’s like to be put on the spot.

In the shadow of recession, companies should ensure that the long term future of the organisation is not compromised, argues the CiB’s Paul Brasington.

ERM strategy

18 Storm warning

52 Two steps ahead

22 Carbon data

Investment risk

CIMA’s Gillian Lees and Helenne Doody consider the nature of strategic risk and how to integrate it into the planning process. EDF Energy

Risk and opportunity

56 Be prepared

24 Special delivery

Pitney Bowes’ Michael Monahan addresses managing risk amid rapid change.

27 A new view on risk

IBM

AIRMIC’s John Hurrell and Paul Hopkin see more organisations turning to ERM to plot their way through challenging terrain.

28 Crunch time

Stuart Sinclair and Ashridge’s Andrew Campbell warn that senior executives need to be able to think creatively to avoid being bitten by the current financial crisis.

Also in this edition: 60 Strike a balance

31 The lost art of cash management

PricewaterhouseCoopers’ Ian Powell and Sarah Churchman on equal opportunities for staff.

64 Best and brightest

ICit Business Intelligence

Bupa’s Alison Platt on how brand ownership is a greater tool than remuneration in holding on to the most talented employees.

Outsourcing Performance and risk

32 Bonus shot

Risk and regulation

36 Collective harmony

The International Centre for Financial Regulation provides a calm approach to the complex task of global harmonisation, as CEO Barbara Ridpath explains to Jim Banks.

39 Chance favours the prepared mind

68 World service

Margaret Woods catches up with compensation structures and finds an unusual potential solution in the structure used for US professional basketball players.

Echo Research

CIM010_Contents.indd 5

When the BBC’s back office outsourcing contract came up for renewal, Group CFO Zarin Patel sent a strong signal by moving processes offshore.

Responsible business

72 Conserve energy

Caroline Ramsay of commercial and personal insurer RSA, explains why business leaders should light up the bottom line with the Carbon Reduction Commitment (CRC).

77 Remember the lessons of the past

Pitney Bowes’ CFO Michael Monahan tells us how to effectively manage risk amid rapid change

Plus: rsA’s Caroline ramsay on the new carbon trading scheme BBC’s Zarin Patel on choosing the right outsourcing provider

For companies with strong balance sheets, strategic vision and a measured approach to risk there are investment opportunities out there, Brian O’Reilly explains to Jim Banks.

Human capital Risk and the boardroom

Special delivery

IssuE 10 2009

For Andrea Giubboni, risk management starts at home, with good organisation and communication.

The Open University’s James Fleck catches up with the evolution of risk management in business in search of a model efficient enough to set your clock by.

Strategic Risk Management

Indesit’s Andrea Giubboni on why risk management should start at home

40 Just in time

The FD and strategic risk

Put your house in order

Gartner

Excellence in Leadership is published by SPG Media Limited and is an official publication of the Chartered Institute of Management Accountants (CIMA). SPG Media Brunel House, 55–57 North Wharf Road, London, W2 1LA, UK T. +44 (0)20 7915 9600 F. +44 (0)20 7724 2089 E. info@spgmedia.com W. www.spgmedia.com www.excellence-leadership.com Chartered Institute of Management Accountants (CIMA) 26 Chapter Street, London SW1P 4NP, UK T. +44 (0)20 7663 5441 Ana Barco, CIMA, Senior Product Specialist E. ana.barco@cimaglobal.com ISBN 978 1 85938 741 2 ©2009 CIMA and SPG Media Limited Every quarter Excellence in Leadership brings you the latest thinking from top industry practitioners and thought leaders. It is easy to subscribe: Email: subscriptions@spgmedia.com or call Kam Jannati: 020 7915 9660. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, photocopying or otherwise, without prior permission of the publisher and copyright owner. The products and services advertised in Excellence in Leadership are not necessarily endorsed by or connected in any way with CIMA. The editorial opinions expressed in the publication are those of individual authors and not necessarily those of CIMA or SPG Media Limited. Whilst every effort has been made to ensure the accuracy of the information in this publication, neither SPG Media Limited nor CIMA accept responsibility for errors or omissions.

78 Next issue

Further copies of Excellence in Leadership are available from SPG Media Limited at a cost of £12.00, €13.00 or $18.00 per copy.

82 Directory

Printed by Warners Midlands plc

24/3/09 14:18:31

ExCEllEnCE In lEAdErshIP

Excellence in leadership Strategic Risk Management

IssuE 10 2009 £12

ExCEllEnCE In lEAdErshIP Strategic Risk Management

Foreword

Charles Tilley, Chief Executive, CIMA

Vital statistics

Reforming risk strategy

Put your house in order

Communicating risk

44 Question time

Social and political risk

12 Cause and effect

CIMA’s Alexa Michael looks at how to integrate social and political risk into management decision making.

48 Seize the opportunity

17 Optimise investment in risk assessment

Aon Solutions

Climate change

As senior executives are quizzed by stakeholders about the health of their investment, Merchant’s Richard Carpenter finds out what it’s like to be put on the spot.

In the shadow of recession, companies should ensure that the long term future of the organisation is not compromised, argues the CiB’s Paul Brasington.

ERM strategy

18 Storm warning

52 Two steps ahead

22 Carbon data

Investment risk

CIMA’s Gillian Lees and Helenne Doody consider the nature of strategic risk and how to integrate it into the planning process. EDF Energy

Risk and opportunity

56 Be prepared

24 Special delivery

Pitney Bowes’ Michael Monahan addresses managing risk amid rapid change.

27 A new view on risk

IBM Cognos

AIRMIC’s John Hurrell and Paul Hopkin see more organisations turning to ERM to plot their way through challenging terrain.

28 Crunch time

Stuart Sinclair and Ashridge’s Andrew Campbell warn that senior executives need to be able to think creatively to avoid being bitten by the current financial crisis.

Also in this edition: 60 Strike a balance

31 The lost art of cash management

PricewaterhouseCoopers’ Ian Powell and Sarah Churchman on equal opportunities for staff.

64 Best and brightest

ICit Business Intelligence

Bupa’s Alison Platt on how brand ownership is a greater tool than remuneration in holding on to the most talented employees.

Outsourcing Performance and risk

32 Bonus shot

Risk and regulation

36 Collective harmony

The International Centre for Financial Regulation provides a calm approach to the complex task of global harmonisation, as CEO Barbara Ridpath explains to Jim Banks.

39 Chance favours the prepared mind

68 World service

Margaret Woods catches up with compensation structures and finds an unusual potential solution in the structure used for US professional basketball players.

Echo Research

CIM010_Contents.indd 5

When the BBC’s back office outsourcing contract came up for renewal, Group CFO Zarin Patel sent a strong signal by moving processes offshore.

Responsible business

72 Conserve energy

Caroline Ramsay of commercial and personal insurer RSA, explains why business leaders should light up the bottom line with the Carbon Reduction Commitment (CRC).

77 Remember the lessons of the past

Pitney Bowes’ CFO Michael Monahan tells us how to effectively manage risk amid rapid change

Plus: rsA’s Caroline ramsay on the new carbon trading scheme BBC’s Zarin Patel on choosing the right outsourcing provider

For companies with strong balance sheets, strategic vision and a measured approach to risk there are investment opportunities out there, Brian O’Reilly explains to Jim Banks.

Human capital Risk and the boardroom

Special delivery

IssuE 10 2009

For Andrea Giubboni, risk management starts at home, with good organisation and communication.

The Open University’s James Fleck catches up with the evolution of risk management in business in search of a model efficient enough to set your clock by.

Strategic Risk Management

Indesit’s Andrea Giubboni on why risk management should start at home

40 Just in time

The FD and strategic risk

Put your house in order

Gartner

78 Next issue

Further copies of Excellence in Leadership are available from SPG Media Limited at a cost of £12.00, €13.00 or $18.00 per copy.

82 Directory

Printed by Warners Midlands plc

23/3/09 17:52:01

Head

Business continuity management

Editorial advisory board Jeff van der Eems Excellence in Leadership

His last role before joining United Biscuits was CFO of PepsiCo UK and Ireland, where he was responsible for Walkers Snackfoods, Pepsi-Cola, Quaker Foods and Tropicana. Prior to PepsiCo, he specialised in M&A, working for several investment banks in New York.

Look to the future CIMA’s Louise Ross plugs into the online business community to assess the Web 2.0 social networking revolution

Stolen identity Dow Chemical and Viacom address why the secure handling of sensitive information has never been more important

Plus: Deloitte’s Margaret Ewing on the next generation of CFOs Corus’ Ian Cooper on the emerging emissions trading system Wolseley’s group treasurer on cashflow forecasting

December 2008 ExCEllEnCE In lEADErShIP

He was headhunted to the Metropolitan Police in 2000. As director of resources, he was responsible for all finance and resource functions, including property, procurement, transport and corporate services. In 2004 he was named CIMA’s Business Leader of the Year.

Data Management in Finance

IssuE 8 2008

Keith Luck is director general of finance at the Foreign and Commonwealth Office. His background is in telecommunications, consultancy and banking. He was finance director for two London boroughs before returning to the private sector in a business development role.

IssuE 8 2008 £12

ExCELLEnCE In LEADERshIp

Data management in finance

Keith Luck

ExCELLEnCE In LEADERshIp

Jeff van der Eems was appointed CFO of United Biscuits in 2005 and additionally became COO in 2006. Born in Canada, he joined United Biscuits from PepsiCo, where he worked for 12 years in a series of senior finance and strategy roles in EMEA and the US.

ISSuE 7 2008 £12

ExCEllEnCE In lEADErShIP Financial Supply Chain

Kai Peters

Pret a Manger, Moss Bros and Paperchase’s FDs discuss a more harmonious approach to FSC

Plus: national Grid’s Steve lucas on people development The Carbon Discloure Project on a responsible supply chain KPMG on talent pools

September 2008 ExCEllENCE iN lEadERShip

David Blackwood

Change your tune

ISSuE 7 2008

He serves on supervisory and advisory boards for a number of organisations in the technology and healthcare sectors, and in various capacities for educational associations such as AACSB, AMBA, EFMD and GMAC. He writes and lectures on strategy, leadership and management education for government, business and academic audiences.

Back to basics CIMA finds new routes to managing cash in the credit crunch

Financial Supply Chain

Kai Peters is chief executive of Ashridge, the business school located in Berkhamsted, near London. Prior to joining Ashridge, Peters was director of MBA programmes and then dean of the Rotterdam School of Management (RSM) at Erasmus University in the Netherlands.

iSSUE 6 2008 £12

ExCEllENCE iN lEadERShip Responsible Business

David Blackwood is the group finance director of Yule Catto & Co plc. Formerly he was the group treasurer at ICI. He qualified as an accountant with Deloitte before joining ICI in 1985. After a spell at EVC in Brussels, where he mainly focused on M&A transactions, he joined ICI Films as CFO in Brussels.

Georg Kell reveals why the UN Global Compact offers hope of a sustainable future for business

Get organised Barclays, BT and FTSE on why companies will suffer financial consequences if they fail to address CSR

Responsible Business iSSUE 6 2008

In 1996 he moved back to London as deputy group financial controller. He was appointed group financial controller in 1998 and group treasurer in 2001. He was also running the group’s global finance function restructuring and outsourcing project. He is a member of the board for actuarial standards, a member of the advisory panel supporting the review of FRS 17 and a member of the risk advisory board at the EDHEC business school in Nice, France.

Positive impact

Special Supplement: CIMA’s Managing Responsible Business 2008 Research Report 17/6/08 09:17:14

June 2008

issuE 5 2008 £12

ExcELLEncE in LEadErsHip

Adam Hart is managing director of equities – corporate finance at Fairfax IS plc, which offers a full range of investment banking services. He has a degree in law and qualified as a chartered accountant with Touche Ross & Co (now Deloitte). He was previously head of business development at KBC Peel Hunt, having joined them in 1993 from Lloyds Merchant Bank. Human Capital issuE 5 2008

In his 14 years with KBC Peel Hunt, he was involved in a range of transactions by quoted companies, such as IPOs, M&A and secondary fundraisings, as well as private equity fundraisings. He is chairman of the London Stock Exchange’s AIM advisory group, which is made up of external practitioners who advise the exchange on all matters affecting the operation and regulation of AIM, and a past member of the corporate finance technical committee of the ICAEW.

Lloyds TSB on risk Centrica on M&A Morrisons on supply chain

CIM006_Cover.indd 1

ExcELLEncE in LEadErsHip

Adam Hart

Plus:

Human caPITaL

Build with the best

BT’s Lalani on world-class, worldwide talent

The Talent Trap

How Barclays, T-Mobile and Ford recognise, recruit and retain

Plus: HSBc’s Flint on pensions; BSkyB on cSR; Oxfam on strategic risk CIM005_Cover.indd 1

March 2008

3/6/08 10:02:33

Excellence in Leadership

CIM010_Ed_VitalStats.indd 6

23/3/09 13:57:11

Vital Head stats

Vital statistics Sound bites ‘This economic crisis doesn’t represent a cycle. It represents a reset.’ Jeff Immelt, Chairman and CEO of General Electric.

‘I was asked what I thought about the recession. I thought about it and decided not to participate.’ Sam Walton, Founder of Wal-Mart Stores, Inc, speaking in 1991.

‘The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.’ Sir Winston Churchill.

And the survey said... 87% of multinationals

In a survey of 3,500 finance professionals across 14 countries, 49% of British accounting and finance workers revealed they feel less secure in their jobs.

59% of UK firms entered recession in state of higher credit risk. This equates to over 1,366,000 UK companies that were adjudged to be at an increased risk of falling into financial difficulty within one year.

staff hires to defined contribution schemes. Source: Mercer’s Multinational Survey of 49 multinationals, February 2009.

88% of respondents said they were concerned about the health of the UK economy over the next 12 months. Only respondents in Ireland were more downbeat, 90% expressing economic concern, while a similar level of concern was shown by professionals in France (85%) and Japan (75%). Source: Robert Half, February 2009.

Source: Graydon UK.

Central banks running out of ammunition Key monetary policy rates (%) European Central Bank

Bank of England

Swiss National Bank

Sweden Riksbank

35%

of surveyed executives believe ‘managing costs’ is the biggest challenge they face, revealing low levels of trust within UK organisations coupled with fears over financial management capabilities. Source: Chartered Management Institute (CMI).

5 4 3 2 1 0 Jan 06

Jun 06

Nov 06

Apr 07

Sep 07

Feb 08

Jul 08

Dec 08

Source: Moody’s global credit research report, January 2009.

Top five tips to beat fraud • Set the tone at the top that fraud is unacceptable. It is up to senior management to create an environment where fraud is unacceptable.

85% will use some

61% now restrict new

Strategic Risk Management Employment risk

will have some form of ‘global’ funding policy in place by 2010. form of ‘global’ approach to set their investment objectives by 2010.

31%

of buyers fail to formally review the intangibles of their target company. 66% believe an earlier focus on intangibles would have improved the chances of success. Source: Hay Group’s Global M&A study, 2009.

• Define fraud risk responsibilities. Identifying the risk of fraud in your business will enable you to spot the weak areas and put measures in place to reinforce your infrastructure. Also, by giving specific responsibilities to specific people or departments will ensure ownership. • Consider internal reporting lines. Are there enough checks and balances in your businesses reporting lines to prevent fraud from slipping by unnoticed? • Collate all information on fraud cases. This will enable you to spot any patterns or consistent warning signs for your business. You will know what kinds of behaviour to watch for. • Develop fraud awareness sessions. Ensure your employees know exactly what is considered fraud, how to spot warning signs and what to do if they suspect criminal activity is happening. Source: David Alexander, director of forensic services at Smith & Williamson.

www.cimaglobal.com/fraud Excellence in Leadership

CIM010_Ed_VitalStats.indd 7

23/3/09 13:57:35

The FD and strategic risk

Put your house in order For Andrea Giubboni, risk management starts at home, with good organisation and communication. Michael Jones went to meet household appliance manufacturer Indesit UK’s new finance director as he gets his feet under the table.

Michael Jones: What are the major duties of CFOs in the current environment in forming a risk management strategy and how has this changed in the last six months? Andrea Giubboni: The role of CFOs in forming a risk management strategy has changed over the past six months, however, this is part of an evolution that has taken place over several years. Back in the eighties, the CFO was a very important player but was obliged to deal mainly with financial issues and, in some cases, even to take risks in order to try and achieve further gains for the operating business.

Today, CFOs of complex organisations have to lead the process of developing a complete management strategy for all types of risk, whether financial, strategic, compliance-related or operational. When a company is developing its risk management strategy, in my opinion only the CFO has the skills to put in place a proper risk management system. Many senior employees, managers or directors will have a clear understanding of the risks, but when the risks have to be assessed, prioritised and dealt with through a robust internal control system, only CFOs have

the appropriate insight and the wider perspective to achieve this. Crises and globalisation in the recent past – from the big downturn in financial markets in 1987, followed by the recession of the late eighties, early nineties, through to the rouble default in Russia in 1998 with the effects felt around the world - has shown there is no ‘comfort zone’ for any entity. And now we have a recession which is likely to be the worse than any of these. Furthermore, the scandals in the last decade involving major companies, Enron in 2001 and Parmalat in 2003, brought about a

Excellence in Leadership

CIM010_012 Giubboni.indd 8

21/3/09 18:42:19

The FD and strategic risk

need for tighter governance and compliance rules. Risks of “black swans” in this new era have increased dramatically. Why are strategic risks so different from operational risks and how do you prioritise the different elements – reputational risk, business continuity, fraud and corruption, for example? There are many managers and consultants who have tried to classify and describe different types of risks. In practise, it is not an easy exercise. There are operational risks which, due to their nature, can result in a change in the approach to strategic risk, and there are strategic risks which can significantly influence operations. For instance, customer change is a major strategic risk, but it can involve operational risks in your supply chain as well as impacting on payment terms. It is a financial risk that can dramatically change your net working capital and, accordingly, your dependence on loans. In my opinion it is not important to define the classification. More important is the prioritisation that is to be made, based on a risk assessment process. Many elements have to be taken into account as part of a comprehensive risk assessment, where the probability of events and their impact have to be evaluated. Referring back to the first question, this is where CFOs have led the way. You mention different elements when it comes to risks ¬– reputation, fraud and corruption. These types of risks have played a major part in contributing to major crises in very large companies in recent years – crises which have highlighted the significance of these risks, and in many countries has resulted in new compliance and governance legislations. What kind of grounding in the area of risk management has your experience as a consultant in corporate finance at KPMG and as an auditor given you? I have to say both have been of paramount importance. The auditor approach is based on risk analysis and I had to consider what the major risks were for every company I audited, in order to address any concerns in the financial statement. I brought this approach with me when I joined Indesit as the head of internal audit. As an associate consultant, I was able to use my knowledge and experience to better assess financial risks, which, of all risks, are

the most difficult to be technically evaluated. In the seven years I have been working with Indesit, I have had the opportunity to fulfil a variety of roles including head of internal audit and group accounting manager, both of which enhanced my knowledge in regard to compliance and governance rules. It is this background that has rounded my approach to risk and enhanced my ability to prioritise. How is strategic risk handled at Indesit? What are the key risk areas for your company and how might these differ from other large corporates? My role is within the UK subsidiary, but to respond to your question, I will need to widen the net and refer first to the group as a whole, and then the subsidiary.

Other major issues we monitor include competitors’ reactions to the crisis, customer changes as the crisis reshapes the market, and consumer demand, which can change significantly, particularly for durables. These are all risks that have to be monitored, in order to put in place a proper strategy in terms of market approach. Our commercial and marketing departments have a strong reporting system which is used to analyse a significant amount of information to consider those risks. The way risk is handled at Indesit Company is much in line with best practice for most large corporates. How closely do you work with your chief risk department at Indesit and where do the delineations of responsibility lie?

‘Communication between departments is communication between people – the higher the level of confidence between them, the higher the chance of managing risk successfully.’ Strategic risk management is based on risk assessment, and is performed by several key players with a bottom–up approach. In the case of the subsidiary, the managing director involves senior management in the process of assessing risks and developing an appropriate strategy to monitor these risks, particularly regarding budgets and long term plans. At group level, it is the CEO and the group CFO who mainly perform the risk assessment and collate all relevant information from each of the subsidiaries. Thanks to strong governance rules, which have been further enhanced in recent years, boards of directors (comprising of independent and non independent members) have been increasingly involved in this process. They operate through the audit committee – a separate board which operates within the company through an internal audit department. The audit committee bases its audit program on risk assessment and handles strategic risks on a day-by-day basis. A reporting system monitors these risks and feeds this through as supporting material for management decisions. Now, in the midst of a recession, it is more vital than ever to monitor all strategic risks, as a lack in monitoring could be disruptive.

Indesit does not have a specific risk department as such. Risk assessment is a process that is handled at senior management level and then cascaded within the organisation to the relevant departments. In my opinion risk management is about organisation and sensitivity to risks and not focused on a single individual or department. For instance, in the case of financial risks, they are cascaded among the organisation into all the departments. Credit risk falls mainly under my responsibility as head of finance and administration of the UK subsidiary, as well as under the responsibility of the UK commercial director. Foreign currency risk is handled by the group treasurer. Despite the different roles, credit and currency risks are handled jointly, with decisions being taken by myself, the managing director, the group treasurer and the commercial director, on how to deal with the risk; for example, the use of derivatives for currency risks, sale without recourse or insurance for credit risk. And the degree of confidence is not a result of another department providing us with guidelines, but more a result of good organisation and a high level of interdepartmental communication. It goes without saying that communication between departments is communication between people – the higher the level of confidence Excellence in Leadership

CIM010_012 Giubboni.indd 9

21/3/09 18:44:59

The FD and strategic risk

‘People, the organisation, co-operation, the culture and sensitivity are what make a difference.’

between them, the higher the chance of managing risk successfully. How much time should the CFO spend in their day setting the risk strategy and how can CFOs avoid over-managing risk? Risk management is a matter of the quality of the risk assessment process and the level of organisation, rather than the amount of time spent on it. A good CFO could spend just 10% of his or her time and manage risk very effectively, but could just as easily spend 80% of time, with insufficient results. Regardless of how much time is spent, in the current market, this has to increase. I do not see any harm in over-managing risks at this particular moment in time. During a recession, the more time spent on risk management the better, and had more CFOs and CEOs done this in the past perhaps we would not have seen so many big companies going bust. To a certain extent, even though it is impossible to blame anyone for the recession, we can certainly say that understatement of risks – think sub-prime, housing markets, liquidity – has contributed to making the recession worse. How can the CFO help to turn strategic risk into strategic advantage? I can only repeat a leitmotif: good organisation. A CFO has to work to encourage cooperation between departments. This is not an academic answer – I cannot offer any mathematical model to turn risks into opportunities, but, in the real world this is the way to go. For example, as the credit crunch squeezes our customers, in my role presumably I should recommend that we immediately cut credit limits for our customers. But, I have to work with the

commercial director to understand if, in doing such a thing, I am actually increasing rather than decreasing the risk, as we could very well be accelerating our customers’ own crises. To understand how to put in place a strategy, I have to closely liaise with the commercial department and share any ideas and decisions with them. Relationships should be based on complete reliance and trustworthiness. Only in this way can we take the opportunity not only to reduce the risk, but also take advantage of a reshape in the market, where a customer could increase their market share as other players exit the market. How can using a strategic scorecard as a tool help you to identify strategic risks? Strategic scorecards can be very useful in providing step-by-step guidelines on how to align operational activities to strategic objectives. As a type of handbook, they can also help to better understand some risks. But a scorecard is a tool, not a magic wand. Again, people, the organisation, cooperation, the culture and sensitivity are what make a difference. A great strategic scorecard implemented in an environment where nobody cares about risks is utterly pointless. To build up a strategic scorecard is a matter of time and money and does not take long. To build up a culture of sensitivity to risk is a matter of people and takes a very long time.

The liquidity crisis has brought with it a call for tighter regulation and governance. Is business in danger of allowing compliance to take precedence over growth? In short, no; compliance is the way to survive, not to curb growth. In recent

years we saw a massive number of companies go bust due to a lack of focus on compliance. Indesit Company is listed, so compliance is a must and I have spent massive amounts of time in previous roles on it. Just a year ago I was responsible for implementing a control system to be compliant with new legislation in Italy which is the Italian version of SarbanesOxley act in the US. But I believe strongly that it is not just a legal obligation but a matter of protecting the company, its stakeholders, ourselves, and acting according to shared rules that enable me to be proud to work in a company with a great reputation in the market. How can the CFO work to re-shape the treasury functions in this environment? Is this a requirement for Indesit? At this moment in time, treasury is probably the most critical area for a company. In our company it is a centralised department dealing with significant financial risks – interest rates, currency and liquidity. Because Indesit has multi-currency transactions, both external and within the company, it is of paramount importance to have a good understanding of this kind of risk. ■

Andrea Giubboni Andrea Giubboni took on the role of finance director at Indesit Company UK in March 2008, in a move from his previous position as group accounting manager. Giubboni has been at Indesit for seven years, having previously held roles at KPMG as a consultant in corporate finance and as an auditor in the audit firm.

Excellence in Leadership

CIM010_012 Giubboni.indd 10

21/3/09 18:45:31

CIMA Online Courses CPD at your fingertips CIMA members want CPD that is convenient, relevant, flexible and cost effective. CIMA Online Courses allow you to complete your CPD requirements - online, internationally, and at any time. Why you should consider CIMA Online Courses: • your time is precious - choose when and where to complete your CPD • our courses cover a wide range of topics from general to technical, as well as ‘soft skills’ • CIMA Online Courses count towards your annual CPD • courses are presented by leading experts • CIMA members and students benefit from discounted prices • you can choose individual courses or packages • we’re continually adding to our range of courses. Take advantage of easy CPD access today. Visit www.cimaonlinecourses.com

www.cimaonlinecourses.com CIMA010_Onlinecourses.indd 1

20/3/09 08:37:49

Social and political risk

Cause and effect Companies and countries that believed they were immune have found themselves increasingly subject to larger and more varied risks, and as the pace of globalisation picks up it poses a common challenge. CIMA’s Alexa Michael looks at how to integrate social and political risk into management decision making.

Social risk can affect any business, wherever it operates in the world, but some businesses are more prone to social risk than others. For example, industries with large installations such as factories, ports, mines and refineries can provoke dissatisfaction and unrest among local populations when: • there is a perception that local expectations are not being met • the surrounding area is being polluted • there is general political unrest, for example, where the army is protecting a site and using its presence to harass

local people for reasons unrelated to the business. Social risk can also occur when there is over-dependence on one company, operation or industry sector. When the company leaves or the industry is no longer viable, an entire region can face economic ruin. This can provoke a backlash against the company by local people. In addition, health, safety and environmental issues affect all companies. Multinational companies often face costly worker and community health issues because of the lack of adequate medical care in some

countries. The use of child labour and forced labour can also fuel social risk if these are deemed to be unacceptable. Political risk occurs when political power is executed in a way that threatens a company’s value. Two types of political risk are relevant to companies doing business internationally; industry- and firm-specific political risk and countryspecific political risk. Mass anti-government protests alone may not constitute a political risk if they do not affect government policies towards

Excellence in Leadership

CIM010_010 Michael.indd 12

21/3/09 18:34:13

Social and political risk

business or a company’s current or future operations. However, changes in the legal framework governing contracts can amount to political risk. For example, foreign energy companies operating in Bolivia faced industry- and firm-specific political risk in 2006 because the Bolivian President Evo Morales nationalised the country’s oil and gas sector. Sector-, provincial- and country-specific political risks are more widespread. They can include civil war, drastic changes in foreign currency rules or changes to the tax code. They can be generated directly from the host country government or from an unstable social situation within the country. Any company trying to understand potential political risk must recognise the difference between political issues that can affect corporate performance, and dramatic situations that do not. In addition, companies should understand the potential reputational damage and associated costs related to political risk.

Mine your own business US-based Freeport McMoran, which owns a large gold and copper mine in Papua, Indonesia lost approximately $48 million and 20% of its share price due to clashes with the local population. There were already tensions in the region after a newspaper reported that Freeport had paid the Indonesian army and police nearly $20 million between 1998 and 2004. This led to local protests and an investigation by the US government. The situation worsened when impoverished local people were banned from prospecting for gold in the waste rock near the mine. Freeport cited health concerns as the reason for the ban, but people believed that they were being prevented from sharing even very marginally in Freeport’s wealth. Local protests closed the mine for four days – at a cost of $12 million a day.

‘To understand political risk [one] must recognise the difference between political issues that affect corporate performance, and dramatic situations that do not.' Risk profiling A company needs to identify all the potential social and political risks that it faces from various sources in order to develop a comprehensive risk profile. There are two elements to developing a risk profile: identifying enterprise risk sources and identifying social and political risks that are relevant to the company or business project. When developing a situation or project-specific risk profile that includes social and political issues, it is critical to be aware that these issues are experienced quite differently, depending on the company’s sector, industry characteristics, products, customers, geographic location and employment strategy. Possible sources of risk include the product or service, media, location, employees, process, suppliers and customer base. These categories provide a useful framework that can help the company to identify its own particular risks. Companies need to understand the

setting for their businesses and how that setting might generate risk. For example, in terms of operating location, establishing a plant in a country like Burma where a totalitarian military government encourages forced labour will be riskier than doing business in a country where forced labour is not tolerated. Public reaction by those adversely affected by business activities (or who think they are affected) can also pose an enterprise risk. Newmont Mining has faced dissatisfaction, sometimes violent, from the local community in Peru’s Cajamarca region (see box, above). This dissatisfaction is partly the result of changes in the community since the arrival of the mine, such as rising housing costs and inflation. There is also a perception that mining operations have contaminated and siphoned off local water supplies. Activists, who use the internet to spread information, also help to destabilise relations between the company and community. Excellence in Leadership

CIM010_010 Michael.indd 13

21/3/09 18:34:47

Social and political risk

‘It is important to remember that risk evaluation and response will be significantly different for new operations than existing businesses.’ Another enterprise risk is the employment of a socially unacceptable workforce. Wal-Mart recently settled a $135,540 lawsuit brought by the US Department of Labor for 24 violations of employing teenagers and allowing them to operate dangerous equipment. Although the amount of the settlement may be insignificant to Wal-Mart, the negative impact has huge repercussions for its reputation. It is also important for companies to be aware that they will not only face significantly different risks from companies in other sectors, but they will also attract different outside scrutiny on diverse issues. The risks that emerge from such scrutiny have affected companies that were often surprised to be accused of socially unacceptable behaviour: • The oil, gas, diamond and gold industries have been accused of harming the environment, human

rights abuses, negative effects on local communities and colluding with corrupt governments. • Footwear and clothing production have been associated with low wages, child labour and poor working conditions. For example, Nike was accused of employing children as young as ten in Cambodia and Pakistan to produce clothing and footballs. This practice led to consumer boycotts. • Telecommunications firms face negative reactions from customers if personal information is used inappropriately. • Food and beverage companies, especially fast food firms, have been associated with the obesity epidemic.

These can vary, depending on specifics such as location within a country, and can be more nuanced than the general sources of risks and the related issues discussed above. Key personnel can become aware of company- or projectrelevant social and political risk at an early stage. For example, a line manager at a plant in a developing country may become aware of negative reactions from local people through discussions with the plant’s workforce, or from public relations experts. These first signals can lead to much larger problems if they are ignored. It is therefore crucial for the company to have an effective process whereby these signals can be picked up and integrated into the overall risk management framework.

Catologue your concerns After it has identified general enterprise risk sources and issues, the company needs to look at company- or projectrelevant social and political risks.

The next step is for the company to generate a detailed risk catalogue, bearing in mind that risks can be location-specific. For example, a new shoe manufacturing

Excellence in Leadership

CIM010_010 Michael.indd 14

21/3/09 18:35:19

Social and political risk

plant in Vietnam faces different risks to an existing oil refinery in Oman. A risk catalogue is simply a more specific list of ‘red flag’ issues developed from the general risk profile, which are connected to a certain project or location. It is important to remember that risk evaluation and response will be significantly different for new operations than existing businesses. For example, ongoing operations are often difficult or costly to uproot if a major risk occurs. If such operations face social and political risks, companies must find ways of minimising their impact, while maximising their potential for continuing

• Internal analysis. This includes employees hired specifically for the purpose and personnel who interact with local leaders, politicians, nongovermental organisations and communities. They understand the business and know how particular social and political issues would affect the company. However, they have a narrower view of the whole industry and would be less sensitive to ‘red flags’ generated outside the company. • External analysis. Boutique political risk analysis firms which supply country-specific information are another source of risk data. They may

‘Integrating social and political risks is critical to effective management of a company’s risks.’ operations. However, it is much easier for companies to evaluate a variety of locations for new investments and compare the risk impacts. For most companies, reputation is a core issue because intangible assets like brand can account for over 60% of a company’s market value. Reputational damage from issues such as negative publicity and costly litigation can lead to lost revenue, falling customer numbers and key employee resignations, whereas a good reputation can lead to very positive outcomes such as increased access to capital markets and the ability to attract investors and the best employees. However, the reverse is also true; a bad reputation can damage the company irreparably. A key element of understanding reputation risk is the identification of stakeholders and their particular interests as these generate the resulting risks to reputation. Risk identification does not have to be a long and costly process. Even a few people spending a few hours discussing and identifying risks and assigning probability values to them can produce helpful if not precise results. This is better than no risk deliberation at all. There are essentially three methods for people to take to contribute to risk identification and the development of the risk catalogue:

also calculate national ratings based on risk from government, society, security and economic factors. This source gives a broad understanding of a country’s current situation, the information is updated regularly and those generating the data are usually very knowledgeable. Unfortunately such information is not usually industry- or region-specific. • Stakeholder scanning. Suppliers, consumers and communities are sources of data on social and political risk. Information can be gathered using surveys, interviews, community meetings and market perception studies. The drawback of stakeholder scanning, especially with new operations, is that studies could reinforce stakeholders’ existing expectations that the company will find hard to meet. The company could also become embroiled in local politics. For these reasons, companies using stakeholder scanning should seek third party assistance or hire personnel trained in conducting social impact assessments. A company could usefully combine elements of all three methods to identify risk. For example, it could assign general risk oversight to internal staff but also use field personnel and train them in ‘red flag’ awareness.

Political risk firms could supplement country information at various stages, and a social impact assessment could be made periodically within the project life cycle by a third party. However, the process should not become all consuming. Instead, companies should adopt a methodology for gathering and reporting information that is appropriate to them and the project. To conclude, integrating social and political risks is critical to effective management of a company’s risks and to improved resource allocation. A key element of this is the comprehensive identification of all the social and political risks facing the company. Once this has been done, the company is then in a position to assess these risks with a view to developing appropriate risk responses. ■

Further information This article is based on ‘Integrating Social and Political Risk into Management Decision Making’, a Management Accounting Guideline by Tamara Bekefi and Marc J Epstein, published by CIMA, the American Institute of Certified Public Accountants and the Society of Management Accountants of Canada. CIMA members can access the full version at www.cimaglobal.com/cpdcentre

Alexa Michael Alexa Michael is an information specialist within the CIMA Innovation and Development department. Her work includes writing and editing various outputs for CIMA publications, including articles, topic gateways and research executive summaries, as well as more traditional information and library work. She has an MA in Library and Information Studies from University College London.

Excellence in Leadership

CIM010_010 Michael.indd 15

21/3/09 18:35:50

** ow Pa $4 pr po in re In $2 Th in

Th im fro ro he ba be m pr –a

Discovery. Lower your total cost of risk:

Just ask our eSolutions clients Aon eSolutions provides innovative products, services and solutions to meet the diverse and varied risk data needs of the worldâ&#x20AC;&#x2122;s leading companies. The groupâ&#x20AC;&#x2122;s pioneering risk management information system (RMIS), RiskConsole, enables clients to consolidate their global risk-related data. By having a birds-eye view of their exposures at the touch of a button, companies gain new efficiencies and renewed confidence and transparency, enab l i ng m ob i l it y to react q u ick ly, put l os s prevention plans into place, improve workflows and significantly lower insurance premiums. In essence, lower their total cost of risk by up to 10%. Fully flexible to meet your needs - no matter how simple or complex - RiskConsole is the premier online RMIS offering multi-lingual and multi-currency functionality. Whethe r accessi ng at HQ fo r management reporting or at local sites for incident notification, gain control of your data management today. Please call Aon eSolutions on +44 (0) 20 7086 0149 to talk with our experts, or visit www.aonriskconsole.com/rc to see client testimonials and to register for a demo of this powerful solution.

297mmx210mm_RiskConsole_ad.indd 1

CIM010_026 Advert.indd 1

2/20/09 11:12:02 AM

20/3/09 08:26:29

Company insight

Optimise investment in risk assessment The concept of risk assessment is fairly well understood these days. What is less well understood is what happens to the information generated once these assessments are complete.

In many cases, risk assessment data is not used effectively and sometimes not at all. Often this is due to inadequate assessment results or lack of follow-up. With the growing pressures on today’s businesses, it is easy to understand how this can happen. However, it can be avoided with careful planning and selecting a suitable solution in which to collate, store and manage the findings. The consolidated results of a risk assessment, the risk register, have limited value as a standalone document and are quickly made irrelevant by the passage of time. The risk issues highlighted need to be compared against risk tolerance, then action plans developed, ownership

assigned and performance indicators created: all of which need regular monitoring and progression. For many, this is a daunting prospect and prevents advancing beyond the risk assessment phase (see diagram, below). However, having the correct methodology of delegating, monitoring and reviewing risk issues will help to put the risk information to more effective use. Here, a tool is required where information is input, processed and appropriate output generated.

However, the cost to implement and maintain these solutions can be very high. In addition, you may not have use for such a comprehensive, sophisticated solution, where the risk register is just one small component.

Stand out from the crowd The simplest approach is a spreadsheet in which to store the risk information and track risks, their criticality, actions, responsibilities and performance.

‘Under pressure, companies are turning to an intermediate solution; a standalone risk register module hosted on a web based risk management information system.’ Ask the right questions Questionnaires and interviews can be used regularly to provide manually updated information. The status of actions can be monitored and management reports generated with relative ease. While this is a simple and effective system, it will suffer from many drawbacks such as scalability, accessibility, update time and the opportunity for human error leading to a lack of auditability. At this point you may want to consider upgrading to an enterprise risk management (ERM) tool. The risk assessment cycle

whole range of enterprise risk information, be fully auditable, accessible from multiple locations and easily scalable. They can also be configured to generate automatic alerts and action reminders.

These systems are designed to suit your organisation’s exact needs, contain the

With budgets under pressure, many companies are now turning to an intermediate solution; a standalone risk register module hosted on a web based risk management information system such as the Aon RiskConsole. This avoids the limitations of spreadsheets, while offering a number of benefits of an ERM system for a significantly lower investment. Staff will gain confidence in and support of a professional tool, while the risk assessment process is facilitated. A risk register module can also generate automated output; saving time for the company and ensuring risk assessment findings are effectively and continually modified. Through careful planning of risk assessment and strategic use of assessment tools, even in today’s challenging climate your risk register can be truly effective, ensuring and promoting governance and transparency throughout the organisation. ■

Further information Aon eSolutions Website: www.aonriskconsole.com/cima Excellence in Leadership

CIM010_026_Aon.indd 17

21/3/09 19:18:56

Climate change

Storm warning The key risks for business are often strategic, but evidence suggests that many organisations are failing to tackle these sufficiently. Climate change is especially overlooked, yet it has the potential to fundamentally alter an organisation’s business model. CIMA’s Gillian Lees and Helenne Doody consider the nature of this strategic risk and how to integrate it into the planning process.

Strategic risks have certain characteristics that make them particularly challenging to manage – and climate change is no exception. Such risks may be hard to predict and they may not result in a single identifiable risk event. Strategic risk events may result from a combination of apparently unrelated and/or trivial events which, when mixed, create a potent cocktail. Therefore, it is important to look at risk in an integrated way across an organisation, as advocated by the enterprise risk management (ERM) approach. It may also not be immediately obvious that a strategic risk event has materialised or it may occur over a long period of time but if it takes some time to take effect, it is often too late to respond effectively. It has only been in the last few years that climate change has been recognised by governments and society as a major threat, and there is debate as to whether it is now too late to adequately mitigate climate change and its associated problems. A global

response is taking place though, and it will become increasingly difficult for companies to maintain competitive advantage without addressing climate change issues. It will almost certainly require changes to the way many organisations operate and climate change may threaten the very survival of some businesses. Organisations need to be able to respond effectively. So let’s take a look at some of the risks and drivers that make climate change a strategic issue for business.

Extreme conditions More and more we hear about the problems caused by extreme weather events, such as hurricanes and flooding. The effects on communities of such changes in weather conditions are highly visible and often covered in the media, but there are also negative consequences for business as a result of climatic changes. The World Business Council for Sustainable Development (WBCSD)

points out the following business risks: • Higher temperatures could affect the location, design, efficiency, operation and marketing of business infrastructure, products and services. • Water scarcity could hinder business operations, particularly those of waterreliant industries. • Rising sea levels could affect the location of business operations, and submerge or complicate access to raw materials, human resources or physical assets. • Increased frequency of extreme weather events could damage business infrastructure, disrupt logistics, and affect business continuity. • Changes in the distribution of diseases (e.g. malaria) and greater population migration could impact on workforces and markets. Many organisations are not yet considering the risks of these climatic changes though, perhaps under the impression that we still have decades before the impacts will

Excellence in Leadership

CIM010_011 Doody.indd 18

21/3/09 18:38:34

Climate change

really come to bear. However, the effects of climate change are already starting to show and organisations need to be factoring climate change risks into their strategy and planning processes now. As an example, the wine industry is already seeing the impacts of climate change and having to adapt accordingly. Producers are being affected by higher temperatures and changing weather patterns, and the harvest season is coming earlier in almost all regions. To protect quality, growers are starting to move their crops to higher altitudes, altering their water schedules and thinking about changing their growing patterns to grape varieties that can tolerate more heat.

High pressure front Climate change could also affect business through its impact on key stakeholders. Consumer tastes are shifting and many customers and employees now favour companies with a reputation for corporate responsibility and being ‘green’. Organisations that do not keep up with environmental initiatives will potentially lose market share and talent to competitors who are ahead of the game. Investment analysts are already asking for disclosure of climate risks and demonstration of effective risk management strategies, and are likely to demand more disclosure in the future. Investors are also starting to shift away from businesses thought to be at risk from climate change or of contributing to it.

including the US, and organisations should be ensuring that they are prepared. And it is not just those organisations directly covered by carbon trading schemes that will be impacted. Larger organisations that are captured are likely to push efficiencies down the supply chain and carbon management will be a bottom line consideration for many businesses. There will also be reputational risks resulting from non-compliance or from being given a poor rating on the league tables that are proposed as part of the CRC. So, given the impacts that are already starting to emerge, and the fact that there will be more to come, it is likely that organisations will have to change their business models, whether through a desire to help address climate change or in response to the changing needs of regulators, consumers and society. Organisations should be adapting their strategy now and not let climate change fall into a strategic blind spot. But how do organisations go about taking a strategic approach to climate change?

The four-box framework of the CIMA Strategic Scorecard is useful for helping to embed climate change into strategy. The scorecard was developed to help boards focus on the key strategic issues facing their business and to provide a framework for their involvement in the strategic process. The scorecard has four dimensions: strategic position, strategic options, strategic implementation and strategic risks (see Figure 1, p14). These cover the main areas of strategy that need to be considered. The scorecard prompts directors to ask constructive and searching questions of management and helps them to determine key points at which they must take decisions. Ideally, climate change should be included within the various boxes of an organisation’s overall strategic scorecard. Because it is a new issue for organisations, it may be helpful to set up a separate scorecard to ensure that boards ask the right questions about climate change. In due course, climate change should be integrated into the organisation’s strategy and not need its own scorecard.

‘Carbon management will be a bottom line consideration for many businesses.'

Governments are taking the issue seriously and new legislation is being introduced to try to mitigate climate change. For example, 2008 saw the introduction of the Climate Change Act, the Energy Act and the Planning Act in the UK, all aimed at ensuring that legislation underpins the long-term delivery of the government’s energy and climate change strategy. The Climate Change Act is a relatively radical piece of legislation, committing the UK to carbon emission reductions of 80% by 2050. One way of achieving these reductions is through the introduction or expansion of carbon trading schemes, such as the Carbon Reduction Commitment (CRC). The CRC is due to come into force later this year and will apply to entities with an energy bill greater than about £0.5 million, covering around 5,000 private and public sector organisations. Similar schemes are being introduced in other countries, Excellence in Leadership

CIM010_011 Doody.indd 19

21/3/09 18:38:59

Climate change

Figure 1. The CIMA scorecard

Strategic position

Strategic options

Strategic implementation

Strategic risks

Figure 2. Strategic position • What is the current state of science in relation to climate change? • What are the trends in consumer taste in light of climate change? What is the impact on the organisation’s market? • What are our competitors doing? Have they started generating options to respond to climate change? • At what point will what we are doing at the moment not be possible anymore, due to legislation, energy prices, restrictions on mobility? • What is the current thinking on environmental technology? Are there alternatives that fit with our business? • What are the threats and opportunities arising from climate change? Models such as SWOT and PEST may be useful but they tend to focus on current issues – longer time horizons should be considered.

• What are the regulators doing/proposing around climate change that will affect the organisation? Consider national and global developments. • What are the risks/threats in our supply chain? How can suppliers be used to help address the issues? • Are we addressing criteria looked at by ethical investors? • Do we have the correct stance on climate change to attract the right employees? • What are we doing to ensure our organisation is climate change ‘proof’? • Will the actions of NGOs or interest groups affect the organisation? • Is there intangible value to our products that we can promote, such as local produce?

Figure 3. Strategic options • Maximise strategic investments in climate-friendly products and processes. • Take over an organisation that has access to the right technology (e.g. clean technologies). • Create partnerships that would allow a new business model to develop (e.g. a car manufacturer partnering with an electricity company to produce electricpowered vehicles). • Set up a business unit to collate carbon emissions data.

• Restructure to facilitate home-working and minimise business travel. • Provide training/support to suppliers to help them change their business model to the advantage of both organisations. • Utilise leadership status on climate change to increase brand value. • Take the costs of carbon emissions into account in major investment and operating decisions.

Figure 2 shows examples of some of the questions that might be asked to assess the strategic position in relation to climate change. This is not an exhaustive list and it will depend on your organisation as to what sorts of questions may be appropriate. It is important to note that when answering questions around strategic position, hard facts should be used and answers should be supported by evidence. Once the strategic position is clear, options should be easier to identify. They will be specific to the organisation and should arise out of the analysis of strategic position. It is useful to walk through different scenarios and generate options based on the organisation’s business model, although ideas may be considered that change the scope or geography of the business. The aim is to come up with a number of options, some of which will then be worth exploring in more detail. At this stage it is about considering what might be possible, without being too specific or exact. While options will vary widely by sector and organisation, some examples of strategic options that may be considered in relation to climate change are shown in Figure 3. Sometimes it may require ‘thinking outside the box’ to come up with a strategic option. For example, worldwide delivery company UPS came up with a slightly unusual initiative for improving efficiencies on their distribution routes. A couple of years ago, the company introduced a global policy of avoiding left hand turns in the US and invested in a ‘package flow’ software programme that carefully plans routes, minimising idling time at junctions. The UPS vans now travel in a series of loops with as few left hand turns as possible. It may sound like a crazy idea, but in 2007, through using this route planning technology, UPS reportedly saved nearly 30 million miles (on already streamlined delivery routes), millions of gallons of fuel and, consequently, millions of dollars. It also cut carbon emissions dramatically, improved safety and reduced delivery times. It is important to think through a number of different strategic options and then prioritise the ones that the organisation is able and willing to act on. When assessing viability, the social, environmental and economic impacts should all be considered. Once the most suitable strategic options have been decided upon, the strategic implementation and risk boxes need to be worked through in relation to the

Excellence in Leadership

CIM010_011 Doody.indd 20

21/3/09 18:39:16

Climate change

options selected. An example of strategic implementation may be Marks and Spencer (M&S)’s Plan A. Plan A is a five-year, 100point ecological scheme introduced to tackle what it considers to be some of the biggest challenges facing its business – one of which is climate change. M&S is pursing this option because they believe it is what is expected of them by their stakeholders and because they believe it is the right thing to do. It is called Plan A because the company considers it is now the only way to do business; there is no Plan B. This demonstrates the strategic importance that M&S has placed on pursuing Plan A. It is not just an idea or only about branding – there are tangible steps and metrics. It is also considered a work in progress and is being continually reviewed.

Accurate forecasting Finally, referring to the strategic risk box on the scorecard, these are specific strategic

risks relating to the strategic options decided upon. An example of a strategic risk that may be considered asks the question: ‘What if the organisation does not achieve the brand ideal portrayed?’. Taking M&S as an example again, what would the damage be to their reputation if Plan A was found to be a PR exercise with no real strategic changes happening within the organisation? Plan A is proving a successful strategy. It is hard to quantify revenue benefits, but research has demonstrated that Plan A has helped the M&S brand and that employees are motivated and engaged. M&S has also seen cost savings through implementing parts of the plan. For example, within a matter of months, it saved over £0.5 million on recycling hangers – asking the customer if they would like the hanger to be recycled rather than placing it automatically into the carrier bag – a simple plan that required little investment.

‘Dealing with climate change should be about making smart business decisions that also provide environmental benefit.’

Returning to the scorecard, assessing strategic position, options and risks should be an ongoing process. Climate change is a fast moving area and there is no one right answer. It is about trial and error, experimenting with different options and continually monitoring your position. It is also important to remember that climate change should not be considered in a generic way, but in the way most appropriate to your organisation’s existing strategy and core business choices, so that actions taken support both your business goals and the environment. Using the strategic scorecard approach should help to ensure that the actions are tailored to your organisation. Ultimately dealing with climate change should be about making smart business decisions that also provide environmental benefit. It’s about using enterprise and initiative to do things differently but without compromising level of service. And it’s about incorporating climate change into strategy and day-to-day operations. ■ For more information on the CIMA Strategic Scorecard and on tackling climate change strategically, please visit www.cimaglobal.com/strategicscorecard and www.cimaglobal.com/sustainability

Gillian Lees Gillian Lees is a Governance Specialist within the Technical Department of CIMA. She has been working on corporate governance issues for nearly ten years and has been a key player in the CIMA/IFAC Enterprise Governance project.

Helenne Doody Helenne Doody is a specialist in the CIMA Innovation and Development department. She spent seven years in PricewaterhouseCoopers’ forensic services team and has worked in industry, focusing on risk management and internal control. Her areas of specialism include fraud risk management and sustainability.

Excellence in Leadership

CIM010_011 Doody.indd 21

21/3/09 18:40:05

Company insight

Carbon data Laurent Mineau, Head of Energy Services, EDF Energy Major Business, explains that good data is key for a low-carbon, low cost future.

As the credit crunch continues to tighten its grip, an increasing number of voices are claiming that businesses cannot prioritise ‘green’ issues in a recession and that sustainability will be pushed back down the agenda.

corporate social responsibility programmes, which contribute to brand assets.

At EDF Energy, we believe that the very opposite is true; that in these difficult times, it has never been more important for businesses to maximise profitability by embarking on a programme of energy efficiency to reduce unnecessary expenditure. In the reduction equation, carbon equals cash.

With significant financial and reputational benefits on offer for companies who succeed in the CRC, input from executives at the highest level in a company is essential. The scheme is complex and the skills required to understand the implications of the detail, assess potential courses of action and manage large data capture projects are often those most associated with the role of financial director, with support from the rest of the board.

Energy becomes an FD issue

The importance of data

The need for smarter energy use carries even more urgency due to the introduction of the new Carbon Reduction Commitment (CRC). This is a cap and trade scheme borne out of legislation designed to help the Government meet its ambitious carbon reduction targets.

The CRC begins in 2010 and requires participating firms to buy carbon allowances to cover their emissions from on-site energy

The CRC is targeting an estimated 5,000 organisations, largely untouched by the existing carbon reduction schemes of Climate Change Agreements and the EU Emissions Trading Scheme. The affected sector comprises organisations described as ‘large non-energy intensive’ and is estimated to account for roughly 10% of the UK’s annual carbon emissions. The CRC is specifically designed to promote carbon savings through greater energy efficiency rather than buying renewable energy from the grid or investing in carbon offsetting. While the positive environmental impacts are fundamental to such schemes, it’s also important to think about them in rational financial terms. We’ve noticed a shift in the amount of senior management attention devoted to energy efficiency as it’s an effective cost control measure. But it’s also often instrumental to the achievement of environmental targets within companies’

‘In the reduction equation, carbon equals cash.’ use on an annual basis. Businesses will have to register for the scheme if they have a site with a half-hourly electricity meter. They will have to participate fully in the scheme if they used more than 6GWh (roughly £500,000 worth) of half-hourly metered electricity consumption across all relevant sites for all subsidiaries in 2008. Participating fully involves buying allowances for forecast relevant carbon emissions at the start of each carbon year, and surrendering these allowances to match actual emissions at the end of each carbon year. Mistakes bring penalties. This makes it critical to have a well maintained inventory of premises the organisations

owns and/or occupy. This inventory should detail the CRC status of each site in terms of who owns the carbon emissions in the case of rented buildings. The scheme counts organisations at group level including all their subsidiaries operating in the UK, but it considers the carbon owner of emissions for each site to be the counterparty to the energy supply contract, normally the bill payer. So it may well be that a company is responsible for buying emissions allowances for buildings it owns and leases out, but not for the emissions of buildings it occupies and pays the landlord for the energy costs within a service charge. If that sounds complicated, it’s because it is. We believe this degree of data management will be the major challenge for most organisations as this level of energy reporting has rarely been a requirement. But it’s absolutely vital to get it right. Businesses will incur significant additional costs if they do not purchase the right amount of allowances to cover their emissions. For example an occupier buying allowances for carbon emissions that are actually the responsibility of the landlord, or vice versa, will tie up funds unnecessarily. That has cashflow implications but at least those allowances could be carried over to the next year within the same CRC phase. However, an organisation will incur fines for not having allowances to match emissions from a particular site that it erroneously thought was not within its CRC responsibility. Those fines have far more significant cost implications for the company.

Excellence in Leadership

CIM010_027_EDF.indd 22

21/3/09 19:36:44

Company insight

Prioritising actions Money collected from the sale of allowances is recycled back to participants depending on their relative performance in a league table that Department of Environment and Climate Change will publish each year. Businesses in the bottom half of the table will be penalised financially as not all their allowance payments will be recycled back to them. But there is a risk to your firm’s reputation too, because comparisons between companies’ ‘green performance’ are likely to be made by interested parties such as the media, NGOs and other pressure groups. For companies that value their brands, it’s even more important to prioritise actions that will deliver good performance in the league table. Recognising that good data about energy use is essential for good energy and carbon management, the scheme specifically rewards the installation of automated metering wherever possible. The amount of so-called smart metering in place by March

2011 versus the company’s potential will account for half their score to calculate their position within the first league table published in October 2011. That provides a great extra benefit for companies considering installing smart meters – more detailed data for energy management, fewer instances of estimated bills and CRC league table points. While success in the first league table is relatively easy to plan for, longer term success is more challenging. However we believe the best performing companies will exhibit the following traits: wellestablished carbon reporting mechanisms, the integration of environmental considerations within new product development to help cut energy use relative to the company’s growth; a workforce that feels engaged in reducing carbon emissions. After installing smart metering, the next logical step is to undertake a detailed energy audit to identify opportunities

‘CRC should be viewed as an opportunity to reduce carbon emissions and costs’

Crunching carbon emissions The CRC begins with a practice phase from 2010-2013 for the Department of Energy and Climate Change to test the mechanics of the scheme and determine the volume of carbon emissions actually covered by the scheme, and to allow participating organisations to familiarise themselves with carbon management. There will be an unlimited amount of carbon allowances available in this phase and surplus allowances from 2010 can be carried over to cover emissions in 2011 and 2012. However practice phase allowances expire in 2013 and cannot be carried over into the next phase. From 2013 a cap on the number of allowances is introduced and future phases last five year. Each year after 2013 the number of allowances available will reduce, implying companies should develop a carbon management programme to keep its emissions in line with the reducing cap. to reduce energy usage. To admit an interest, the energy services team at EDF Energy Major Business has extensive experience of advising companies to improve energy efficiency. The Advanced Efficiency Programme (AEP) that we offer has helped organisations like John Lewis make significant savings. Our programme of Café Energy workshops last summer helped over 450 customers to understand the complexities of the CRC and start their preparations early. CRC should be viewed as an opportunity to reduce carbon emissions and costs together. Forward-thinking finance directors can rest assured that by taking early action, both their profitability and brand value will improve. Please check www.edfenergy.com/crc for our latest updates on the CRC. ■ Further information EDF Energy Website: www.edfenergy.com Excellence in Leadership

CIM010_027_EDF.indd 23

21/3/09 19:37:13

Risk and opportunity

Special delivery Perhaps the most fundamental change in corporate culture to come about with the invention of the internet has been the allpervasive use of email, a revolution that has seen mailstream specialist Pitney Bowes reinvent itself for the digital age. Executive Vice President and Chief Financial Officer Michael Monahan addresses managing risk amid rapid change with Steve Coomber.

Excellence in Leadership

CIM010_013 Pitney Bowes.indd 24

21/3/09 18:47:18

Risk and opportunity

US Fortune 500 firm Pitney Bowes is an organisation used to dealing with risk. The business’ success was founded on its invention of the postal franking machine in 1902. Yet, following decades of dominating the huge postal market in the US and expanding across the globe, new forms of communication such as email threatened to cast Pitney Bowes into obscurity. Former CEO Michael Critelli even described the company as the whip to the postal service’s buggy. Under the guidance of its management, however, the company anticipated the risk inherent in the introduction of new technology and successfully reinvented itself, redefining the way it looks at markets; the diverse stream of mail, documents and packages that flow in and out of organisations, from bills and e-statements to direct mail, catalogues and online goods, such as DVDs. The company calls this flow the mailstream. It is no surprise to find then, given the firm’s history, that Pitney Bowes has a well developed framework for dealing with enterprise risk management. As Michael Monahan, Executive Vice President and Chief Financial Officer, explains, it is a framework that goes much further than risk mitigation, seeking to make effective risk definition and management an integral part of organisational growth strategy.

A risky future Given the severity of the ongoing global financial crisis, it is no surprise that Pitney Bowes is already factoring issues such as the increased liquidity risks encountered trading in the current environment, into its strategic decision making. So what is the enterprise risk management programme telling CFO Michael Monahan at the moment as the business moves forward into 2009? ‘Liquidity is an obvious area, but if you think about your business more broadly, that leads you to supply chain and procurement, and your supply network. Our process has kept us attuned to the fact that we needed to expand our view, and review our supplier base to look at their ability to continue to meet their obligations and continue to supply us,’ says Monahan.

The firm looks at three key elements. First, there is the definition of the risk. Then it is a question of looking at the probability of a particular risk occurring and its relative severity. Plus the extent of disclosure required for the risk is considered, measured in terms of whether that disclosure needs to be within the management hierarchy, to the board or externally, as well as the potential financial impact on the firm, or other possible impacts, such as reputational risk. The third component is risk mitigation, and the strategies and plans that Pitney Bowes puts in place to mitigate each of those risks. One reason the company’s approach to risk works well is the way that its enterprise

‘So we have taken a much closer look at our customer base as we identified a risk in a certain segment in the marketplace, let’s say mortgage lenders, for example, in the United States. So in the latter part of 2008 our risk assessment process told us that not only should we look at mortgage lenders, but we should also look at the people who support them, and the segment of our customer base that supports them.’ The focus on risk assessment, says Monahan, allows you to cascade the planning and thinking about how Pitney Bowes may be impacted by the credit crisis, across the broad spectrum of its business.

‘With a carefully structured risk management programme, it is possible to factor risk into the strategic decision making process.’ risk framework is structured to drive responsibility for risk down to the lower levels of the organisation.

Enterprise risk management ‘We have defined a number of risk areas for our business; 17 in total,’ says Monahan. ‘These cover a broad spectrum of risk areas, including competitive environment, industry specific risks, more traditional financial risks such as liquidity, as well as other related business risks such as contractual and supplier risks.’

‘The way we have organised it is to assign the ownership of each of those risks to a leader across the business, and the decision of who has the ownership of a given risk will be based on which leader is most able to understand the impact of that risk,’ says Monahan. ‘Then that person will engage across the organisation to develop a risk mitigation programme or strategy to deal with that risk.’ Although one person will have ownership of each of the 17 areas, there are sub risks within each risk category, and people who support that risk owner in terms of evaluating and mitigating those sub risks. A committee of senior executives will review the portfolio of risks on a regular basis, review the mitigation plans, and review the probability assigned to these risks. It will then take a view on the risks, rate them in terms of the firm’s mitigation strategies and put a programme together to continue to refine those mitigation strategies, especially in the light of changes in risk or business goals.

The results of the process are regularly reported right up to the CEO, and then to the board directors. Certain risks will go to committees of the board, where the risk is most relevant to the topics those committees are responsible for. ‘It is really a structure that allows us to drive down ownership into the organisation,’ says Monahan. ‘We have structured it that way because we want to address the risk at the level at which it is most likely to impact the business, and then be able to bring those plans together at an overall corporate level to understand the overall risk, and create an overall dashboard of those risks that can be communicated both to our senior management as well as to our board.’ The process then is a highly integrated one throughout the business, that allows management to really understand the broader risks in the business, but at the same time have its mitigation strategies align strongly with growth objectives.

Risk and opportunity With a carefully structured risk management programme in place, says Monahan, it is possible to factor risk into the strategic decision making process in a meaningful way. Excellence in Leadership

CIM010_013 Pitney Bowes.indd 25

21/3/09 18:48:34

Risk and opportunity

‘The process for acquisitions and capital investment programmes means that, as well as putting together an explanation of the project, the business unit has to put together a business case,’ he says. ‘An important component of that business case, what we call the capital investment proposal, is identifying the risks inherent in the programme, and the mitigation strategies associated with those risks. One value of having these risk categories identified, defined, and redefined, is that we can identify those risks within any capital programme or investment that we might undertake, and

management would expect an assessment of the regulatory risk as part of any investment proposal for the product or service. Monahan is aware that risk assessment can come to dominate a firm’s activities and mindset, particularly operating under certain economic conditions. ‘The greatest risk of that happening, though, is when you do not have a clear definition of what the risks are, and then it can paralyse the decision-making process,’ he says. ‘The key to being able to make the business decisions is really being able to understand or quantify and define what the risks are.

‘The key to being able to make the business decisions is really being able to understand or quantify and define what the risks are.’ map them consistently against our preexisting risk categories.’ This means that management’s ability to assess the impact of those risks against an investment opportunity has a lot more clarity and objectivity to it. So, for example, says Monahan, Pitney Bowes has a substantial part of its business in the postal industry. If someone is proposing a new product or service within the postal industry in a given market, one aspect of risk to consider is the postal regulatory environment in that market place. And so

By having an effective enterprise risk management programme you actually allow those risks to be put into a more objective context within the decisionmaking process, allowing you to make faster, more informed decisions.’ Pitney Bowes also ensures that it does not take too cautious an approach to risk management. Within its rating system it identifies excessive mitigation, as well as acceptable mitigation and optimal mitigation. Excessive mitigation is where the company may invest more in avoiding a risk than is really necessary, based on the return that the

firm is trying to generate from that activity. ‘You are never going to mitigate 100 percent of any risk, and that has got to be part of the assessment when you are making investments,’ says Monahan. ‘Our goal is not to limit investment but actually to enable investments, by understanding risk, and putting it in the right context in the decision-making process.’ As Monahan points out, risk management systems are inevitably a work in progress, yet Pitney Bowes has spent some time developing what is a fairly robust enterprise risk management framework. With the benefit of hindsight how would Monahan go about building a risk management programme if he was starting from scratch? ‘I think the first thing is really understanding your business strategy, what you are trying to accomplish in your business, and then defining your risks around that strategy, both the external risks, as well as the internal risks,’ he says. ‘Once you have defined those risks it is a matter of determining what you need to address to mitigate those risk, and then the most important element is creating ownership around that within the organisation.’ And an important aspect of this, emphasises Monahan, is to ensure that it has relevance to the business, that it is not a separate compliance exercise, but is about enabling the business to achieve its strategic objectives. Finally, ownership also means that the senior management has to communicate to the organisation that this enterprise risk management is a critical business need and a critical business objective for the organisation for it to achieve its goals, says Monahan. With that commitment from leadership, you get the engagement of the organisation. ■

Michael Monahan Michael Monahan was named executive vice-president and chief financial officer of Pitney Bowes in March, 2008. In this role, he has responsibility for the financial operations of the company on a global basis.

Excellence in Leadership

CIM010_013 Pitney Bowes.indd 26

Excellence in Leadership

23/3/09 16:56:31

Company insight

A new view on risk Laurence Trigwell, Worldwide Financial Services Executive, IBM on using improved insight into risk to make a competitive difference. Risk is the currency of the modern financial institution. As a result, systems and processes have arisen to ensure the management of risk is as efficient and accurate as possible. However, despite significant research and investment into risk calculation and modelling methodologies, turning risk data into operational information and automating the process still remains a challenge. Some of the issues are caused by the growing complexity of the information needing to be managed. From an inability to respond to ad hoc queries, to requests from senior management to run risk reports – and the need for those to be done manually – greater automation would fill that gap. From a legislative point of view, Basel II has had the biggest impact on the ability of organisations to model effectively.

A changing landscape Banks and financial institutions are often organisations that have evolved over decades, responding to new technology where there is a clear and measurable benefit. This can often lead to organisational structures that are disparate and arranged in silos, with different teams each operating to their own ends and little formal structure in place for knowledge sharing or crossdepartmental processes or reporting. More recently, the increased rate of mergers and acquisitions has also exacerbated the issue of information sharing, particularly of operational intelligence designed for senior managers. The resulting organisational matrix – across planning teams, financiers, management and regulatory units, and then across the organisation’s regions themselves – can mean up-to-date risk information needs to be manually gathered and presented before it can be delivered as data for decision-making. When combined with multiple emerging risk classes and regulator pressure to

report and manage risk more effectively, the financial institutions are facing a challenge. Imagine this: could a senior risk or finance manager, faced with a critical business decision to make quickly, request the risk exposure of a single business unit in a single region, and immediately have the accurate, up-todate detail at their fingertips, aggregated from numerous sources and including operational data and other related product or business information?

Beyond compliance For many senior risk and finance managers, this need for information is not driven solely by the legal requirement to comply with regulations like Basel II

‘Linking risk to business growth or customer metrics creates valuable intelligence for senior managers.’ or Sarbanes-Oxley. What we’re seeing instead is a move beyond compliance to enterprise performance management. This represents far more than just a ‘box ticking’ compliance exercise, and takes risk management best practice into a far more strategic area altogether. The ability to monitor integrated risk information from across the enterprise, including timely risk alerting and controls, is the beginning of the journey to risk management as a performance differentiator. Next, understanding the impact of risk and the related profitability and cost issues, and being able to act on them, is vital. Finally, informed and coordinated decision making which –

crucially – can be done quickly in response to sales and marketing or market changes, moves the management of risk into a truly optimised offering that is aligned with business needs.

Satisfying the appetite for risk In a dynamic market, risk management is key, and access to valuable risk information from across an organisation can ensure better-informed decisionmaking and more effective capital and business management. While improved reporting systems can cut down the complexity in risk management – removing, for example, the need for manual aggregation of information – the true benefit comes from the ability of risk insight to create valuable management information. With all departments of an organisation moving in sync, risk becomes a community issue. All of a sudden, the ability to model future scenarios, take decisions on products, and act, turns what was a compliance issue into a sales tool. The fact that senior management are more focused than ever on risk might be, in part, thanks to Basel II. But the potential business benefits are there. Linking risk to business growth or customer metrics creates valuable intelligence for senior managers. Tools that help them do that easily are sure to be top of the shopping list. ■

Further information IBM Website: www.ibm.com/cognos/uk Excellence in Leadership

CIM010_Cognos.indd 27

23/3/09 18:03:23

Risk and the boardroom

Crunch time Andrew Campbell, Director, Ashridge Strategic Management Centre and Stuart Sinclair, former CEO of Tesco Personal Finance warn that senior executives need to be able to think creatively and independently of previous experience to avoid being bitten by the current financial crisis.

Excellence in Leadership

CIM010_Ashridge.indd 28

23/3/09 14:35:36

Risk and the boardroom

Many companies are facing a tough and uncertain future which is creating both problems and opportunities. Markets are shrinking and possibly changing permanently, financing arrangements are under pressure, share-based incentive schemes are under water and markets for talent are moving from shortage to glut. When so many things are changing, boards need to question fundamentals: • Is our view of the market realistic? • Does our financing strategy take account of the new conditions? • Can we take advantage of the pain our competitors are experiencing? • Should we reset the incentive scheme or abandon any approach based on share prices? • Can we exploit the current glut of talent? Unfortunately, because most boards have not experienced this combination of changes before or because their previous experiences suggest to them that normal service will be resumed shortly, many are likely to fail to adjust strategies and policies sufficiently. This failure to make enough adjustment is a common, clinically-observed, human trait. Referred to in the literature on judgement and decision making as anchoring, this human trait causes us to be over influenced by previous judgments. The mechanisms that cause us to assume that normal service will be renewed happen inside our brains. Decision making is now understood to be an emotional process: we are only able to judge good from bad by accessing the emotions we associate with the differences. Since we have attached positive emotions to previous decisions, these positive emotions can disrupt our judgement as we try to adjust our thinking. What happens is that our previous view of the market, the strategy we have been pursuing and earlier judgments we made about management development, acquisitions or incentive schemes will become anchors in our thinking. The research demonstrates that we will change our thinking on these topics when faced with new conditions, but not far enough. We will adjust, but the adjustments we make will be insufficient. This habit of insufficient adjustment is a double challenge for boards. Not only do they need to question current strategies, but they also need to adjust current board procedures. Most boards have full agendas and few opportunities for unscripted debate.

Board members are not in the habit of ‘throwing current assumptions out of the window’ or ‘starting with a clean sheet’. But this is what is needed if the board is to really question current strategies. Anchoring will cause boards to adjust insufficiently from normal procedures in the same way that they are likely to adjust insufficiently from past strategies.

financially oriented: the numbers get all the attention, the board members peer at their responsibilities through the financial data. But amid all this heterogeneity lies, in our experience, one simple theme - there tends to be relatively little scope for genuinely free thinking or for any fundamental reexamination of the premise of the company. Again the solution is for the chairman to explicitly change the style.

Disruption tactics So what should chairmen and other board members do to avoid the anchoring trap that dogged boards at companies like Vivendi and Marconi in 2001 or Northern Rock in 2007. First, chairmen need to attack the complacency of the board’s natural rhythm. Most boards have a preset and hard to change sequence of events. Meetings, agendas and timetables often follow an annual pattern. Advisers are pre-scheduled for audit and compensation committees.

Speak freely The chairman needs to give permission for members to articulate what they have perhaps feared, or thought, but have not had the confidence or forum to express. These will be uncomfortable conversations. Some will be more conceptual than a typical board meeting. Some participants will have to risk saying something stupid as they grope for a powerful organising principle to express their ideas, questions or prejudices. Long-cherished assumptions, existing plans

‘Chairmen need to attack the complacency of the board’s natural rhythm.’ Behaviour patterns can become established, with some board members expected to say little. Even seating positions can become regularised. Attempts to make changes are often resisted in part because of habit and in part because those involved have busy calendars that do not make coordinated changes easy. Even if there is energy for fresh substantive work, and the mind is willing, the diary will often defeat. The only solution is for the chairman to force change. This requires more than the annual strategy away day. Boards need to have ‘credit crunch’ meetings, ‘survival’ meetings, ‘does our plan still make sense?’ meetings and ‘how can we turn this pain into an opportunity?’ meetings. The chairman needs to break the rhythm by calling one, two or three extra meetings with unusual agenda items. Without this shake up in rhythm, anchored thinking will dominate. Second, the chairman needs to change the style of board interaction. Most boards have a default style. Some are focused on smooth running: no disagreements, no late papers, no fluffed presentations and no late finishes. Some are preoccupied with governance: procedure is top of the list, content gets less attention and process dominates. Some are

or defined ambitions may need to be torn up. For most boards, these conversations will take them into deep waters which will be frightening. One board we are familiar with used the Edward de Bono hats technique to force members into different conversations. The technique defines different styles of contribution (e.g. critic, growth zealot) and asks members to signal which style they are using. It helps expose dominant styles and encourages style experimentation. Many boards use outsiders either to facilitate a change in style or to provide controversial challenge. In one board, the work involved identifying the 6-10 premises upon which the 2009 plan was based. The consultant then interviewed each director in confidence to get their range of opinions on each premise. When shown to the group, the results demonstrated that most of the board no longer believed the premises were valid. Different meetings and a different style of interaction is not enough. The chairman also has to build in stronger follow through than is normal. The typical annual strategy away-day helps to free the discussion, but Excellence in Leadership

CIM010_Ashridge.indd 29

23/3/09 14:35:54

Risk and the boardroom

‘Without some dramatic leadership from chairmen, many companies will wander into 2009 focusing more on survival than revitalisation.’

the trade-off is an understanding that major change is not expected. New ideas from the strategy away-day are expected to be part of creative input, rather than fundamental review. To grapple with today’s challenges companies need both open discussion and strong follow through. Every one must understand that the messy dialogue they are having could lead almost immediately to significant change. If indeed the board moves into a fresh trajectory of thinking, the chairman needs to make sure this leads to changes in plans and budgets. One board we know has followed up some new thinking with weekly board calls to confirm the new direction and check whether the flood of new data and news about the credit crunch requires the board to re-calibration again. Of course, new types of meeting with a new style of dialogue even if linked to a powerful follow-up mechanism, will achieve little if the board are not in touch. So there is one additional job for the chairman: make sure the board is exposed to reality

in as tangible and emotionally real way as possible. This may mean encouraging the board to attend gatherings of bankers. It may mean asking board members to visit customers or distributors to help them distinguish between de-stocking and evaporating customers. It may mean asking them to visit Hungary to understand how the crunch is affecting small countries with weak banks. It may mean encouraging them to talk to middle managers to understand the impact of a share incentive scheme that is underwater. What is important is that directors have visceral experiences that can trigger their thinking and intuition and help them let go of past anchors. Without some dramatic leadership from chairmen, many companies will wander into 2009 focusing more on survival than revitalisation, hoping that their past view of the world will be restored. As a result, they will find themselves struggling to withstand the tough conditions and badly positioned for the new environment that will emerge. ■

Andrew Campbell Andrew Campbell is director of Ashridge Strategic Management Centre, a specialist in strategy for large multi-unit global companies and author of ten books on strategy and organisation including Think Again: Why good leaders make bad decisions and how to keep it from happening to you, published in 2009. Campbell is also a contributor to the McKinsey Quarterly.

Stuart Sinclair Previously CEO of Tesco Personal Finance, CEO of GE Capital China, and president of Aspen Re, Stuart Sinclair is now chairman and non-executive director of several companies in the UK and Eastern Europe.

Excellence in Leadership

CIM010_Ashridge.indd 30

23/3/09 14:36:16

Company insight

The lost art of cash management As the recession deepens, Mark Bodger of ICit Business Intelligence argues that there has rarely been a more important time to focus on traditional cashflow management.

As the global downturn deepens, external sources of finance are harder to come by and suppliers are trying to shorten payment terms, companies are under intense pressure to hunt for the cash they need to run their businesses from within the company.

detail, ensuring that all sources of cash and expenses were accurately assessed before being included in the forecast. While the weekly visits of bankers to businesses may have lapsed, so has the focus on tight cash management.

Operational cashflow management Cash management skills and the mentality that recognises its importance have gone out of fashion in recent years as management focuses on driving top-line sales growth and profitability. In my early career as the company accountant for a utility contractor, I learned the importance of cash. Large US owned cable TV operators would release payments to sub-contractors when they felt like it. The contractors, on the other hand, would demand their wages to be paid every week, no excuses. It was not an enjoyable experience having to keep an eye on hourly cash movements as pay day loomed each week but it was a better education than anything I gleaned from accounting studies.

The local banker and cashflow forecasts The reason for relaying this story is that, despite the daily concern of running out of cash and worrying if we could afford the wage bill, this was at a time when the local branch bank manager played an important role in helping businesses manage their money. At our weekly Thursday morning meeting, the bank manager would review my cashflow forecast for the following eight weeks and provide objectives. This weekly governance process meant that as a company we had to develop accurate daily, weekly and monthly cash reporting and variance analysis against the forecast. This required considerable attention to

Several years on and the same issues surrounding cash management exist today as they have always existed in commercial enterprises. At ICit we have seen a sharp increase in the number of our clients turning to us to help them implement cash management solutions.

‘At our weekly Thursday morning meeting, the bank manager would review my cashflow forecast for the following eight weeks and provide objectives.’ The more interesting solutions involve what we term ‘operational cash management’ solutions. For example, we recently implemented a daily cashflow forecasting system for a retailer with 200 stores and 20,000 product stock keeping units. This was essentially a stock replenishment forecast that was integrated into the receipts and payments forecast.

The bottom line is that the client now has greater control and visibility of cash inflows and outflows that can be aligned to operational performance. The solution was built using a multi-dimensional analysis tool, IBM Cognos TM1, and was implemented in less than ten days.

More effective cashflow management In terms of cashflow management, the tighter the cash position, the more detail you need to manage it effectively. While daily cashflow management may seem extreme to some, it is vital to others. I spent a number of years working for a £2 billion retailer that was run on daily cash management principles. The basic measure of business performance was assessing whether the bank balance had improved over the review period. Given the current financial crisis, how many firms now wish they had been run on such sound footing? The art of cash management cannot be forgotten. We do so at our peril. ■

Further information ICit Business Intelligence Email: info@icitbi.com Website: www.icitbi.com Excellence in Leadership

CIM010_003_ICit.indd 31

21/3/09 19:15:27

Performance and risk

Bonus shot In the wake of a worldwide fiscal crisis, believed by many to have been caused by the actions of greedy financial institutions, bankersâ&#x20AC;&#x2122; bonuses have been slammed as an unacceptable luxury and there are cheers for radical change. Margaret Woods catches up with compensation structures and finds an unusual potential solution in the structure used for US professional basketball players.

Bank compensation and bonus structures are now firmly on the agendas of both the banks and regulatory organisations such as the Financial Services Authority (FSA), not to mention the general public. The reason is simple, while performance related pay has long been the norm in the banking sector, the performance and hence the pay has not been measured on a risk adjusted basis. What is more, the risks have been exacerbated by asymmetric arrangements in which short-term bonuses have been

paid out before longer term performance has been revealed to be weak. It has even been suggested that financial services groups have long been prisoners of a pay structure that contains the seed of their own destruction.

promoting staff ambition and loyalty. So what exactly went wrong in banking and financial services? Pinpointing the mistakes allows us to learn lessons that can be applied to any sector of business.

The problem in banking Management accountants and HR managers have for many years praised the concept of performance related pay as a useful way of improving overall organisational performance as well as

The reward culture within banking is characterised by the payment of performance related cash and/or stock bonuses which supplement basic pay. The bonus system permeates the institutions,

Excellence in Leadership

CIM010_020 Woods.indd 32

21/3/09 19:12:06

Performance and risk

straddling business lines such as retail banking, corporate lending, investment banking and insurance. While the details of how bonuses are determined will vary from bank to bank, the underlying culture is one in which staff commonly expect a significant proportion of their pay to be performance dependent. What is more, this principle holds true across all grades of staff. The 400 partners of Goldman Sachs typically share around 20% of the bank’s bonus pot – which totalled $13.2 billion in 2007 and Goldman Sachs’ chief executive was paid $68.5 million in 2007 but in 2006 an individual trader, Driss Ben-Brahim, was reputed to have received a record $50 million bonus. Such bonus schemes will inevitably drive behaviour, following the maxim of ‘tell me what you measure and I’ll tell you how I behave’, but that behaviour may involve the institution in taking greater risks. In 2006 This is Money reported that staff at Royal Bank of Scotland and at NatWest were being paid commission according to a score system in which workers amassed disproportionately more points for selling larger loans. Reporting on the financial crisis suggests that other banks probably operated similar reward systems, but the more important issue is whether or not these bonus schemes take into account the increased risks associated with the larger loans. From the FSA’s perspective ‘it would appear that, in many cases the remuneration structures of firms have been inconsistent with sound risk management. It is possible that they frequently gave incentives to staff to pursue risky policies, undermining the impact of systems designed to control risk, to the detriment of shareholders and other stakeholders.’

Pay, performance and risk CIMA’s official terminology defines risk management as ‘the process of understanding and managing the risks that the organisation is inevitably subject to in attempting to achieve its corporate objectives’. Corporate objectives are defined within a context that encompasses the competitive environment, internal resources and attitude to risk. If returns are a compensation for risk, then performance measures need to pay heed to risk, and ensure that the organisational appetite for risk is not exceeded. This gives us guideline number one: When setting performance targets, ensure that the risk boundaries are clearly defined.

In practical terms, making sure that performance targets are met, and risk appetite is not exceeded requires that both performance targets and risks are defined, measured and monitored at all levels within an organisation. Using a scorecard approach, targets can be set at corporate, divisional, business unit, team and individual levels. The targets then need to be linked to lines of responsibility, so that risks are assigned to owners. This can be achieved by each individual manager being asked to take each performance target for which they are responsible, and produce a list of the risks that may cause performance to fall below target. In this way the risks become embedded in the performance management process and in so doing risk management matches up to its definition as ‘the process of understanding and managing

the risks that the organisation is inevitably subject to in attempting to achieve its corporate objectives’. This gives us guideline number two: Assign managers responsibility for the risks associated with their own performance targets. Figure 1 illustrates how the links are made between overall company objectives, lower level performance targets, and risk management. The next step is to ensure consistency of approach between the performance measurement system and reward structures. Using Figure 1, this can be achieved by using the information provided by the bottom box under monitoring

‘Financial services groups have long been prisoners of a pay structure that contains the seed of their own destruction.' Figure 1. Integrating performance and risk management Performance

Corporate plan and scorecard

Risk

Monitoring

Corporate key risk matrix

Performance indicators Divisional plans and scorecards

Divisional risk matrices

Risk ownership Business unit plans and scorecards

Business unit risk matrices

+ Comparison of risk and performance

Team and individual targets

Business unit risk matrices

Excellence in Leadership

CIM010_020 Woods.indd 33

21/3/09 19:12:24

Performance and risk

monitoring – the comparison of risk and performance. If a member of staff has achieved the required results, but taken excessive risks to do so, then bonuses should not be paid. This approach reinforces the message that internal controls matter as well as performance. This gives us guideline number three: Pay bonuses only when risk appetite and internal controls have been fully adhered to. In practice, this is the really difficult part to implement, and so a review of the detail of how to do this is clearly useful. Lessons can be learned from both basketball and also the mistakes made by banks.

From principles to practice So what can US basketball teach us about how to link pay structures to risk taking? The answer can be found in the overall compensation structure used for professional players. The National Basketball Association in the US has well established guidelines on • base salaries • salary caps • bonuses as a percentage of salary and • escrow arrangements.

Escrow arrangements mean that a portion of players’ total compensation is held in trust by a third party and only payable when longer term team performance targets have been achieved. The culture that is laid down is one that rewards exceptional performance but only up to a certain level, defined in terms of salary caps. Base salaries are good, and bonuses are restricted to a relatively low proportion of salary- rather than multiples of salary as in the banking sector. Lastly, the bonuses and escrow arrangements link individual pay to long term team performance. Cash bonuses are not received until the league position or cup win is ‘in the bag’, and no single individual is rewarded disproportionately relative to the team. In the case of the US national basketball team, it would seem that this approach to management helped to take the team from a humiliating defeat at the 2004 Athens Olympics to gold medal winners in Beijing four years later.

Lessons from financial services • Embed risk into the bonus pool and ensure risk ownership. In other words, avoid falling into the trap of policies such as paying sales staff huge

bonuses for selling mortgages or loans that may never be repaid, or giving huge bonuses to traders who engage in high risk complex derivatives deals that may put bank capital at risk. Staff need to be sensitive to the risks they may be taking and such sensitivity can be achieved in three complementary ways. First, by making an internal charge for the use of capital, so that performance is measured on a residual income rather than a gross profit basis. Bonus plans could then reflect a risk adjusted return on capital. In an investment bank, for example, each trading desk could be charged for the capital used, and the traders’ bonuses adjusted accordingly. Additionally, the higher costs of capital associated with greater risks will discourage excessive risk taking. Secondly, it is suggested that employees should be made aware of risk by having ‘skin in the game.’ One example of this is the fund management sector, where managers and their team members may be required to defer a percentage of their annual bonus, which is then invested in the funds they manage. This approach may, however, be difficult to apply in non financial sectors.

‘The [NBA] culture that is laid down is one that rewards exceptional performance but only up to a certain level, defined in terms of salary caps.’

Excellence in Leadership

CIM010_020 Woods.indd 34

21/3/09 19:13:18

Performance and risk

Thirdly, the use of bonus claw back schemes can help to ensure that staff retain ‘skin in the game’. In October 2008 the New York State attorney-general demanded that former executives at AIG, the insurer bailed out by the government, should repay previously granted incentive awards. Shareholders in UBS, the Swiss bank that has been badly hit by the credit crisis, have made similar calls for bonus claw backs, and the bank is considering ways of encouraging voluntary repayments. Current employment contract terms may make the enforcement of claw back demands extremely difficult, or impossible, in practice, but it is quite possible to suggest that future contracts should incorporate performance adjusted deferred compensation schemes which include claw back provisions that are both legally robust and contractually enforceable. Even if risks are embedded into the bonus pools, in the case of a loan, for example, the risk is not fully eradicated until the loan is repaid and so it makes sense to consider the following: • Match the time frame of the reward to the time frame used for the bonus payments. In the private equity industry, for example, carry arrangements are commonly applied to investments, so that bonuses are based upon a ‘through life’ fund performance rather than on the back of one-off deals. Deferred bonus schemes are often used in companies to provide deferred stock bonuses to senior managers and board members, but deferral is less common at lower staff levels. A system in which a percentage of, for example, sales commissions was deferred and ultimately paid out in the form of shares would encourage employee loyalty and help to maintain their interest in the overall success of the business. • Investigate performance outliers and avoid ‘superstars’. This is linked to the idea of ensuring that staff are held accountable for the risks they may take. If one individual’s performance is stellar, it is worth investigating why. Most people do not have long term and repeated good luck. Nick Leeson, the trader who brought down Barings Bank is a good example. If someone had looked carefully at what was going on, instead of just applauding his apparently superb

investment performance, the truth may have come out much quicker. A safe assumption is that superstars are excessive risk takers until proved otherwise. • Link individual performance rewards to overall corporate performance. Compensation structures may be based upon any combination of individual, team, business unit, divisional or corporate level performance. The balance is important, as demonstrated by the example of the US national basketball team. Bonus structures could be rebalanced so that they are based primarily on overall company performance, secondly upon the unit/team performance and lastly upon the individual performance. This approach complements the other tools that discourage individual risk taking and promote a long term perspective on rewarding good performance. One likely short-term side effect of this is that core pay levels may need to rise, so that bonuses become a less significant element of an individual’s overall compensation. At the same time, such a move may prove beneficial in increasing cash flow forecasting. • Ensure enterprise wide oversight of the performance: risk interface. At board or director level, the concern will be with the extent to which internal controls are designed sufficiently robustly, so that capital at risk is protected within the boundaries of the organisation’s risk appetite. The financial crisis, however, offers many examples of where board members appear to have ‘taken their eye off the ball’ as they have become entranced by rapidly expanding returns in particular areas of the business. Basic management accounting principles guard against over dependence on any single product or customer group but some banks did not adhere to this principle. For example, the bank’s annual report shows that Peter Cummings, head of corporate lending at HBOS was handsomely rewarded for his historic achievements in boosting profits from the bank’s corporate loan book from £515 million in 2001 to £3.2 billion in 2007. Cummings received total pay of £2.6 million in 2007, of which £1.6 million was in cash incentives; cash that was paid out well before the loans were repaid. In the second half of 2008, bad debts in the division rose

from £500 million at 30th June, to £1.7 billion at 30th September and £3.3 billion by the end of November.Presumably, the figure is still rising. The final price paid by HBOS for such mistakes is that it is in the process of being absorbed into Lloyds TSB. The lesson here for senior management and board members is don’t pay cash bonuses until product performance is completed, and secondly don’t lose sight of the fact that good returns in one business may be putting other areas of the business at risk. Simple, but easily forgotten in the euphoria of rising profits.

Conclusion Hindsight is a wonderful thing, and it is now relatively easy to look back and identify the flaws in performance related pay schemes in the financial services sector, but few spotted the flaws at the time. That said, the lessons to be learned are straightforward. Good returns are earned by taking risks, but internal controls are intended to limit the scale of risk taken. Performance related pay should therefore also take account of risk taking. It looks as if HR managers will be burning the midnight oil for a while as new contracts are drafted and the reward culture is redefined. Meantime, performance related pay is far from dead. ■

References Guerrera, F, (2008) ‘On Wall Street: Time is ripe to rebalance pay scales in the banking sector,’ Financial Times, August 29,London. This is Money,(2006) ‘Revealed: The bank bonus game,’ Sascha Hutchinson, 3rd September, London. FSA (2008) ‘Dear CEO: Remuneration Policies’, October, London.

Margaret Woods Margaret is Associate Professor of Accounting and Finance at the University of Nottingham, specialising in risk management and risk reporting in financial services, and accounting for pensions. She is co-ordinator of the European Risk Research Network which draws together researchers from around the world who are working on the area of risk. Researchers in the network cover many disciplines including financial and management accounting, psychology, and operations management. Excellence in Leadership

CIM010_020 Woods.indd 35

21/3/09 19:13:46

Risk and regulation

Collective harmony Governments, banks, regulators and investors all have strong opinions on how to shape the future, but there is no room for knee-jerk reactions. The new International Centre for Financial Regulation aims to ensure a calm and calculated approach to the complex task of global harmonisation, as CEO Barbara Ridpath explains to Jim Banks.

The strengths and, more importantly, the weaknesses in systems of financial regulation around the world have rarely been thrown into such sharp relief as in the last year. The crisis in financial markets, the loss of confidence in banks and accusing fingers pointed at industry regulators mean that there has never been a more pressing need to look at what forms of regulation will be needed in the future and how they will need to interact cross-border. In January, the UK saw the launch of the International Centre for Financial Regulation (ICFR), which has the goal of examining exactly those issues. Its diverse range of

stakeholders, including major investment banks, venture capitalists, consultants, academics and, of course, Her Majesty’s government, will work together to find out how financial regulation around the world can become not only more harmonised, but also more robust and effective. The venture is backed with a financial commitment of £5 million from the 19 financial services firms backing it, along with the City of London Corporation, while the Department for Innovation, Universities and Skills has released £2.5 million committed to the project by the UK government, over

a three-year period. The financial backing is testament to the belief that London, as a world-leading hub for financial services, is the right home for a centre of excellence that will help shape the markets in the years ahead. In essence, ICFR’s remit is to bring clarity about the challenges that lie ahead. To do so, it will focus on generating objective, nonpartisan research, debate and training on financial regulation. Key to its success will be the ability of its stakeholders to foster a more collaborative approach to global regulation that will benefit from the lessons of the current crisis.

Excellence in Leadership

CIM010_014 ICFR.indd 36

21/3/09 18:50:36

Risk and regulation

The job of leading the efforts of ICFR falls to CEO Barbara Ridpath, formerly Head of Ratings Services at ratings agency Standard & Poor’s, where she spent 16 years following a stint as an economist at the Federal Reserve Bank of New York. Her strong desire for tangible results and an era of collaboration and creativity is matched only by the scale of the challenge of balancing the many different goals and opinions held by different communities with the financial industry. ‘ The stakeholders all realised that there needed to be a rethink on regulation and that they could not work in isolation. Working together leads to cross-fertilisation and creative thought. Creativity comes from mixing people from different disciplines,

The first challenge is to define the language in which different stakeholders can communicate their ideas and knowledge. Everyone must clearly understand the issues and the terms used to discuss them, be they lawyers, regulators, accountants or any other interested party. Creating that language goes hand in hand with another key goal Ridpath has – to take out the heat of emotion from the debate. The sudden turnaround in the world’s economic fortunes has caused some intense emotional reactions and knee-jerk responses that are short-term in their focus.

band-aid solution or to get publicity. It is concerned only with meaningful change. ‘I felt the pressure to deliver results quickly when I started this job back in September, but then a week later Lehman Brothers went under. I realised that we didn’t need to be too reactive. It is better to look at the medium term and take some of the passion out of the debate,’ she continues. At the same time, however, she recognises that ICFR must show its utility and she expects some research and training to be in place by September this year.

Reaching out across the world ‘We need to take the passion out and replace it with research and fact. When

ICFR may be based in London, but its backers have fully embraced the idea that regulatory

‘We need to take the passion out and replace it with research and fact. When you start looking for a short-term fix that will gain you political capital then your perspective is very different to when you look at the issues in the long term.’ and the financial meltdown is certainly an incentive to change things,’ says Ridpath. Currently in the process of setting up the board and offices of ICFR, Ridpath has already spent a lot of time talking to each stakeholder about what they want to see changed, and she will soon begin commissioning research to address those very topics. Ultimately, she feels that finding ways in which regulation could better address and anticipate the evolution of financial markets must come from bringing together all sides of the argument, as only then can clear terms of reference and meaningful courses of action emerge.

Tower of Babel Ridpath recognises that different sectors of the financial industry will approach the issue of regulation from their own standpoints, and while she in no way decries the value of this work she feels that its fruits will only blossom in a more collaborative environment. ‘For example, there is some work being done for chartered accountants, but if they don’t talk to their users then the ideas they come up with remain purely theoretical,’ she points out.

you start looking for a short-term fix that will gain you political capital then your perspective is very different to when you look at the issues in the long term,’ says Ridpath. An objective approach is necessary from the start to define where the process of regulatory reform should start. How should issues of consumer protection, financial stability and investor behaviour be prioritised? ‘Principles are a good place to start. What constitutes good regulation and supervision? By looking at principles you can take out the philosophy and the passion. You can start to look beyond the presumptions that different cultures and markets make about each other,’ believes Ridpath.

reform will achieve little without a truly global focus. In an interconnected world there is no room for a parochial approach. From its London base ICFR will operate an active outreach programme to America, the Middle East and Asia. Its research and training will be relevant for all financial markets. That said, ICFR has three fundamental tenets, which rule out certain jurisdictions from its brief: good regulation is only possible where the rule of law works, where the free flow of capital is seen as an economic good, and where there is transparency in the market. ‘Beyond that we are agnostic,’ stresses Ridpath.

‘If you look at the G20 communiqué that came out in November 2008, you can see that there is agreement on the easy stuff, but the medium-term agenda is more difficult, and that is our domain. That is where we can have the most impact,’ she adds.

Maintaining a global focus is a big challenge, and Ridpath recognises that ICFR’s efforts will be part of a much broader process that will continue for a long time to come. Financial systems function cross-border, so regulation must follow. Collaboration will have to prosper on a truly international basis.

A medium-term focus means ICFR will not be rushing out proposals to provide a

‘The decision-making mechanism for crossborder regulation does not exist. Some Excellence in Leadership

CIM010_014 ICFR.indd 37

21/3/09 18:50:57

Risk and regulation

regulators around the world are semiautonomous, others are very much part of government. In an organisation like the WTO, for instance, there is [case law about] a legal basis for what you can and can’t do as a member. There is no such thing in the world of international banking and finance regulation, so how do you agree, implement and enforce regulation across borders?’ says Ridpath. ‘The process of regulatory and reporting reform will go on for many years. Right now we’re not sure who will be left to regulate. No one knows what the future shape of the financial industry will be. The process will only end when the shape of regulation matches the shape of the industry, but while the industry is global, regulation tends to be local,’ she adds. Investors also operate cross-border, so a global response to the problem of financial regulation is vital if their confidence is to return. ‘One of the causes of uncertainty among investors is that different approaches to

the rescue of banks are being taken in different countries. So, we need to look at how we can get a common framework. In the UK, there was a new banking bill a year ago, but that now needs review postNorthern Rock, but when you look at what the UK needs it may be very different from what the US does. There needs to be harmonisation, which is difficult because of the history of case law in each country,’ says Ridpath. ‘We want constructive solutions. We have an ambitious target, but we can certainly contribute to the broader process,’ she adds. Despite the size and complexity of the challenge that lies ahead for ICFR, and the urgency that many feel about the need to implement regulatory reform, Ridpath’s positivity and enthusiasm for the task at hand is impressive. The biggest challenges are also the biggest opportunities, and she is confident that ICFR will take its chance to help improve the integrity and security of tomorrow’s financial markets. ■

Barbara Ridpath Barbara Ridpath is chief executive of the International Centre for Financial Regulation. Prior to her current position, from 2004-2008, Ridpath was executive managing director and head of ratings services, Europe, for Standard & Poor’s, responsible for rating activities in Europe, the Middle East and Africa. Before that she was managing director and chief credit officer, Europe, based in Standard & Poor’s London office, where she was responsible for the development and application of ratings policy in Europe including its global consistency.

‘The process of regulatory and reporting reform will go on for many years. Right now we’re not sure who will be left to regulate.’

Excellence in Leadership

CIM010_014 ICFR.indd 38

21/3/09 18:51:30

Company insight

Chance favours the prepared mind Sandra Macleod, Group CEO of global reputation analysis firm Echo Research, believes that research is the key to corporate survival and reputational integrity in times of economic turmoil.

In the first weeks and months of the global downturn, a kind of night blindness seized the business world. Now, the first shock past, we’re starting to discern our surroundings again – we hope. Fresh imperatives are called for to operate more effectively with less, but protecting reputation is more important than ever before. Necessity excites the inventive mind and with financial models unable to create a broad enough range of outcomes to capture current and future uncertainties, risk and issues management and scenario planning are stepping up to provide muchneeded evidence to support improved decision-making. These are growing in importance as companies adopt disciplines to collect signals of impending change and build scenarios to anticipate what may come.

‘An organisation should be thought of as a complex adaptive system – a kind of neurosystem.’ Just as companies are investing in disciplines to return faster readings from their markets, so executives can pool knowledge and build projections more promptly than before. Reputationally too, a rapid exchange of information and instructions is especially valuable if an organisation needs to

respond and adjust its trajectory in turbulent times. An organisation should be thought of as a complex adaptive system – a kind of neurosystem – bombarded, challenged, and forced to adapt. This image captures the ebb and flow of reputation through the myriad channels of the internet and articulates the urgency of investigating these morphing environments. This provides the evidence for either consistency and focus on basics that are all too easy to lose sight of, or highlighting areas of change and action that may be necessary. Tracking reputational risks and analysis of the points of light that make up perceptions around an organisation is the first step on the road. It yields contextual intelligence, without which complex adaptive systems seize up because they no longer know what to adapt to or how.

Testing times When reaching out to customers, the demands to be future-proof and not waste expense require pre-testing to get right first time what an organisation takes to market – products and propositions alike. To be certain they are up to speed with customers’ changing needs, habits, beliefs and intentions, research is a key aid. At one extreme this becomes part of the trend of co-creation – involving buyers throughout the R&D process. At the other end, harnessing the power of word-of-mouth through greater web connectivity amplifies success or failure and requires its own due diligence. Internally, do you know your teams’ inclinations to be advocates and

‘There are few today who would dare feel their way through the midst of reputational risk by guesswork alone.’ ambassadors, not jump ship to a more stable setup and go the extra mile, inspire, and stiffen the resolve of their colleagues to succeed? Research lays bare how teams feel and what is important to them, which is often not what senior managers focus upon. There are few today who would dare feel their way through the midst of reputational risk and uncertainty by guesswork alone. Research remains a precious instrument in the toolbox. Supporting and influencing organisations through this challenging time requires all to raise – or change – their game. ■ Further information Echo Research Website: www.echoresearch.com Excellence in Leadership

CIM010_025_Echo.indd 39

23/3/09 17:55:01

Reforming risk strategy

Just in time One of the biggest challenges to the Anglo-American management paradigm in the past 30 years has been the ‘just-in-time’ philosophy from Japan. As Eastern ideas are subsumed into sophisticated western industry thinking, The Open University’s James Fleck catches up with the evolution of risk management in business in search of a model efficient enough to set your clock by.

Excellence in Leadership

CIM010_015 Open Uni.indd 40

21/3/09 18:53:40

Reforming risk strategy

In the context of the history of commercial activity, business and management is still a very young area of study. Yet during its lifetime of perhaps little more than a hundred years the subject has established itself around a connected set of ideas that could be seen in basic terms as an Anglo-American paradigm. Often this is considered to be the conclusion of enquiry, beyond some novelties and innovations linked to technology, but in the main there is a belief we are now only tinkering with what has been proved to be the most rational philosophy and most effective style of management. All that is needed now is to exploit the model to the best of our abilities and to extend it to new geographies and new industries – a challenge that has been taken on by organisations around the world with alacrity in the hope of replicating the material successes of the West. However, management thinking still has a long way

part of a modern organisation’s toolkit. Indeed, risk management is often presented as a science. Systems for risk analysis are frequently used in order to attempt to reach an ideal situation where all risks from all internal and external factors are identified, assessed and assigned a priority based on their probability. However, there is a real difference between risk, on the one hand, and uncertainty on the other. Risk is characterised by a known probability distribution attached to a range of actions, and hence outcomes can be calculated; while uncertainty is what is not calculable, and the actual outcomes can not be known in advance. Many innovations and new technologies have the potential to unleash unexpected consequences that could not be anticipated: think of the climate change consequences of our current way of

detail and possibility, the likelihood and impact of any problem has been formally assessed and therefore somehow become contained. But does a strategy of this kind bear sufficient relation to reality, or necessarily make organisations more secure? Essentially, no. Risk management is a useful function to aid thinking to a degree, but it is important that organisations realise its underlying limits and do not misguidedly over-rely on it in cases where more fundamental uncertainty is at issue. A range of risk analysis methods have been extensively used in recent years by financial institutions to monitor their investment in the sub-prime mortgage markets, for example. In essence we have an overtheorised concept of risk. Instead, we need to accept the inevitability of fundamental uncertainty and adopt appropriate arrangements and strategies to deal with it, as well as more fully discriminating

‘Organisations must realise risk management’s underlying limits and not misguidedly over-rely on it in cases where more fundamental uncertainty is at issue.’ to go in terms of its evolution. Contained within the current economic crisis is a stark example of the limitations of the Anglo-American management style in its approach to risk and risk management. Commentators have frequently pointed to the short-termism of Western corporations, driven by the need to deliver high levels of growth each year and high returns to shareholders, sometimes unthinkingly. The terms of chief executives can be equally short and the consequent strategy and evaluation of risk has the potential to lack long-term consistency and vision. As a result, exposure to risk can be heightened by decision-making which is based on short-term imperatives and the need to push for expansion and innovation. In spite of this, or more likely because of it, risk management techniques and strategies have become a substantial

using hydrocarbons, for instance. Such consequences cannot be anywhere near adequately captured by the subjective assignment of probabilities, least of all anything like the normal distribution which is the usual default in such exercises.

the subtleties contained within different forms of risk. Currently, Western management tends to work in terms of models inappropriately applied rather than approaching reality itself directly.

Thinking outside of the West Whenever any degree of real complexity is involved, we move closer to a situation more accurately characterised by uncertainty rather than calculable risk. And in such situations, any risk assessment can be wrong, indeed is likely to be wrong, and in the longer term is almost certain to be wrong. It only takes one major failure to lead to dramatic effects on an entire organisation, or in our current situation, the whole global economy. The abstract analysis involved in risk assessments can provide a comforting but misleading sense of security for leaders within complex organisations, that due attention has been given to every

Different attitudes and approaches to management, especially of risk and uncertainty – those alternative ideas, sometimes minor or used in minor ways at this stage, but which are currently emerging outside of the West and gaining greater credence here – have the potential to change attitudes and the impact of risk. An example of how this has already happened can be found in manufacturing and one of its most fundamental business risks, defective products. One of the biggest challenges to the Anglo-American paradigm in the past 30 years has been Excellence in Leadership

CIM010_015 Open Uni.indd 41

21/3/09 18:53:58

Reforming risk strategy

the ‘just-in-time’ philosophy from Japan. This idea has now been widely subsumed into sophisticated Western industry thinking, but at the time it was a radically different idea, and one that demonstrated the difference in mindset, and even basic philosophy. In the traditional Western approach, the risk of a defective product was calculated, based on existing statistics, and targets set for what was regarded as an acceptable rate or quality level of say, 5% rejects, in order to allow for the various problems that would arise. The problems were accepted as unavoidable and only if the statistics indicated that they were getting substantially worse would remedial action be taken.

In contrast, the Japanese approach, as notably pioneered and implacably pursued by Toyota, involved looking at the underlying physical realities of the process, with continuous efforts made to eliminate all problems, aiming at ultimately reaching zero defective products. Rather than using buffer stocks to smooth out the probabilities and minimise downtime, whenever a problem was discovered the firm would stop the line and take whatever steps were needed to remove the cause of that particular problem.

things as they are and seek to keep problems to an identifiable, measurable level. On the other hand we see an attitude which seeks to penetrate to the reality of the situation, not accepting things as they are but working to improve the basic operations, thus dealing with each situation at an immediate, local level rather than through the existence of a theory. Perhaps at an extreme, the African way of thinking about management is based on story-telling, where activity is perceived in terms of realities, contingencies and rich contexts rather than abstract principles.

The difference is one of philosophy: on the one hand risk is seen as inevitable and knowable, so we adopt systems which accept

In the modern Western-inspired finance industry, a great deal of reliance is put upon elaborate systems for credit scoring which

‘The Japanese approach involves looking at the underlying physical realities of the process, with continuous efforts made to eliminate all problems, aiming at ultimately reaching zero defective products.’

Excellence in Leadership

CIM010_015 Open Uni.indd 42

21/3/09 18:55:14

Reforming risk strategy

necessarily can only take into account a relatively restricted range of details of personal history, and are used to put people into pragmatic categories. This may be effective for mass data analysis and mass management of customers, but it cannot reduce the underlying risk; it can only average out a set of ascribed probabilities in an attempt to contain the overall risk. And what have we seen recently with the credit crisis if not structural changes which have impacted on individuals’ and companies’ ability to pay, leading to an invalidation of the probabilities ascribed in the first place?

Perhaps the central flaw in the AngloAmerican approach is this reliance on abstract models. Even the famous ‘case study’ approach introduced by Harvard Business School in the early 20th century, which is regarded as ensuring a practical element in management studies, involves thinking about an essentially simplified and stylised world, one step away from reality. MBAs themselves, in general, have become reliant on learning the ‘game’ of business rather than the reality, although more UK schools are making more use of actual practice rather than case studies alone.

Again in contrast, the remarkable success of the micro-credit organisations in Bangladesh, such as Grameen Bank, where small amounts of money are loaned to large numbers of customers, with astonishingly low levels of default, at least to a Western financier’s eyes, is a good example of a different approach. In these schemes, quite unlike in our own banking system, the default rate is very low, because the contact and operation is local and personal, and the operation is underpinned by networks of personal trust, personal knowledge, and peer pressures.

One individual in a South African business school has already begun to try and prick the bubble of managers, who can come from privileged backgrounds and with fixed ideas. Part of their development involves

There are some similarities with Africa’s ‘merchant ladies’ who travel around communities providing small loans to local businesses when they need them, depending on personal knowledge to make loan judgements and personal networks to ensure compliance. The nature and scale of the organisations may be very different from our own high street banks, but there are still lessons here for how knowledge of the realities and specificities of individual customer situations, and a sense of personal commitment, can enable potentially dangerous forms of organisational risk to be mitigated. Another area of abstract formality in the Anglo-American model is the increasingly legal, contract-based nature of all business activity. In the Middle East and parts of Asia it is still more common to have commercial relationships based on trust, without a reliance on detailed interpretation of a written contract. The role of human dynamics, of person to person trust, a positive and mutual respect, is seen as being more powerful than any piece of paper and the accompanying threats. Relying on rigid legal contracts can create just another form of invented security, and another platform for unforeseen risk.

‘The role of human dynamics, a positive and mutual respect, is seen as being more powerful than any piece of paper.’ learning from prisons, the townships, and about people’s lives, rather than treating communities at an abstract distance, purely as markets. Risk analysis may be properly appropriate to Las Vegas because in gambling there are identifiable probabilities which are known and can be accurately calculated. Organisations, on the other hand, have to deal with the unremitting pressures – and opportunities – presented by the real world with its attendant fundamental uncertainties. While any form of risk management strategy may offer a heuristic basis for thinking about potential problems and responses, it should not be the end point, and mistaken as perfectly capturing reality. Increasingly in future, the organisations best placed to overcome risk will not be those investing in abstract analysis alone, but those most willing to think differently and deeply about the real causes of risk, and able to distinguish calculable risks from essential uncertainty. ■

The Japanese management style in-brief The Japanese management style places particular emphasis on employees and manufacturing techniques, to which the Japanese economic miracle that began in the 1960s is attributed. Japanese management practices have been studied in the rest of the world in the hope that the economic success they brought to Japan can be recreated elsewhere. These practices emphasise forming collaborations, particularly in times of uncertainty, human resources, closer superior-subordinate relationships, and consensus as a means of facilitating implementation. It has been suggested that the Japanese competitive advantage stemmed from skills, staff, and superordinate goals, the softer features identified by the McKinsey 7-S framework. Dominant characteristics include: • • • • • • •

people-centred management loyalty to employees just-in-time kaizen continuous improvement quality control total quality management.

With the downturn in the Japanese economy in the 1990s, management practices were reappraised, and there emerged a focus on radical change as opposed to incremental improvement. Customers were offered less variety, there was a shift toward simplicity, and an alternative to consensus-based decision making was adopted, with individuals making decisions based on high-tech information systems. Source: BNET Business Dictionary

James Fleck James Fleck is dean and professor of innovation dynamics at The Open University Business School. One of the early experts on Artificial Intelligence, Professor Fleck is one of the world’s leading thinkers on the management of innovation and knowledge. He was previously director of the University of Edinburgh Management School. Excellence in Leadership

CIM010_015 Open Uni.indd 43

21/3/09 18:55:43

Communicating risk

The global recession, coupled with wavering public and shareholder trust in the boards of the companies that may have helped to cause it, has seen senior executives more comprehensively quizzed by stakeholders about the health of their investment. Merchantâ&#x20AC;&#x2122;s Richard Carpenter finds out what itâ&#x20AC;&#x2122;s like to be put on the spot.

Question time

Excellence in Leadership

CIM010_017 Merchant.indd 44

23/3/09 14:08:42

Communicating risk

The recent call on shareholders by advisory group PIRC to vote down the executive pay plans of TUI Travel, easyJet and Imperial Tobacco will have caused renewed concern on executive remuneration issues in many boardrooms across the UK. PIRC argued that bonus targets are too easy to achieve and in some cases too excessive. This is just one indication of mounting shareholder militancy as the global recession begins to bite. Where a year or two ago, investors may have been willing to make their investments and trust boards to direct the company effectively, now they are becoming more involved. None of this is new – shareholder activism has been around for years – but it is changing in scale and scope. Now mainstream investors are frequently posing difficult questions on issues such as executive remuneration, capital expenditure and the adoption of anti-takeover measures. Of course serious investors always scrutinise these steps very carefully but, in today’s straitened times, boards need to work ever harder to bring those investors onside. No senior executive wants to face difficult questions about his options package while he is announcing redundancies. Nor does he want to have to explain every single piece of capital investment. It’s all a matter of trust. Yet, as anyone involved in investor relations knows, building and maintaining this trust is difficult. It requires a significant investment of time and money over a sustained period, and even that may not be sufficient. Now more than ever, successful investor communications takes insight, experience and judgement. Anyone involved in this area faces an uphill struggle to succeed in this, but succeed they must – the price of failure is too great.

Time to invest Looking back over the events of 2008 it would be easy to argue that many of the financial service providers that struggled might have had a much greater chance of survival if they had communicated more successfully with their shareholders in the runup to and during the crisis. Yet, assuming an organisation continues to operate, once the immediate crisis has been averted it is tempting to cut investment in shareholder communications. Almost every company is having to make cutbacks in most areas, so why should investor communications be any different? Why put together a new investor website, or design a new annual report when you could cut spending?

Six tips for a communicative annual report 1) Keep it concise Few investors have time to wade through page after page of dense information. They want to grasp the key facts rapidly. Provide all the information that you are legally required to, but design your report so that readers are directed towards the information that matters to them.

2) Take the opportunity to sell Don’t just bombard readers with facts. Tell them about the company’s achievements – targets exceeded, awards won, new markets exploited, and so on.

3) Introduce a variety of voices You are not the only person who can tell readers how well your company is doing. Consider including customer case studies which will bring the strategy to life. Or have department heads explain how their work is contributing to the achievement of the corporate strategy.

5) Assess risks Your report needs to be credible if it is to engender trust among readers. So, provide a frank assessment of the threats you face, and the risks involved in your strategy. Explain how you intend to manage them.

6) Showcase management 4) Don’t forget about CSR Social and environmental responsibility was never an expensive luxury; it was always about long term sustainability. Take this chance to show investors that you still see it as a key part of corporate strategy.

Make it clear that your Board sees this report as more than just a bland disclosure document by giving senior individuals a prominent profile. Prove their gravitas with detailed CVs and put faces to strategies with photos.

‘No senior executive wants to face difficult questions about his options package while he is announcing redundancies.’ The answer, of course, is that if you fail to communicate with your shareholders now, if you fail to hold their hands through these very difficult times, they will lose confidence in you. They will not be there to support you when you need to get approval for a new remuneration package, new capital investment or, even more dramatically, when you face a hostile takeover bid. With international investors, who may be less aware of UK-specific practices, this is even more important. So, investor relations professionals need to be getting out there, meeting institutional and major shareholders, talking to them about their positions, their concerns, and what the company is doing to offer them maximum return. They should know who is in charge of

the shareholder register. They should be making good use of the many investor relations management services that are available. And, alongside this face-to-face time, they should be investing carefully in their written shareholder communications.

Written communications The first step towards producing materials that will build trust among shareholders is identifying your key messages. Many companies try to say too much in their annual reports. Or they bury the important points they have to make in an avalanche of facts, figures and incomprehensible legalese. Annual reports are legal documents, and you should of course abide by all the relevant rules. But annual reports are more than that – they are an opportunity to convey your corporate strategy to your shareholders. Excellence in Leadership

CIM010_017 Merchant.indd 45

23/3/09 14:09:18

Communicating risk

Report Leadership at CIMA To learn more about online reporting, the reporting of executive remuneration and for general report leadership guidance, please visit our dedicated web page at www.cimaglobal.com/reportleadership. The website includes: • the ‘Reporting Executive Remuneration Report’ • a videocast from key players in the Report Leadership initiative • Report Leadership brochures • real life examples of Report Leadership ideas. Report leadership is a coalition between CIMA, PricewaterhouseCoopers and Radley Yeldar, aimed at maintaining the health and relevance of corporate reporting. The group came together to develop simple, practical ways to improve narrative and financial reporting. The group is keen to stimulate discussion and receive feedback to inform its future work. If you would like to contribute your views to the debate you can do so at www.reportleadership.com. If you would like to be informed of developments in Report Leadership, please e-mail tis@cimaglobal.com quoting ‘Report Leadership update’ in the subject field.

So, abide by the maxim that less is more. Provide a succinct and compelling outline of your strategy, putting it in the context of the broader market, explaining how you are dealing with threats and taking advantage of opportunities, and crucially how you are delivering long term shareholder value. Shareholders will appreciate a well-designed report that clearly signposts the information that matters to them. Be upbeat, but avoid the temptation to appear unrelentingly positive in the face of the facts – be transparent about risks, and detail how you intend to mitigate them. On the other hand, don’t labour any failures. Support every point with facts and reasonable argument. While still important, the traditional printed annual report is only one of a number of tools at the disposal of today’s investor communications professional. Online reports are nothing new, but a growing number of companies are finally getting to grips with the potential of the medium for providing indepth information in a format that is low cost for them and easily searchable for visitors. There are also many online tools that you

should consider: email alerts, online proxy voting, share price calculators, and share price charts that users can configure to show the information most relevant to them. On top of this, falling production costs and increasing broadband take-up have made online video a feasible option, and you should consider including some webcasts of senior executives describing company strategy. With so much to think about it is little wonder that most companies bring in specialists to help produce their investor communications material. Indeed, in times like these, getting the right consultancy can transform a potentially troublesome shareholder base into one that understands the corporate strategy and is willing to work with the board to bring that strategy to fruition. The best way to find a good consultancy is almost always to look at other companies’ investor communications material, see which ones you admire, and find out who produces it for them. Bear in mind however that your requirements are unique and so what works for another company may not work for you. See at least three consultancies so you see a

‘Investors will no longer toe the corporate line as they might have done before.’

Excellence in Leadership

CIM010_017 Merchant.indd 46

23/3/09 14:09:40

Communicating risk

broad range of styles and approaches. Look for a strong pedigree in producing these materials.

2010 and beyond No one is expecting 2009 to be an easy year. We are all suffering the hangover from the years of easy credit, over-inflated asset markets, and lax regulation of the financial system. The hedge funds are on the ropes. Institutional investors are cautious at best, and panicked at worst. All of this is translating into significant challenges for corporate boards and those tasked with investor communications. Investors will no longer toe the corporate line as they might have done before. According to the RiskMetrics Group at more than one in five general meetings it analysed in Europe during 2008, at least one resolution was rejected or withdrawn. The onus is now on investor relations professionals to communicate effectively and keep those investors onside when it comes to contentious issues such as executive remuneration, capital investment and anti-takeover measures. Yet amid all this chaos there are opportunities. Investors have to invest somewhere. They are desperately searching for companies they can believe in, safe havens for their clients’ funds. They want to pick up annual reports, or log onto investor websites, and read about companies that are clearly articulating sensible strategies for growth. Creating shareholder communications that provide exactly that is not easy. Few companies achieve it. However, those that do succeed in getting the best advisers on board and working with them to get it right, will not only find it easier to attract loyal and supportive shareholders and so survive the tough times of 2009, but looking beyond that they will also be in very good shape for the return of the good times.

Fruitful communication Companies are shifting their investor relations strategies to deal with fallout from the credit crisis and boosting communications with analysts and investors, according to an annual survey conducted by The Bank of New York Mellon. Developed as a benchmarking tool for its depositary receipt clients, the survey, ‘Global Trends in Investor Relations,’ was conducted by The Bank of New York Mellon in cooperation with the US National Investor Relations Institute (NIRI). Results were based on input from

Investor relations

90%

of companies have maintained or increased communications with analysts and investors due to financial market volatility in the last 18 months.

73%

of US firms showed the tendency to shift IR messaging based on credit concerns, followed by Western Europe (70%). AsiaPacific companies (54%) were the least likely to have shifted messaging on this issue.

70%

of Latin American companies surveyed and 69% in Asia-Pacific target investment decisions based on environmental and social factors, compared to 36% of companies in the US.

270 companies across 42 countries, the highest response rate since the survey began in 2004. It looks at how publicly traded companies are managing IR practices in the current economic climate, including investor outreach, communications and disclosure, approaches to the sell-side, and staffing issues. ‘As in past surveys, this year’s findings show the importance issuers attach to their investor relations programmes, in their home markets and abroad,’ said Michael Cole-Fontayn, CEO of The Bank of New York Mellon’s Depositary Receipt Division. ’While there is a positive correlation between a company’s size and its IR practices, in light of recent events in the capital markets, companies appear to have a regional bias to communications, regardless of their market cap.’ Key findings of the survey include: • 90% of all respondents have maintained or increased communications with analysts and investors due to financial market volatility in the last 18 months • The most frequent shift in IR messaging prompted by analyst questions was related to credit concerns (66%), followed by outlook horizon (50%) and cost-cutting (50%) • North American firms (73%) showed the

•

highest tendency to shift IR messaging based on credit concerns, followed by Western Europe (70%). Asia-Pacific companies (54%) were the least likely to have shifted messaging on this issue 70% of respondents in Latin America and 69% in Asia-Pacific target ‘sustainability’ (i.e., investment decisions based on environmental and social factors) investors and/or sell-side analysts as part of their overall IR strategy, compared to 36% of companies in North America 89% of companies proactively meet with hedge funds, though 27% of respondents said they did not know, or lacked enough information to judge, the quality of hedge fund managers they met through brokers Financial companies led all sectors in increasing their communications (67%) and were the most likely to have changed their outlook horizons due to recent market uncertainty (65%) Only half of the financial sector companies that took part in the survey have a written crisis communications policy in place, compared to nearly twothirds of the energy firms. Respondents in Western Europe (52%) and North America (46%) are most likely to have written crisis communications policies, compared to 40% of companies in Latin America, Asia Pacific and EEMEA (Eastern Europe/Middle East/Africa)

‘This year’s survey provides valuable insights into how issuers allocate their resources and communicate with investors and analysts in light of the current market,’ said Guy Gresham, New York head of the Global IR Advisory Team in the bank’s Depositary Receipt Division. ‘There’s clear optimism in terms of investor outreach opportunities in 2009. We look forward to helping issuers capitalise on this and gain greater visibility within the international marketplace.’ ■

Richard Carpenter Richard Carpenter is managing partner at corporate reporting and online communications specialist Merchant. Previously, he was a board director and head of reporting at Radley Yeldar. Previously, he ran an investor communications and reporting consultancy. He has also been a financial journalist for the Mail on Sunday.

Excellence in Leadership

CIM010_017 Merchant.indd 47

23/3/09 14:10:14

Communicating risk

Seize the opportunity In the shadow of recession, companies should take the opportunity to evaluate employees and ensure that, in any cost cutting exercises, the long term future of the organisation is not compromised, argues Paul Brasington, National Chairman of the British Association of Communicators in Business (CiB).

When recession hits, communication professionals will always argue fiercely that their budget should not be regarded as an easy target, partly because they know it will be. The argument usually goes something like this: when everyone is feeling uncertain and your competitors are pulling back there is a real opportunity to reach out to your customers and build your brand strength, positioning you more strongly for recovery. Internally too it seems self-evident that you need to ensure that while you might have to shed staff, you need to keep those who remain focused and motivated, again so you might be best positioned to catch the wave of recovery. These things are usually said, not least because they are broadly true. So if these

things are practically received wisdom why do they still need to be said? Certainly thereâ&#x20AC;&#x2122;s no shortage of recognition at a senior level of the importance of effective internal communication. A YouGov survey, commissioned by the Engage Group and carried out in October 2008, offered some unsurprising headline findings: four out of five board members said that a focus on employee engagement improves productivity and service delivery and three in four believe it improves bottom-line performance. These things are recognised, but not always acted on. And when the essential good practice that underpins effective internal communication is sidelined, there can be heightened risk in many strategic areas. But more than this, if recession forces

organisational change at the same time as the need to rethink the role of internal communication, you need to approach this problem as a strategic one. Naturally where there is heavy recessionary pressure to cut budgets, it remains tempting to view communication with staff as a discretionary activity, or at least one that can be reduced to a bare-bones operation. Several UK businesses have already taken this draconian action. They do this probably because the causal links between communication, engagement, and productivity seem intuitively obvious but are not always or simply demonstrable: itâ&#x20AC;&#x2122;s not obvious that cutting a particular communication

Excellence in Leadership

CIM010_016 CIB.indd 48

23/3/09 18:11:02

Communicating risk

channel will have a bad effect, and managers could be forgiven for thinking that it’s not the quantity of communication that matters, but its quality. That would be fine, if they then address that quality, and I want to argue that this means treating internal communication as a fundamental aspect of strategic planning, rather than something that can be ‘aligned’ after the fact. This entails a shift in the way internal communication is regarded, not as a bolt-on activity through which you try to tell people what you are doing, but as a fundamental aspect of the way you commission, maintain and deploy the resources of the organisation.

Risks to brand and reputation This is no time to be taking risks with your corporate reputation. Customers do not become less demanding in a recession. Partly because they may be anxious about their own finances, partly because it is a buyers’ market, they will be looking for more for less. For a

damage to your reputation could be difficult to reverse: you will have given customers a reason not to buy from you and, more directly, you will have given skilled future employees a reason not to join you, and valuable existing staff a reason to look elsewhere for work. This is as much a matter of what you do as what you say. The traditional PR wisdom of accentuating the positive and minimising the negative is not only irrelevant but can be simply damaging. If you want people to believe that it is worth staying with you, you need their respect, which means respecting them enough to believe they will understand what you understand. Engagement is a two way process, where both transparency and consistency are essential. That does not mean their priorities will be the same as yours. You still have to think how you present information. But the

but it could be equally damaging in the long term if the business starts treating suppliers as a resource to be exploited rather than developed. This is all the more likely to happen if cuts in the business have engendered a dogeat-dog culture, so that people feel that whatever rules or values might be in place, all senior management really cares about is short term bottom line performance and will reward it accordingly. To counter this it will not simply be enough to point at values or rules. The reality matters. You need to ensure that reward systems clearly reward good practice, and are seen to do so. You also need to ensure that people talk about what matters, including how to resolve these different pressures in their real jobs, which they can do best with a clear definition of what is expected of them, as well as some understanding of how this could contribute to the organisation’s future.

‘If you want people to believe that it is worth staying with you, you need their respect, which means respecting them enough to believe they will understand what you understand.’ business serving them that means somehow cutting costs without compromising quality. It’s likely to translate organisationally into asking more of fewer people, so the readiness of those remaining people to respond becomes critical to success. Not all of these people will be employees. For many organisations supply chains have become intrinsically linked to production or service capability. If you treat either employee or supplier relationships in a crudely transactional way you are not likely to secure the kind of enhanced performance from them that you really need. Recession tests both personal and corporate values. Most organisations these days have a set of predictable corporate values which are likely to include statements about valuing staff, treating colleagues with respect and fairness or whatever. As we’ll see shortly, people tend to treat these statements with scepticism at the best of times, but if under the pressure to cut costs they become obviously compromised, the

goal of the communication here, which needs to be thought of as a process, not a message, is a shared understanding rather than a spun reality. If that sounds abstract, consider how it could work with a specific reputational risk. There will be pressure on procurement functions to reduce input costs. In better times and under the influence of good CSR practice you may have set up procurement rules which ensure that you only buy from suppliers with sustainable working practices themselves. Usually too this commitment will reflect one or more of your stated corporate values. But if all the emphasis within the business is on cost cutting, the temptation for procurement people may be to cut corners, to discard the abstract notion of values or reputation in pursuit of cash flow or profitability. At worst this could mean buying from suppliers whose practices could threaten your reputation,

Informality rules Underpinning this is a fundamental point about the nature of internal communication. In the early days of the merger that created accountancy giant PricewaterhouseCoopers, only 9% of employees used the specially designed merger website. Employees said it was ‘boring’ and ‘out of date’. 60% said they got their information from their own informal networks. Those informal networks functioned in the past simply through people talking together, but now they may also reach through geographically diverse parts of the organisation, thanks to the multiple communication channels available over the internet. These informal networks will continue to be very influential in shaping perceptions. You cannot control them. All you can do is influence the context in which these conversations go on, ensuring that people have correct information (where information is lacking they will speculate) and that they have reasons to believe your leadership will take them to a better place. Excellence in Leadership

CIM010_016 CIB.indd 49

23/3/09 18:11:47

Communicating risk

Employer-employee relations

70%

of executives totally trust their boss

40%

trust the bossâ&#x20AC;&#x2122;s boss and a further rung up the ladder trust levels fell to just 33%

75%

The engagement score of employees with engaged line managers

40%

The engagement score of employees with line managers that are disengaged

56%

of employees expect to receive less than last year, no pay rise, or, among a small proportion of them, a pay cut in 2009

Excellence in Leadership

CIM010_016 CIB.indd 50

23/3/09 18:01:13

Communicating risk

You can influence this context partly through communication channels like company magazines, video and podcasting. You can go out on the road to address staff directly. These things have their place, especially if managed imaginatively and intelligently. They are not effective when they reinforce an ‘us and them’ culture: when their underlying message is, ‘this is what we think and you had better listen, which is more than we will do’. In a study of UK companies by Linda Glover at De Montfort University Leicester, employees said executive Q and A sessions at big town hall meetings were a failure as executives usually gave ‘politicians’ answers’. People trust who they know. A recent British Association of Communicators in Business survey found that 70% of respondents totally trusted their boss (ie line manager) but this figure fell to just 40% for the boss’s boss, and a further rung up the ladder trust levels fell to just 33%. This compares with GfK NOP research suggesting that staff with engaged line managers typically have employee engagement scores of around 75%. Those with a disengaged manager typically score around 40%.

Communication and effective change It is not as if we went into this recession with staff engagement in a healthy state. Only just over a third of employees believed that their organisation engaged them to perform well. Fewer than four in ten employees believe their senior leader (usually the CEO) was effective. Employees add that the most effective leaders were those able to inspire confidence and commitment, empower those around them and build effective teams. Earlier in 2008 research prepared by Investors in People interviewing a sample of 3,000 indicated that one third of staff felt demotivated and were intending to seek alternative employment over the coming year. Right now they might be happier to hang on to what they have. However, this is hardly a constructive state of mind and expectations are certainly low right now. The CIPD annual Barometer Report predicts that there will be around 600,000 job losses in 2009. This survey also showed that more than half of employee respondents (56%) expected to receive less than last year, no pay rise, or, among a small proportion of them, a pay cut in 2009.

These findings suggest that employees are realistic about conditions, and the first rule of engagement must be to talk in equally realistic terms, communicating often and early, as far as possible before decisions have been made, so people can see what options were available and understand why a particular action is followed. So much is basic, but if you want to engage more than acquiescence you will need to offer some kind of vision of what could lie beyond, a vision which gives people a reason to do more for you.

‘Recession tends to contract horizons, but strategic thinking demands the opposite.’ Recession tends to contract horizons, but strategic thinking demands the opposite. It means understanding what could lie beyond the immediate horizon, and understanding too what you must do with the resources you currently have available, including human resources, to get to that goal. Change is inevitable, and strategic change may be desirable, but it is often hampered by an inadequate commitment to communication. A survey of 197 companies by Marakon Associates suggested that only 60% of the projected value of strategic change is ever realised, and many different surveys state that poor employee communication is a major factor in any failed implementation. Another Marakon Associates survey of 500 companies says that while inadequate or unavailable resources was the leading cause of lost value (accounting for some 20% of that loss), “poorly communicated strategy” was not far behind in accounting for 14% of the missing financial value. Similarly a survey of merger activity by Sylvia Devoge, Hay Group, of 65 high-tech companies found that 85% of companies said communication during their merger was poorly managed. Recognition of the problem must be the first step to correcting it. These businesses by and large will have been professionally run, and it’s unlikely that they will have neglected communication as such. It’s more likely that they failed to recognise the scale and indeed nature of the task.

The opportunity Conventional approaches to strategic risk management demand scenario planning and then various monitoring systems designed to give early warning of potential problems, allowing you to react. Since you cannot possibly anticipate every eventuality, you also need the organisational agility to be able to respond quickly and effectively. It is in this latter area that effective internal communication is fundamentally bound to effective strategic risk management. The recession has underlined what was already true: that “business as usual” is barely possible any more – things just move too fast. But smart organisations will take the opportunity forced by the recession to push forward how they manage the engagement of their staff. Internal communication is not about telling people what you’re doing, it’s about how staff see their roles, about how they see what they can and can’t do, and understand what they should be doing. It forms the essential connection between strategic purpose and operational action, because it is not just about your overt and perfectly sculpted management messages. It means understanding what your processes and policies “say” about you, and among the processes you need ways of listening, not just through formal mechanisms like staff surveys, but through plugging in to the informal communication networks which define the real cultures of every organisation, and with it the reality of corporate behaviour. ■

Paul Brasington Paul Brasington is national chairman of the British Association of Communicators in Business (CiB), the UK professional body for internal communication professionals. He is the first person to have served in this role for a second term. He is a freelance writer and communications consultant who started his career working in advertising and public relations consultancies. After holding several senior positions, Paul turned freelance in 1992, working across many different sectors and with a number of high-profile clients including BECTA, BT and the Foreign Office.

Excellence in Leadership

CIM010_016 CIB.indd 51

23/3/09 18:01:35

ERM Strategy

Two steps ahead As corporates find themselves in unfamiliar territory, battling the plunge into recession, enterprise risk management could offer them the clearer perspective on risk they so badly need. Industry association AIRMICâ&#x20AC;&#x2122;s John Hurrell and Paul Hopkin see more organisations turning to ERM to plot their way through challenging terrain, as they explain to Jim Banks.

Excellence in Leadership

CIM010_018 AIRMIC.indd 52

23/3/09 17:57:00

ERM strategy

Excellence in Leadership

CIM010_018 AIRMIC.indd 52

24/3/09 14:19:40

ERM strategy

While many organisations are now much more cautious about the risks they take, they are also more fervent in their desire to identify and understand the many types of risk they face. Much greater interest in enterprise risk management (ERM) is emerging, as it promises a much broader and comprehensive view of the risk landscape and, therefore, enables better decision-making.

that many companies are already looking to use it for more strategic purposes rather than simply as a tool for compliance. Since then, that trend has strengthened.

Nevertheless, there is a hitch. ERM has many benefits, but the current crisis in financial markets has cast risk management as a whole in a poor light. The challenge for industry bodies like the Association of Insurance and Risk Managers (AIRMIC), which endorses the ERM concept, is to ensure that this defensive reaction does not lead companies to miss a major opportunity.

The question is whether the dramatic change in the global economy over the last 18 months will prove how effective ERM can be.

‘ERM has a much higher profile than even a few months ago. The collapse of the financial system has seen the finger pointed at risk management, with many

‘The market has become much more receptive to ERM, but we need to look at how to tackle implementation. Risk management is higher up the boardroom agenda now, but the next step is to take action,’ says Hurrell.

The proof is out there In bringing together all of the risks an organisation faces across all its internal disciplines ERM supports compliance, risk assurance, enhanced decision-making and greater efficiency. In a buoyant market it can be a valuable tool in assessing the value and risk of corporate acquisitions, and Hurrell believes that this can also apply in a recession.

‘The collapse of the financial system has seen the finger pointed at risk management, with many people asking whether it was good enough or simply ignored.’ people asking whether it was good enough or whether it was simply ignored at board level. There may in some cases have been a breakdown in governance, where information coming from the risk managers was not given credence by members of the board,’ says AIRMIC’s John Hurrell. ‘There has been apparent failure of risk management and the financial system has collapsed, but the warnings were out there. Now, companies need to take out apparent systemic risks in their financial systems and supply chains,’ he adds. AIRMIC’s membership of insurance and risk management professionals controls around £5bn of annual insurance premium spend, and many members hold senior roles in project, operational and enterprise risk management in FTSE 100 companies. Last year AIRMIC concluded a major piece of research examining attitudes to ERM among its members. The results of the survey suggest that approaches to ERM are rapidly maturing, and

‘Companies are now looking at cost control, not investments, but ERM could help build confidence in their investments,’ he says. With ERM companies can make more informed decisions about which risks to eliminate, mitigate or manage. Whether these risks are operational, financial or strategic, ERM enables the modelling of different scenarios and outcomes in a way that supports quick, high confidence decisions. ‘Some risks are gradual to a tipping point, at which there is a sudden change. Companies have to be aware of those risks and know their tipping points so that they can see the signs early,’ says Hurrell. ‘In risk management there is now more focus on scope, and companies want to be clear about why they are doing ERM. In the past, compliance has been a big driver of risk management, especially for banks, but ERM is all about systemic risks, how to cope with tipping points and how to balance risk

The advantages of ERM AIRMIC’s study reveals that successful ERM initiatives yield a broad array of benefits: • Better decision-making, especially in the development of corporate strategy, because of the availability of more reliable risk information • Implementation of targeted actions to reduce the level of risk associated with operations and projects • Greater efficiency of operations, including reduced disruption to routine operations and activities • Successful delivery of projects and enhancements, resulting in more effective business processes • Improved corporate governance and compliance standards by the delivery of risk assurance • Increased scope for delegation, due to the assurance that risks will be managed effectively.

LILAC – the attributes of embedded ERM Leadership Strong leadership on strategy, projects and operations Involvement Involvement of all stakeholders in all stages of the risk management process Learning Emphasis on training in risk management procedures and learning from events Accountability Absence of an automatic blame culture, but appropriate accountability for actions Communication Communication and openness on all risk management issues and the lessons learnt.

and return,’ adds AIRMIC’s Paul Hopkin. To encompass all categories of risk ERM must be seen in a strategic context. ‘Compliance as a driver of risk management directed attention away from the true value of ERM. Financial institutions saw ERM as a net cost that added nothing to the organisation. They saw it as a cost with no payback, but they missed the option to be more proactive by using it to inform decision-making and strategy. If they had Excellence in Leadership

CIM010_018 AIRMIC.indd 53

21/3/09 19:06:24

ERM strategy

chosen that option they would have seen the current market coming,’ says Hopkin. The success of ERM in giving companies a better foresight on risk and enabling them to become more agile and proactive depends greatly on their approach to implementation. AIRMIC has worked hard to define the elements that support a robust ERM project and has recognised the need for a more coherent approach among industry bodies. ‘The difficulty with risk management and successful implementation is that senior management, including the CFO,

Key elements of a risk aware culture Purpose • Objectives should be established and communicated • Significant internal and external risks should be identified and assessed • Policies should be established, communicated and practiced • Plans should include measurable performance targets and indicators Commitment • Shared ethical values should be established, communicated and practiced • HR policies should be consistent with these ethical values • Authority, responsibility and accountability should be clearly defined • Mutual trust should be fostered to support the flow of information Capability • People should have the necessary knowledge, skills and tools • Communication processes should support the values of the organisation • Sufficient and relevant information should be identified and communicated • Control activities should be designed as an integral part of the organisation Learning • Decisions and actions within the organisation should be coordinated • Assumptions behind objectives should be periodically challenged • Information needs and related information systems should be regularly reassessed • Procedures should be established to ensure appropriate actions are taken

Excellence in Leadership

CIM010_018 AIRMIC.indd 54

21/3/09 19:06:53

ERM strategy

get different messages from different organisations at the moment. The industry associations they talk to about ERM may just use different vocabularies to describe the same things, but the perception is that there is a difference,’ says Hopkin. ‘ERM is a very simple approach in many ways, but it needs to be coherent across different business disciplines. ERM can deliver quantifiable benefits, but it needs a proactive approach. You must know what you want it to deliver so that you can target those benefits,’ he adds. AIRMIC has developed guidelines known as PACED, an acronym for the vital ingredients in ERM implementation. It must be proportional to the organisation’s needs, aligned to its strategic goals, comprehensive in its application, embedded into the organisation’s culture and dynamic enough to evolve in line with the business and its markets. This model clearly suggests that companies need to take a steady and measured approach. Hurrell and Hopkin warn companies to accept that real change may take two years or more, as ERM needs to be embedded firmly into corporate culture if it is to deliver tangible benefits. Nevertheless, they both believe that these benefits will be worth the wait.

Evolution is unstoppable In the few months since the publication of AIRMIC’s research a further change in the perception of ERM has occurred. ‘In terms of what our members have learnt the most important thing is that you need a joined up approach that pulls together all the elements of risk management within an organisation into one body. Risk committees that were once so popular are being renewed and reinforced,’ notes Hurrell. He further stresses that companies must recognise the importance of non-executives in their organisation’s efforts to bring all risks to the notice of the board. He sees that some companies have understood this already and more will do so as they take their bearings against today’s changing risk landscape. ‘Anecdotally there seems to be a higher level of priority given to ERM now, and companies are dusting down their risk maps,’ he adds.

PACED – the attributes of effective ERM Proportionate The risk management initiative must be proportionate to the level of risk faced by an organisation. High-risk organisations, for instance, may need to appoint a Chief Risk Officer. Aligned ERM activities must be aligned with other activities in the organisation. For example, the output of the risk assessment workshop should be available in time for budget planning. Comprehensive To be fully effective, ERM initiatives must involve all parts of the organisation, so that all significant risks are identified and managed. Embedded Risk management activities should be embedded within core processes, according the LILAC model. Dynamic ERM activities must respond to emerging and changing risks.

‘The most important thing is that you need a joined up approach that pulls together all the elements of risk management within an organisation into one body.’

since October last year, and that ISO standards are coming this year, and he feels that the timing is right for industry guidelines on ERM. He is pleased to see a drive for consensus among industry bodies, but accepts that there is still much work to do. Parallel to these discussions there will be further research into how organisations can best assess their attitude to risk. ‘As the economy changes companies need to revisit their risk tolerance - their ability to withstand losses - and their risk appetite. We will be looking into how we can help them do this. The difficult thing for risk managers at the moment is knowing that risk is not a bad thing per se, and that risk management is not a failure. It just needs to be applied properly to organisations, and boards must listen to the messages that come from risk managers,’ says Hurrell. He stresses that ERM will not work its magic overnight, but he believes that it will be an important catalyst in helping companies adjust to the very different world of risk in which they now find themselves. ‘ERM is not a bolt-on, nor is it a magic black box. It is an activity that must be a fundamental part of an organisation’s culture.’ Making that cultural shift may not be easy, but worthwhile things seldom are. ■

John Hurrell John Hurrell became AIRMIC chief executive in 2008. He was previously at Marsh Inc, where he held a number of roles, including CEO for Europe, Middle East and Africa and CEO for the UK business.

Paul Hopkin AIRMIC and other industry organisations are now in discussion to develop a consistent and co-ordinated set of messages for their members in order to promote a clear understanding of how ERM works and the benefits it promises. Hurrell notes that a British Standard on risk management has been in place

Paul Hopkin is technical director at AIRMIC. He was previously director of risk management for the Rank Group plc and prior to that he was head of risk management at the BBC. Excellence in Leadership

CIM010_018 AIRMIC.indd 55

21/3/09 19:07:16

Investment risk

Be prepared The unsettling combination of huge volatility in financial markets and global recession has made everyone more cautious about their investment strategy, especially as the worst may well be to come. Nevertheless, for companies prepared with strong balance sheets, strategic vision and a measured approach to risk there are investment opportunities out there, Brian O’Reilly explains to Jim Banks.

No one has any doubt now about the severity of the current recession, although it would be a bold person who claims to know exactly when a recovery will happen. Most market predictions are now couched in caveats and every investment decision is pervaded by a new-found caution. With most corporates now reviewing their investment strategy very closely the ultimate results of this more cautious attitude are yet to play out, and there

is widespread expectancy that global economic trends will unleash a few more nasty surprises before any green shoots of recovery appear. ‘From our perspective the ramifications of the financial crisis of the last 18 months are only just permeating the wider economy. There will be a prolonged period of deleveraging by banks and consumers, so there will be significant reorganisation and recapitalisation of balance sheets,’ believes Brian O’Reilly, Head of Wealth

Management Research for UBS in the UK. In December 2008, UBS published its Global Outlook for 2009, and its heading ‘Proceed, with caution’ says it all. O’Reilly expects the UK economy to contract by 3.4% this year, though he accepts that it could prove worse, and unemployment may grow to as much as 8%. ‘It is similar in the US, and less so in the Eurozone, but cyclical industries like air travel and retail are particularly suffering. This will be a painful recession – the worst since the 1930s,’ he remarks.

Excellence in Leadership

CIM010_019 UBS.indd 56

21/3/09 19:08:35

Investment risk

UBS analysts expect most developed countries, including the US, Japan and Europe, to slip further into recession before a mild recovery in 2009. Furthermore, they perceive a continuing global recession that will result in significantly slower growth in emerging markets, although they expect the BRIC countries – Brazil, Russia, India and China – to avoid outright recession. We will all have heard parallels between today’s market turmoil and the Great Depression of the 1930s or even Japan in the 1990s. O’Reilly feels that any such comparison is excessive, though he is in no way underplaying the severity of the current economic climate. ‘There is one big difference in that central policymakers have learnt their lessons. From 1929 to 1933 US government spending was pulled back, but now we are seeing the recapitalisation of the banking system and a willingness to reinflate the economy. They are providing some of the fuel the system needs, though some policies are not necessarily optimal,’ he comments. The thorniest issue of all, of course, is how to get banks to start lending again. ‘Banks need to restore their balance sheets, so they need a period of adjustment. The housing market affordability in the UK, for instance, is still above the last boom in the 1980s, but banks need some time to get liquidity,’ says O’Reilly.

Strength in strategy The writing was certainly on the wall before the global economy started to nosedive. The downturn itself was no surprise, but what caught most of us by surprise was its speed. ‘The leading indicators from mid-2007 all pointed to a contraction, but no one knew how severe it would be and the credit crunch only added to it. People were not surprised by the direction, but by the fact that we have crashed into recession. The next two quarters will be very painful. US data has seen over two million people unemployed in the last six months, but we could hit the bottom in the second quarter of this year,’ says O’Reilly. He also points out another difference between the current downturn and the Great Depression that will have significant bearing on how companies formulate their investment strategy. ‘Companies are coming into this recession with more cash than in 1929,’ he notes. How this affects corporate investments will

depend largely on the ability of companies

The UK economy in 2009

healthcare and technology are industries

3.4%

Predicted contraction of the UK economy

Predicted unemployment level Source: UBS Global Outlook for 2009.

‘Investors must look at how they invest and avoid cyclical markets. At the moment healthcare might be one market where there are attractive opportunities.’ to ensure that their thinking is devoted to strategic as well as tactical issues. ‘Companies are battling on a daily basis, but we fully endorse the view that strategy should win over tactics, and I hope that companies can achieve that way of thinking. The risk profile has changed considerably. Risk appetite is at rock bottom by any indicator. There is some interest in investment opportunities, although appetite for risk varies greatly,’ says O’Reilly. He also believes that finance teams should be cautious about what might appear to be attractive valuations. ‘Timing is impossible with the volatility that is in the market. So, any investment needs to be viewed with a long-term perspective, especially in equity markets, although we are cautiously optimistic about equities at the moment,’ he says. With the right strategic perspective, however, O’Reilly believes that there are investment opportunities worth pursuing. ‘Investors must look at how they invest and avoid cyclical markets. At the moment

where there are attractive opportunities, and we are seeing companies using their strong cash balances and buy competitors with a longer term strategic perspective. Corporate bonds are also offering bigger spreads now, though there will be some defaults, so risk appetite is again the defining factor. Low valuations can be misleading, but they are less so when viewed in the long term,’ he remarks. UBS expects corporate bonds to deliver some of the strongest returns in financial markets this year and, while corporate defaults will rise from their present low levels, the bank’s view is that the yields more than make up for the risk. Consumerrelated sectors such as the US automotive industry, however, remain most at risk, so its advice is to look at bond markets that are less exposed to discretionary spending patterns such as utilities, telecommunications and consumer staples. For equities, the bank advises a defensive stance. Further market weakness cannot be ruled out as corporate earnings are hit. Yet for investors with a long-term Excellence in Leadership

CIM010_019 UBS.indd 57

21/3/09 19:09:12

Investment risk

‘The lesson from last year is that there is definitely a new attitude to risk, so make sure your balance sheet is strong and that you generate cashflow.’ view and a tolerance for volatility there are opportunities in insulated areas such as healthcare. As for emerging market assets, a sharp slowdown in growth is expected, so last year’s flight to quality into developed markets could continue this year. There are also risks with government bonds as much depends on how effective reflationary policies prove to be. Lending to a state becomes less attractive as government debts grow, and UBS sees higher risk for bonds denominated in US dollars and Japanese yen.

Unearthing opportunity The impact of global economic trends on corporate investment strategy will vary, depending largely on a company’s resilience and the strength of its cash position. ‘If a company has a strong balance sheet then it can afford to take the longterm view. There will be opportunities to take out a competitor, but again it all depends on a company’s appetite for risk. For many businesses the focus now should be on shoring up the balance sheet,’ comments O’Reilly.

For those businesses in the position to make investments, the advice from UBS is to weigh any improved valuation against recession risks. The economic outlook remains bleak but there is a sense that financial markets have also priced in a lot of the bad news. Last year saw all major categories of risky assets, like real estate, equities and commodities, fall sharply, which watered down the benefits of diversification. For this year, UBS recommends greater emphasis on portfolio diversification, a defensive stance on investment, and the willingness to take calculated risks to outperform the market. Their analysts warn that investors cannot simply pick up where they left off when the recovery starts. The potential value of investment opportunities will no doubt become clearer when we can see how successful the ongoing attempts are to revive the economy with aggressive fiscal and monetary policies. This may take some time, and the advice from UBS is to wait for clear signs of macroeconomic improvement before taking on exposure to higher risk assets like the financial sector, real estate, or energy.

‘The lesson from last year is that there is definitely a new attitude to risk, so make sure your balance sheet is strong and that you generate cashflow. Banks have been withdrawing liquidity and that can happen quickly, and it is contagious. Only companies with strong balance sheets will be well placed to take advantage of low valuations,’ warns O’Reilly. ‘Caution is still the watchword now, and it will be for some time to come.’ ■

Brian O’Reilly Brian O’Reilly is a senior economist and head of UK research at UBS Wealth Management. He joined eight years ago from Goldman Sachs and has held various positions as an economist and equity market strategist in New York and London. Prior to his current role, O’Reilly worked in the global equity strategy team at UBS Investment Bank.

Excellence in Leadership

CIM010_019 UBS.indd 58

21/3/09 19:10:04

Islamic Finance Islamic Finance is now an established is set to grow exponentially over the next decade. Demand for skills in this area has

Developed in association with respected, independent meet the needs of this vibrant sector of the industry. Four modules, delivered by distance learning and supported by a dedicated website, culminate in an online assessment which will equip you with the knowledge and skills you need in this dynamic and exciting new market area. For more information on this new opportunity visit

A global product for a diverse world

supported by

CIMA010_Islamic.indd 1

20/3/09 08:36:05

Human capital

Strike a balance As the dawning of the 21st century has so far failed to herald equality in the workplace, PricewaterhouseCoopersâ&#x20AC;&#x2122; Ian Powell and Sarah Churchman speak to Steve Coomber about how companies should stay on their toes when it comes to providing equal opportunities for employees.

In the UK, women have been able to vote on the same terms as men since 1928. Women can join the Armed Forces, they pay the same taxes as men, and graduate in equal or greater numbers from university.

advantage, a quick glance at a list of senior managers in FTSE 100 corporations, or the upper echelons of professional service firms, reveals that the principle of equality for women has yet to reach the boardroom.

Yet, in 2009, in an age where workforce diversity is supposed to promote competitive

Fortunately, for those that believe equality of opportunity is essential, not only

for moral and ethical reasons, but also for economic reasons, several organisations are making progress towards increasing diversity within the ranks of senior management.

Diversity matters For organisations that want to thrive in a highly completive, modern, global

Excellence in Leadership

CIM010_021 PWC.indd 60

23/3/09 13:43:58

Human capital

economy, diversity is an important issue, for a number of reasons. ‘One reason is that firms need to reflect the clients that they serve,’ says Ian Powell, Chairman and Senior Partner at PricewaterhouseCoopers LLP (PwC). ‘If you look at new business start-ups, for example, around 50% of new businesses are started by people from an ethnically or gender-diverse background. Those are the businesses that are going to develop and grow. So, if we want our business to be relevant to these businesses in ten years’ time, we need a completely balanced and diverse group of people inside PwC.’ Another reason for focusing on diversity is the impact on innovation, says Powell. Markets and clients are constantly changing. ‘Innovation increases with diversity, and decreases with sameness,’ says Powell, citing leadership gurus Rob Goffee and Gareth Jones. ‘If you’re going to really have great new ideas in your business, you need people from diverse backgrounds, whether it’s business, ethnic, or gender diversity. If you’re really going to be creative going forward, you need that mix.’ Not forgetting, adds Powell, that the aim is to offer real, great, and equal opportunity to everybody. In order to deliver on its ambition to provide equality of opportunity, PwC has put in place various measures to try to ensure that where people are talented enough and have the ambition, they can ascend the partnership ladder. As with many organisations, however, there is still work to be done. Take the proportion of female partners. In terms of graduate intake 41% are female, and 59% male. Yet women make up just 13% of partners. This under representation is now being addressed, through tailored initiatives. ‘Initially, before I was in the chairman’s position, I made the mistake of thinking that you can solve the gender diversity issue at the strategic level. You can encourage gender diversity at that sort of level, but if you really want to make things happen, you’ve got to get tactical,’ says Powell.

‘And it should not be about positive discrimination. Nobody wants tokenism. You don’t want to promote a woman if they’re not quite ready, just because you’ve realised that you need a woman on the board; you can damage somebody’s career by doing that. No, it’s about making sure that the playing field is level.’

Equality of opportunity All organisations can take steps to improve access to opportunity across their workforce. How do they do this? By seeking out best practice, taking those examples, and adapting them to fit their organisations. One diversity initiative at PwC is the women’s leadership programme, a programme Powell sponsored as head of Advisory. And, as befits a firm of accountants, the initiative is underpinned by a raft of data.

‘If you’re going to really have great new ideas in your business, you need people from diverse backgrounds, whether it’s business, ethnic, or gender diversity.’ ‘The programme was developed to ensure that we brought more women through to partnership. Inevitably, in an organisation like ours, we do a lot of data analysis. So we’ve worked with our actuaries to develop a model where we can see the underlying trend and extrapolate it for future,’ says Sarah Churchman, director of diversity and inclusion at PwC. ‘When we started doing this analysis three years ago, it told us that we were going nowhere fast. Increasing the proportion of female partners seemed to be an inordinately slow process. But, it also enabled us to identify where we needed to focus our efforts.’ The firm does a line-by-line analysis of people’s movement within PwC– whether they have been promoted, or whether they have left. It then works out

Limited progress for women The 2008 ‘The Female FTSE Report: A Decade of Delay’ was published by the International Centre for Women Leaders at Cranfield School of Management in November 2008. Marking the tenth anniversary of the annual report, authors Professor Susan Vinnicombe, and Dr Val Singh, reported limited progress in getting women representation on the boards of leading UK businesses. The representation of women in senior management at FTSE 100 companies was as follows: • CEO – 5 • Chairman – 2 • Executive directors – 17 (13 in 1999) [Male: 336] • Non executive directorships – 114 (66 in 1999) [Male: 649] • Total board directorships – 131 • Total number of women holding FTSE 100 directorships – 113 • Companies with exclusively male boards – 22 • Women among the 149 new appointees to the FTSE 100 – 16 (10.7%) The authors also noted that female directors have significantly shorter tenure than their male counterparts.

Feed the pipeline If the best talent is to rise to the top regardless, organisations also have to pay attention to diversity during talent selection. ‘All the partners and directors involved in talent management in the organisation undergo diversity and bias awareness training,’ says Churchman. ‘We’ve got lots of checks and balances in place now. So, for example, when people are nominated for the emerging leaders programme, the high flyers programme, or promotion, we look at the gender split of those who’ve been nominated and we compare it to the gender split of the population from which they’ve been selected and if it’s dramatically different, we would challenge that.’

Excellence in Leadership

CIM010_021 PWC.indd 61

23/3/09 13:45:25

Human capital

Workforce diversity in the UK UK large-sized organisations Work structure

Sample percentities

European percentities

25th

50th

75th

25th

50th

75th

Workforce Diversity: Women (%)

35.1

51.4

64.6

28.6

43.0

55.7

• Management

21.7

31.8

36.8

16.3

27.0

37.3

• Professional

32.0

38.2

48.7

24.4

37.3

52.9

• Non-management

35.9

61.6

77.2

29.7

49.4

66.7

Source: PwC, November 2008.

the underlying trend, effectively the probability if you are male or female of either being promoted from one grade to another, or of leaving the firm. Initial efforts, which date back to 2001, focused on gender diversity, and stemmed the flow of women from the firm. But the next step was to ensure that women not only stayed, but progressed. Churchman says that a number of barriers to advancement have been identified. ‘One big issue is that there’s a lack of female role models. Women look upwards in an organisation, only to see that there isn’t

anyone that they can aspire to be like; and that quashes ambition.’ Another factor is that, generally speaking, women are not very good at promoting themselves, says Churchman. A point arrives in people’s career where getting on is no longer about technical competence or abilities, but much more about who they know within the organisation and who knows what they are doing, and how well they are doing it. A lot of that comes down to self-promotion: people blowing their own trumpets, getting support and building a network.

Breaking glass Carly Fiorina and Carol Bartz are two women who have led massive US corporates from the front and faced all manner of added pressures in the role because of their gender. Michael Jones caught up with both to discuss their views on diversity in the boardroom. Michael Jones: In 1998 Fortune Magazine called you the most powerful woman in business. Seven years later you left HP in a very public manner. What did these two extremes teach you about business? Carly Fiorina: The “number one most powerful woman in business” – one of things that I’ve said over and over again is that I wish that magazine didn’t have the list. I think it sends the wrong message. Of course it was an honour in many ways, so I don’t want to sound ungrateful, but when you list women one to

Churchman also believes lack of confidence is a problem. ‘I think there is something about being a minority in the corporate world that seems to sap women’s confidence in their own abilities,’ she says. ‘At PwC, foe example, we recruit incredibly bright, talented women into this organisation, yet some of them say that they’ve lost the confidence they had earlier in their careers and during their education.’ The women’s leadership programme is structured around the key qualities that PwC looks for in its partners. It is a modular program, run over a period of six months, with three discreet modules that focus on helping female participants to understand the value they bring to the organisation in terms of the partner admissions process, and about leadership skills and the capacity to develop. Each woman director that participates also has a senior sponsor, frequently male. Each day long module is followed up with a halfday session the next day, where the sponsors are also in attendance. ‘The whole idea is to help the sponsors better understand the female participants, and then between the two of them, to go back into their business to work together, and for the the organisation, and to hone their leadership skills and realise their capacity to develop,’ says Churchman.

fifty you imply that business is like tennis – that there is the men’s ladder and the women’s ladder and women can only compete against each other because we can’t play on the same field with men. That’s totally the wrong message. So I wish it didn’t exist but, I’ve learnt this so many times, you can’t make your choices based upon what other people say; whether they are saying that you are good or you are terrible. You have to make your choices based on what is right for the organisation and what is the best decision based on the circumstances. As a female executive and former CEO of HP, how much of a concern for you is the current lack of females in CEO positions in Fortune 500 companies; is the glass ceiling issue still there? Well I think we are seeing more and more. Things are clearly changing for the better. And yet the data suggests that we have a very long way to go still. If you look at the percentage of women that are represented in boardrooms, or that really lead big companies, it’s still very small. It’s like 16% of senior executives and board members and it hasn’t changed in over five years. I find it short-sighted on businesses, partly because you don’t make the best choices if everybody thinks the same. Diversity is important for enlightened self-interest reasons. The ‘club’ in the boardroom isn’t making as good a set of decisions as a more diverse group of people

Carly Fiorina Excellence in Leadership

CIM010_021 PWC.indd 62

23/3/09 13:46:02

Human capital

The women on the programme are also encouraged not to shy away from selfpromotion, says Churchman. ‘We help them to understand that it’s not about inauthentic leadership, they can remain true to themselves, it is just about doing what is required to attain a level of sponsorship to bring them through to senior roles,’

However, when these women see the data on women’s career progression, their attitude usually changes.

ready and experienced enough to take senior leadership positions on the executive board, for example, in the near future.

Building networks

‘Ultimately, we don’t have capital that we invest, or machinery, what we have is the ability of our people, and so to stay innovative, to stay ahead of the market, we must recruit, retain and nurture, the very best.’ ■

Of course it is not only women that should benefit from diversity measures within the workplace. PwC, for example, has

‘There is something about being a minority in an environment that seems to sap women’s confidence in their own abilities.’ ‘And we rehearse them, helping them to better understand the female participants, and vice versa of course. We call this gender intelligence. Then they go back into their business. We do that repeatedly using a variety of resources, including, for example, an actor that comes in and helps them articulate more positively exactly what it is they’re good at and why they should be promoted.’ There is sometimes a degree of resentment from the women selected to do the programme, who believe that they will get to senior partnership on their own merit, without the help of targeted initiatives.

a number of initiatives targeted at different segment of its organisations, says Powell: ‘Inside the organisation we’ve got over eleven different interest groups, supported and sponsored by the firm to help make sure that people with different backgrounds, whether it’s ethnic, youth, disability, whatever, will get the same level of experience, and so that we can, as a firm, support everyone equally. ‘So there’s a huge push inside the firm to make sure that our best and brightest, particularly women, are getting the profile and the job opportunities, so that they will be

would. So I have to believe that as pressure in business continues to mount, talent will become more important than bias. So there are reasons for optimism, but the progress is slower than I would like. What lessons could British or European business women learn from their counterparts in the US, where there does seem to be more access to the boardroom? I’m not sure it’s a question of European women learning from American women, I think maybe European men could learn something from American men – seeing as it’s frequently men making the hiring decisions and the placement decisions. I think it’s fair to say that the American business community is more dynamic and more diverse – perhaps there is a connection there. Carly Fiorina is the former President, CEO & Chairman of Hewlett Packard and was a keynote speaker at the Leaders in London event: www.leadersinlondon.com

Michael Jones: As a woman chief executive, how much of a concern is it to you about the current pervasive lack of females in CEO positions in Fortune 500 companies? Does the ‘glass ceiling’ issue still resonate with you or do you think that things are changing?

Sarah Churchman Sarah Churchman is director, diversity and inclusion, PricewaterhouseCoopers LLP. Her role resulted from her work on PwC’s life balance and flexible working policies following the merger in 1998.

Ian Powell Ian Powell is the chairman and senior Partner of PricewaterhouseCoopers. He joined the UK firm’s management board in 2006 as head of the advisory business and was elected chairman and senior partner on 1 July 2008.

Carol Bartz: It absolutely resonates. I don’t think they are changing at all. I think they fall back every time one of us leaves the job! Meg Whitman recently left her post, Pat Russo left her post. It’s just as tough out there for women to get senior positions, because the men do still run the place. How can that change though? Do you see this being a permanent problem or can you see that changing within a generation?

Carol Bartz

Because I have daughters I’d like to think that the young men that they are going to university with and working with are much more familiar with them in the work place so it maybe will lighten up but I’m not overly optimistic. At the time of interview, Carol Bartz was the executive chairman of the board (and former CEO) of Autodesk, Inc . She is now the chief executive officer and a director of Yahoo! Inc. Excellence in Leadership

CIM010_021 PWC.indd 63

23/3/09 17:58:22

Human capital

Best and brightest As recession starts to bite, the impetus on businesses attracting and retaining top talent is greater than ever before. Alison Platt, Bupa Group Development Director, tells Phin Foster how brand ownership is a far greater tool than mere remuneration in an organisation’s effort to find the most brilliant employees and hold on to them.

‘Our people are our greatest asset’ has long resided in the lexicon of business cliché. While the sentiment is undeniably noble, too many captains of industry have been guilty of paying the line lip-service, failing to take substantive steps towards making it a reality. During the boom years, when jobs were plentiful and capital easy to come by, perhaps such an approach did not seem so bad: top performing staff members were generally well remunerated and performing businesses tend to be happy ones.

But what happens when results start to turn and the money disappears? As we enter an age of austerity, belt tightening and job cuts, perhaps a new addition to that dictionary of clichés will soon have to be made: ‘We need to do less with more.’ In order to tackle such a counterintuitive proposition, the onus is now on businesses recognising and keeping talent like never before. If money ever did truly buy loyalty, it cannot be the answer now and more nuanced

approaches are required to keep organisations going in the right direction. In the quest for new ideas and direction, one could do worse than start by looking at companies where fiscal remuneration has never really been an option. Bupa, which in many sectors of its business competes against large private equity houses, has no shareholders and oversight is provided by a group of 100 members with no direct economic interest in the group. All surpluses

Excellence in Leadership

CIM010_024 BUPA.indd 64

21/3/09 19:31:02

Human capital

are invested back into the business. Despite this, it has enjoyed startling growth, retained and attracted top talent and now boasts seven million customers and close to 50,000 employees across three continents. ‘Many of my colleagues are not going to see the sort of monetary returns that some of their opposite numbers make elsewhere,’ admits Alison Platt, Bupa group development director. ‘They must have had countless offers, but they’re driven by something else. Whether one is talking about heritage, status, purpose or value, you can decide that your values matter or you can merely pay lip service to them. The consequence of the former will quite often see people at all levels buying into the

for attracting new customers. ‘You have to get on top of brand management within the organisation before you can make a good fist of projecting it outwards,’ she believes. ‘If the values and aspirations are discussed, appreciated and trusted by our own people, we have 50,000 ambassadors who can make these ideas tangible. They’re the biggest asset we’ve got for attracting talent at all levels.’ Perhaps the best way of expressing the truth behind this statement is to look at the downside. ‘We’ve all seen it,’ says Platt, ‘the rolling eyes of the woman behind the check-in desk or the train conductor who ignores your requests. These are people that clearly don’t believe the brand promise their organisation

where we’ve come from and what we do. Finding what makes your organisation unique is what will make you people proud to work for you and making that discovery has to be a corroborative process.’ The day before we meet, Platt has been working late into the night on an action plan for driving staff satisfaction forward in the coming year. She has already overseen the implementation of rigorous performance and management tools across the company, but is a great believer in the need for such solutions to constantly adapt and grow. ‘Those in management positions at every level of the organisation are targeted,

‘We have a very rigorous and transparent process of measuring customer satisfaction, but staff satisfaction is also audited annually by an external organisation.’ culture of a company in a way that would be unthinkable otherwise.’ This was not a view that everybody shared when the organisation set out upon a restructuring programme ten years ago. ‘The organisation wasn’t in great shape and one of the debates we had was whether it was actually possible to attract and retain top talent without being able to offer equity, an aligned incentive to the rewards for commercial success,’ Platt explains. ‘A lot of the advice we received from some very influential people in business was that it would be impossible to turn the group around without going down that path.’ Platt and her colleagues decided to ignore that advice and the results speak for themselves. Not only does a large proportion of the executive committee remain with Bupa a decade later, but recent appointments, including a brand director from Pepsi and an internal communications head from Barclays, point to an organisation that is now seen as that most elusive of institutions, an employer of choice.

A healthy brand Brand strength lies at the heart of any successful company, although that strength can be achieved in a multitude of ways. It is also not a one-way street: for Platt, a strong brand message is as important from a staffing perspective as it is a powerful tool

makes and, if your staff are not willing to be ambassadors on your behalf, it’ll kill you.’ In a large organisation with a variety of interests and divisions, one of the great challenges can be keeping these ideas consistent. Rapid growth, particularly through acquisition, can lead to one’s brand message becoming disjointed, undermining efforts to empower one’s workforce with ownership of the company’s values. ‘People can know lots about their small part of the company but are unable to see the whole,’ Platt agrees. ‘If that is the case, it’s likely your customers will feel the same way. We look upon our employees as a customer group, discussing what the company means to them, why they should be proud to work for us and the credentials that sit behind the brand. We don’t make beans. You can’t stick your fork in and decide that what we sell really does taste as good as we claim. The measure of our brand is the quality of people onboard.’ Communicating this message to one’s workforce is an ongoing effort. ‘You need to provide the raw material that will bring people to the party,’ Platt explains, ‘but the values need to be shared. We’ve recently launched the Bupa Story microsite, for example, which is aimed directly at our workforce and articulates who we are,

measured and rewarded on two key factors beyond the financial,’ she explains. ‘We have a very rigorous and transparent process of measuring customer satisfaction, but staff satisfaction is also audited annually by an external organisation. It’s across the board. In some organisations I’ve encountered, there’s a culture of saying, “we think people management stuff is really important, but that guy is so brilliant technically that we don’t worry about it for him”. The minute these processes don’t apply to one individual, they stop applying anywhere.’

Performance related persuasion Being able to point towards concrete examples of how your organisation rewards performance and promotes on merit is also a key weapon in one’s recruitment armoury. ‘The promotions and appointments you make send out a far stronger message than any marketing spiel,’ Platt believes. ‘It’s not about selling the position through mapping out a career path; a compelling vision of the future and being clear about the values that are rewarded within your organisation is far more likely to enthuse the right people. We can point to the performance and talent indicators we have in place, a robust performance Excellence in Leadership

CIM010_024 BUPA.indd 65

21/3/09 19:31:30

Human capital

management system, a talent board at the top of the organisation looking across all tiers at performance across all levels. Huge importance is invested in the scoring people get on staff satisfaction and how it is championed, on flexibility and a drive to be better. Showing graduates how far some of our people have risen through the organisation helps demonstrate just what is possible.’ When it comes to recruiting externally, finding people who compliment the existing DNA within an organisation can be a big challenge. This not only places great impetus upon the employer to articulate that culture successfully, but also means that any partners in the process must also buy into your message. ‘We put a lot of stock in personal recommendations from inside the organisation,’ Platt explains, ‘but it is sometimes necessary to bring in external help. We only work with a very small

number of recruitment consultants, people we trust and, more importantly, people who know us and our values extremely well and appreciate the motivation, culture and methodology behind the company. At senior levels, the biggest reason behind people joining and leaving a business within a 12-month window is not because the job is beyond them; it’s that they simply don’t fit with the ethos of their new employer. You need people out there recruiting for you who have an inherent appreciation of your values.’

80%

of Bupa’s UK workforce are female

Values are a theme Bupa’s group development director returns to time and again. A startling 80% of the organisation’s workforce are female and Platt sits on the advisory board of Opportunity Now, a group working to transform the workplace by ensuring inclusiveness for women. ‘Such a high proportion is not atypical of the sectors we operate in,’ Platt admits, ‘but we do take the Opportunity Now and Business in the Community benchmarking exercises each year. As with most things, the aim is to compare to the top quartile of participants and we stand up pretty well. People see this and it makes a difference, but there is a strong business case behind action to bring in more women and minority groups, not some noble aspiration: if you obsess about excellence, it makes sense to fish in the widest talent pool. Gain a reputation as a company that only recognises white, middle class men and that talent simply isn’t going to make itself available to you.’

‘Gain a reputation as a company that only recognises white, middle class men and talent simply isn’t going to make itself available to you.’

Excellence in Leadership

CIM010_024 BUPA.indd 66

24/3/09 14:20:38

Human capital

80%

of the organisation’s workforce are female

‘Gain a reputation as a company that only recognises white, middle class men and talent simply isn’t going to make itself available to you.’

Excellence in Leadership

CIM010_024 BUPA.indd 66

21/3/09 19:32:02

Human capital

Outside help Alison Platt may put a lot of stock in staff retention and promoting from within, but even at Bupa there is sometimes a requirement for bringing in help from the outside. ‘You need a mix,’ Platt admits. ‘There are times when you have a peak of activity or are looking for an injection of different perspectives or styles. Interim manager can be a very effective solution.’ This has been the case in two particular spheres of late: marketing and change management. ‘A lot of work is being put into branding at the moment and that has called for fresh ideas and people who boast experience from a variety of industry backgrounds. There probably is a relatively short-term peak in the work that needs to be done, but that help has been invaluable in guiding us towards a place where the situation will eventually stabilise.’ A recent acquisition has also placed demands upon Bupa which led to a search for external assistance. ‘With short-term change issues you really need hands-on management,’ Platt explains. ‘We suddenly had two organisations competing in the same UK market and needed to bring both bodies together in as speedy and comprehensive manner as possible. We needed somebody who could apply 100% focus to that task and brought in an interim who has done an absolutely great job. ‘A strong company is not one that insists upon doing everything in-house; you must also know yourself well enough to be able to see when external assistance is required.’

Platt’s other interests away from Bupa include the role of non-executive director at the Foreign & Commonwealth Office (FCO). This has afforded her an opportunity to see how brand management and talent recognition is tackled within the public sector. ‘There you’re talking about a stunningly good brand with a reputation for attracting incredible talent,’ Platt enthuses. ‘Private sector organisations would give their right arm to have the

FCO’s profile and it comes down to the fact that it’s built a first class diplomatic core over generations where the brand experience meets the promise. Brands don’t exist in limbo or advertising land; they can be made tangible through both the employee and customer experience. People want to work for them.’ While public sector organisations can suffer from a reputation for excessive bureaucracy and a tendency to recognise quotas and targets ahead of talent, Platt believes that the manner in which such issues are tackled within the FCO offers an elegant rebuttal. ‘In terms of mechanisms and processes there are some major differences,’ she admits.

is not an option, making the need for innovative recognition mechanisms absolutely fundamental. Programmes such as the One Life Awards, where staff members are nominated for exceptional performance, Personal Best, an ongoing scheme where care staff are encouraged to put themselves in the shoes of the customer, and Holiday of a Lifetime, an annual competition in which 100 staff members win a flight to a variety of worldwide destinations, ensure that even those on the lowest rung of the organisation feel valued. ‘It has always been a challenge across large swathes of businesses to reward staff when the money is simply not there,’

‘It has always been a challenge across large swathes of businesses to reward staff when the money is simply not there.’ ‘How people bid for promotion, the tendency towards three to four year postings and a great degree of movement: these aspects are not synonymous with an organisation such as Bupa. However, the quality of strategic HR management and thinking is exceptionally high.

Platt explains. ‘Besides, smart companies realised a long time ago that cash is not the answer to everything. It’s great when it’s there, but money alone will not buy you loyalty. We are a people business and if that bit’s not working for us, nothing will. Our people are our core asset.’

Tackling massive geographical disparity and an extremely diverse workforce they do a stunning job thinking about how best to deliver a challenging agenda. The manner in which the people element is so strongly embraced across the board is absolutely first class.’

There’s that dreaded cliché again, but, n this case, one might just be willing to believe it. ■

For her part, Platt cannot remember a chief executive committee meeting at Bupa where a core issue to do with its people has not been on the agenda. ‘We’ve a team at the top that feels great responsibility and pride in what has been built,’ she says. ‘We’ve never outsourced the responsibility for defining the values that make this organisation special. That sense of ownership makes the job of sharing the message with those further down the line all the easier.’ Of those operating at the lower tiers, 30,000 are care service providers, many working for minimum wage. Remuneration for good performance

Alison Platt Alison Platt is group development director at Bupa. She took up this post late in 2007, having overseen the sale of Bupa’s Hospital business to private equity group, Cinven. Alison had been chief operating officer of that business for the previous three years with full profit, operational and regulatory responsibility for all hospitals across the UK. Excellence in Leadership

CIM010_024 BUPA.indd 67

21/3/09 19:32:24

Outsourcing

World service When the BBC’s back office outsourcing contract came up for renewal, Group CFO Zarin Patel sent a strong signal by not only changing provider but moving processes offshore. She explains to Steve Coomber how, after a tour of possible destinations and providers, the decision was made to go with a provider in India for the company’s cultural fit, value for money, and flexibility.

Zarin Patel is a busy woman. As Group CFO of the BBC she is responsible for a broad range of CFO related activities from ensuring strong financial control, through to maximising net income from commercial exploitation of the BBC’s properties through BBC Worldwide. Then there is delivery of the BBC’s public service obligations under its charter, not to mention pension scheme investment responsibilities, plus her membership of numerous BBC boards and committees. In addition to her considerable day-to-

day duties, however, Patel has found time to engineer and oversee a substantial transformation process at the BBC. In doing so, she has pioneered the use of finance and accounting outsourcing solutions in the public sector.

Tough decisions When Patel first arrived in her post in December 2004, she had the unenviable task of informing her staff that some 50% of them would no longer be with the BBC in a few

years’ time. It was a tough call and a tough timescale but, for the most part, Patel has delivered on her objectives and the finance team is down from 670 people to 320. ‘In finance, we have taken out 50% of the cost,’ she says. ‘Part of that was extending into second generation outsourcing and offshoring, and that has delivered a very big gain for us.’ Contracting out back office business processes to an offshore operation is a well established practice. But, despite

Excellence in Leadership

CIM010_022 BBC.indd 68

21/3/09 19:26:25

Outsourcing

the comparative maturity of the market, outsourcing arrangements have not run smoothly for all organisations. In some cases, for example, and for a variety of reasons, organisations have decided to bring processes back in-house. For the most part, it seems the BBC’s experience of finance and accounting outsourcing has been a positive one, although there have been a few glitches along the way. Getting the outsourcing and offshoring right, has been a learning process, says Patel. Initially, Patel spent a lot of time deciding on what outsourcing model to adopt. Theoretically there is a lot that can be outsourced in the work stream that flows from processing the invoice all the way through to trial balance and producing the accounts. But, says Patel, producing the accounts requires a certain depth of knowledge of the business, and some of that knowledge cannot be acquired at a distance.

in Cardiff, where accountants could take the transaction data from the outsourcing provider and use it to produce the accounts, budgets, and forecasts. Now the corporation is two years into its second generation relationship and the outsourcing is working as well as Patel wanted, she says. There have been some changes, though. For a start Xansa, the outsourcing provider that the BBC eventually selected, after switching from Medas in 2007, was taken over in the summer of that year by Steria, the European IT services group. Steria is a huge player in its market, having bought a number of businesses, such as Bull information systems. Being part of a larger group has its advantages, says Patel, in terms of depth of research and expertise. So, despite any upheaval caused by the change of provider, Patel says that she is pleased at the outcome.

Learn your lessons Another thing that Patel did not envisage was that the transition to the new service provider took far longer than she expected. ‘One key lesson is around systems. It’s easy to move processes and people, because there is a lot of expertise amongst most of the outsource providers on how to do that,’ she says. ‘But, with our systems infrastructure, because the whole business runs on SAP, and it is not just the financial accounting system, we buy on it, we sell on it, we resource and schedule our staff on it. It is fundamental to our operations. So shifting that across service providers was probably the most difficult and risky thing we’ve done.’ The lesson here for the BBC and other organisations, says Patel, is that if as an organisation you do not want to be bound to one service provider forever, then it is essential to continually keep the business’s systems under review and make them as highly portable as you can.

‘I’m a great believer in keeping outsourced service partners unsure as to whether we will constantly renew the contract with them. Otherwise an expectation that nothing is likely to change can breed complacency.’ In the end Patel opted for a model that outsourced rule based transaction processing that did not need as much subjective individual attention. So out went invoice processing, sales order processing, contributor payments, fixed asset accounting, purchase ledger procurement, VAT, and so on. When the first generation outsourcing contract came up for renewal, Patel decided on a bold strategy, not only changing provider, but moving the back office processes offshore. After a tour of possible destinations and providers, the decision was made to go with Xansa as a provider with India as a location. The reasons cited were cultural fit, value for money, and flexibility. Not everything was offshored, though. Voice contact, for instance, stayed in the UK, based in Manchester. While the transaction processing was outsourced, much of it offshore, Patel also created an in-house shared service centre

F&A indicators Statistics on the Finance and Accountancy Outsourcing (FAO) market are not that easy to come by. In the summer of 2008, however, FAO Research led by CEO Lisa Ross, an outsourcing professional with many years of industry experience, published some key findings about the market. The firm’s research revealed: • 66% of major FAO contracts were valued at less than £25m, ranging from a few million pounds to a maximum of £245 million • Of those contracts signed from 20042007, 43% involved service provision in Europe • Over 75% of outsourced finance functions are handled offshore, although increasingly this is expected to be a mix of offshore, onshore, nearshore and onsite.

‘It has been one very major learning point for me,’ says Patel. ‘I’m a great believer in keeping outsourced service partners unsure as to whether we will constantly renew the contract with them.’ Otherwise, she says, an expectation that nothing is likely to change can breed complacency. Hence the need for the outsourcing provider to at least believe that change is possible. Another positive, adds Patel, is that although Medas provided a good service as the BBC’s first outsource provider, moving to a new firm has provided a new perspective on how processes might be improved. ‘Once you come out of one provider and go to another, people see things with fresh eyes. We thought some of our processes were already quite fit and healthy, but found that actually they weren’t,’ she says. A good example is payroll. This is outsourced using a mixed model. With regards to the data and security aspect quite a lot is onshore; however, some of the processes Excellence in Leadership

CIM010_022 BBC.indd 69

21/3/09 19:27:00

Outsourcing

around accounting are offshore. Xansa has also dealt with a large telecoms firm’s payroll processing, and although the two businesses are very different there were some cross business insights that could be applied. ‘We have a very complicated payroll, because we have people abroad; we have casuals, freelancers, and other people paid in different ways, by the hour, by the day. The telecoms company’s payroll has ten times as many people as we have, yet, at the push of a button, works really cleanly and quickly every month. Ours took much longer and involved many more people,’ says Patel. ‘The underlying reasoning was that our systems architecture was hugely complicated, and it took a new set of eyes and new expertise, and us pushing to say if the telecoms company can do it in this way, why can we not learn from them and do it at the BBC.’

Build strong relationships When ensuring that the outsourcing arrangements run smoothly, says Patel, the relationship between the organisation doing the outsourcing and the client is paramount. That is especially true when you are transferring from one provider to another.

Patel and her team are still at the early stages of building a strong relationship with Steria. One of the things she does to enhance that relationship is to conduct high level meetings that include the chief executive of Steria, and other senior people involved in the contract.

partnership with our service providers, because technology’s such a big component. So that is a big issue for us.’

‘We go through what’s working, what’s not working, and where we want this relationship to be in a year’s time and what we need to do,’ says Patel. ‘It is very healthy. Both sides are honest with each other about what they want. That kind of conversation allows you to create a relationship so that when something goes wrong, you’ve both got the ability to pick up a phone to try and sort it out, rather than resorting to the contract.’

‘The relationship is still maturing,’ says Patel. ‘But a new service provider really can bring you new thinking around process efficiency.’ ■

Finally, Patel points to a third aspect of outsourcing concerning data security, where moving to a new provider has helped. ‘I think that there is a feeling around data protection security that, however good we were before in following the rules, the public’s expectations about data protection security are much higher now. So we needed to look at issues such as how robust we really are on security, if and how somebody might break the system, and then increasing data protection security,’ says Patel. ‘That is something we have to do in

So, all things considered, the move to a new outsourcing provider has been a beneficial one, for the BBC at least.

Zarin Patel Zarin Patel took up the role of group CFO for the BBC in December 2004. She is a member of the BBC’s executive board. Patel joined the BBC in 1998 as Group Financial Controller. She achieved a transformation of the organisation in Greg Dyke’s One BBC Review, which allowed substantial investment into programming from overhead savings.

‘There is a feeling around data protection security that, however good we were before in following the rules, the public’s expectations about data protection security are much higher now.’

Excellence in Leadership

CIM010_022 BBC.indd 70

21/3/09 19:27:29

CYPRUS. STEP IN TO YOUR NEW OFFICE

Much more than beautiful views and dream holidays, Cyprus will cater to your business needs in ways that others can only aspire to, combining dynamic commercial prospects and the mythical beauty of the Mediterranean.

CYPRUS

INVEST WITH CONFIDENCE

A fully â&#x20AC;&#x201C; fledged EU country with 300 days of sunshine; A highly skilled workforce with welcoming smiles; A country with efficient business services and a mouth-watering cuisine; Low corporate tax rates and an ultra modern infrastructure that takes you home to sunset cocktails at the end of a busy work day. Sounds like a dream? Here in Cyprus, we can make it a reality.

Beirut, Beijing, Bratislava. Wherever your business is based, create its new space in Cyprus â&#x20AC;&#x201C; and step into your new office.

Severis Bldg 9 Makariou III Ave. 4th Floor Lefkosia 1065, Cyprus

CIM010_CIPA Advert.indd 1

P.O.Box 27032 Lefkosia 1641, Cyprus

Tel + 357 22 441133 Fax + 357 22 441134 www.cipa.org.cy info@cipa.org.cy

20/3/09 08:29:18

Responsible business

Conserve energy Caroline Ramsay, UK Finance Director of commercial and personal insurer RSA, explains why business leaders should take notice of the new carbon trading scheme, the Carbon Reduction Commitment (CRC), to light up the companyâ&#x20AC;&#x2122;s bottom line.

Excellence in Leadership

CIM010_023 RSA.indd 72

21/3/09 19:29:17

Responsible business

It’s 2009, the holiday season is over and the UK is officially in a recession. Faced with a decision to fight or fall, many businesses are taking drastic steps to cut costs such as reducing staff and downsizing operations. A new piece of green legislation sounds unlikely to be at the top of the list of concerns for companies that don’t consider themselves to have a high environmental impact. And yet, the ultimate aim of the new regime is to reduce building energy use (and hence CO2 emissions) and links into the cost reduction/energy efficiency agenda that is increasingly being considered. This new regime will require decisions on purchasing carbon allowances and assessing the cost benefits of acting early. A public league table will put green claims under the spotlight. This carbon trading scheme, which starts in 2010 but requires key actions in 2009, will give environmental responsibility a greater strategic significance as it will impact the reputation and bottom line of every company involved. These are just two reasons why RSA is preparing now.

The legislation Under CRC, companies will be required to purchase allowances for every tonne of CO2 they emit and will then be ranked in a public league table according to their energy use and rewarded or penalised depending on their chart position. An organisation will be included in CRC if its annual half-hourly metered electricity consumption is greater than 6,000MWh – equivalent to roughly £500,000 a year in electricity bills. Then, once the scheme starts, companies in scope will have to monitor and report their emissions from all energy sources other than transport fuels, such as electricity, gas, fuel and oil. This means it will include public and private sector organisations, such as banks, insurers, local authorities, schools and retailers.

we are in the consultation stage. You may have seen the Government’s recent consultation paper, outlining details of CRC to all involved. In July, the Environment Agency will issue registration packs to all businesses with half-hourly meters. At this point, your business will need to indicate whether or not it qualifies for the scheme by providing details of its energy consumption in 2008. It is vital that businesses do this, so you should alert your building manager or equivalent to the new obligations.

but your performance relative to other businesses could also lead to financial rewards or penalties at the end of each year. In terms of compliance costs, companies will be required to buy their carbon allowances at the start of every year (other than the first year) so they will need to forecast their energy use for the year ahead and ensure they have sufficient funds in place. The Department for Environment, Food and Rural Affairs (Defra) has estimated that allowances should amount to 6% of an organisation’s current energy spend and

‘Defra has estimated that allowances should amount to 6% of an organisation’s current energy spend.’ Calling all sustainability researchers CIMA is seeking to enhance and expand its body of knowledge on sustainability and intends to fund ground-breaking research on this global issue. We invite research proposals on topics which will help organisations to consider sustainability in a strategic context and will assist management accountants in the pivotal role they can play in providing business intelligence to support strategy and influence decision making. Grants are typically between £5,000 and £40,000.

The registration packs will also call on participants to monitor and report their total energy use emissions from April 2010 and from April 2011 CRC will require organisations to purchase an allowance for every tonne of CO2 they emit. The Government will then start reducing the overall cap on emissions to ensure overall reductions.

The Government has indicated that it intends to view compliance at the highest UK parent organisation level. So if a company has several subsidiaries which individually do not meet the 6,000MWh criterion but do so collectively, they would all fall under the scheme. Consideration will also be given over the matter of the various energy supply arrangements that apply to landlord/tenant relationships.

The financial impact

There will be several stages of implementation of CRC and currently,

CRC will have a significant financial impact on those involved. Not only will there be a number of costs associated with compliance

CRC compliance will involve a lot of planning and effort in order to gather all of the information for the registration packs. Many may wish to avoid thinking about compliance until it becomes absolutely necessary but there are financial and reputational consequences of doing this.

To find out how to apply please contact CIMA’s research team on t: 0208 849 2497 e: research@cimaglobal.com The closing date for applications is 31 May 2009 and shortlisted applicants will be invited to present their proposals to a CIMA review panel on 17 June 2009. To learn more about how carbon reduction, climate change and sustainability could affect your business, please visit www. cimaglobal.com/sustainability and http://snipurl.com/cimacarbon

related administration costs will be 5%. So, if your business just falls into scope and spends £500,000 a year on energy, you will need to spend £30,000 on allowances and £25,000 on compliance-related administration costs. Given that energy use could change yearon-year because of workforce changes, unexpected power failures or enforced energy saving measures, predicting your energy spend could seem near impossible. To solve this problem, a number of companies, including RSA, have created forecasting and benchmarking tools to enable companies to accurately predict their energy use for the year while at the same time reducing their energy consumption. This provides participants with significantly lower energy costs as well as fewer allowances to buy. Excellence in Leadership

CIM010_023 RSA.indd 73

21/3/09 19:29:56

Responsible business

ultimately be held accountable for the company’s performance within CRC. In addition, your company should initiate a system that ensures that good quality energy consumption data is retrieved across all sites – particularly where there are currently estimated bills. There are early action metrics that will determine the rankings in the early league tables and the cost benefit of adoption should be considered. Finally, consider the value of making structural changes to your buildings to make them more energy efficient, thereby lowering your energy costs long term and improving your chances of gaining a high position on the league table.

‘[In CRC] there is a genuine opportunity there as well as a potential risk to finance and reputation.’ Money raised from the CRC allowances will be recycled back to participants later the same year, however the money returned will be related to energy performance. Companies will be rated in a league table and their position will determine whether they should receive a bonus or penalty. If positioned near the top, a company will receive all of the money they paid towards allowances and more. Those organisations that have already engaged in climate change programmes should be at an advantage as they already understand their own footprint and are more likely to have initiated reduction actions. This is a clear financial incentive for becoming aware of your company’s carbon footprint sooner rather than later. In addition to calculating rewards and penalties, the CRC league table could also be used to name and shame poor performers as it will be issued to the public every year. Your reputation could be damaged, particularly so if your table positioning strongly contradicts your Corporate Responsibility policies. Consequently, the impacts of CRC are likely to concern senior management as well as the Finance department.

Corporate Responsibility Manager as it is a green issue and some may expect the building manager to take control as he or she monitors utility bills. With others, the issue of CRC could be completely overlooked and, given the financial impact of this legislation, this is a dangerous situation to be in. Every business should take steps to ensure that at least one person in the business fully understands CRC and is capable of fulfilling its requirements on behalf of the company. Additionally, it is crucial that the finance department be involved in order to appreciate the costs involved with this legislation, such as money needed to purchase allowances and investment funds for making the building more energy efficient. Having worked with RSA’s corporate responsibility team to ensure that RSA is ready for CRC, I recommend taking four steps now to prepare. Firstly, you should assess whether your organisation is subject to the scheme. This may be as simple as referring to the previous year’s utility bills. However, reference should be made to organisational structures particularly where a number of subsidiaries are involved.

The finance director’s role One of the interesting aspects of the legislation and a key reason for my article here is the uncertainty around which business function will pick up responsibility for managing CRC compliance. Some companies may assign the task to the

Next, ensure there is a team appointed that understands energy use and has sufficient understanding of the strategic significance of full compliance. They may wish to appoint an external partner to help them forecast and reduce energy use but they should

As an example, RSA followed the advice of an energy audit to make some adjustments to its heating system and is expected to save thousands of pounds as a result. Previously, the office in Manchester had a fault in its heating and ventilation system which meant that the hot air discharge louvre was feeding directly into the chiller condenser coil so all of the hot air was being lost. The new duct was installed at a cost of £15,000 to deliver the hot air in the right direction. It is estimated that this investment will lead to an annual saving of £6,000 and 36,000kg of CO2 per annum. At a time when there is real pressure on budgets and workforces some organisations might be tempted to simply look at the deadlines and think about compliance only when it becomes absolutely necessary. By doing this, a company is reducing its chances of making money out of CRC and making its inevitable way to costly expense. What is more, for those companies that talk about being environmentally aware, a low rating in a public league table has to be a serious reputational risk. CRC looks like it going to be an important issue for many years to come and there is a genuine opportunity there as well as a potential risk to finance and reputation. ■

Caroline Ramsay A chartered accountant, Caroline Ramsay joined RSA from insurer Aviva in March 2007. After working for just over a year within RSA’s Group finance department, she was appointed UK Finance Director in May 2008.

Excellence in Leadership

CIM010_023 RSA.indd 74

21/3/09 19:30:15

CIMA Mastercourses The catalyst to succeed High quality professional development helps accelerate your career. We provide over 120 business, financial and accountancy training courses that will equip you with the skills and techniques you need to succeed. Led by industry experts, our courses will keep you up-to-date with the rapid changes in the business world and help you fulfil your CPD requirements. To find out more or to book: T. +44 (0)20 8849 2244 E. mastercourses@cimaglobal.com www.cimamastercourses.com

Paint a brighter future offer. Up to 50% off selected CIMA Mastercourses

Find out more at www.cimamastercourses.com/offer CIMA010_ Mastercourses.indd 1

20/3/09 08:30:01

Gartner Outsourcing & IT Services Summit 2009 Practical Outsourcing: Balancing Cost Optimization with Performance Management europe.gartner.com/outsourcing 15â&#x20AC;&#x201C;16 June 2009 | Royal Lancaster Hotel, London, UK t "SF ZPV VOLOPXJOHMZ TBDSJmDJOH performance and sustainable business outcomes? t )PX EP ZPV FTUBCMJTI PQFSBUJPOBM IFBMUI UIBU XJMM TVTUBJO ZPV UISPVHI good times and bad? t 8JMM UIF EFBM ZPV TJHO UPEBZ IBWF UIF TUSBUFHJD CVTJOFTT WBMVF ZPV OFFE JO UIF GVUVSF t 8IBU XJMM IBQQFO XIFO UIF FDPOPNZ TUBCJMJ[FT BOE UIF GPDVT TIJGUT UP HSPXUI BOE JOOPWBUJPO 5IF (BSUOFS 0VUTPVSDJOH *5 4FSWJDFT 4VNNJU TIPXT ZPV XIBU ZPV OFFE UP EP UPEBZ UP FOTVSF ZPVS PVUTPVSDJOH JOJUJBUJWFT FOEVSF GPS UPNPSSPX 4FF IPX UP mOE UIF SJHIU CBMBODF CFUXFFO PQUJNJ[JOH DPTUT BOE JNQSPWJOH QFSGPSNBODF t (BSUOFS "OBMZTUT t 0WFS $POGFSFODF 4FTTJPOT t &OE 6TFS $BTF 4UVEJFT t 1SJPSJUZ 0OF PO 0OF CPPLJOH XJUI "OBMZTUT &OTVSF ZPVS *50 #10 BOE (MPCBM 4PVSDJOH JOJUJBUJWFT DPOUJOVF UP UBLF UIF CFTU EJSFDUJPO JO UIFTF tumultuous times.

Register before 17 April 2009 and save â&#x201A;¬500 on the standard delegate rate! europe.gartner.com/outsourcing Tel: +44 (0)208 879 2430 Email: emea.registration@gartner.com

15-16 June | London europe.gartner.com/outsourcing

CIM010_002 Advert.indd 1

20/3/09 08:25:27

Company insight

Remember the lessons of the past Attitudes towards outsourcing have matured over the years as companies learnt, often the hard way, that the lowest price does not guarantee the best value. Now the global economy has suddenly stuttered, some of those important lessons could be forgotten, which could spell further danger for companies already under pressure, Gartner’s Helen Huntley tells Jim Banks. The dramatic nosedive in the world’s economic fortunes has left many companies facing difficult decisions, none more crucial than how to drive more cost out of their business. There has already been a noticeable impact on outsourcing decisions, for instance, with companies once again drawn to the prospect of cost saving and efficiency gains. Market analysts, however, sound a note of caution. Will the combination of uncertainty and the need for quick action take us back to the old days of ad hoc outsourcing, where long-term value comes second to short-term cost-cutting? ‘The challenge of the economic crisis means we are seeing many quick deals to take out cost. But long-term, you have to ask whether a deal set up just on the basis of cost is going to be successful. Clients are jumping into three or five-year deals, but things will change a lot during that time,’ says Helen Huntley, Research VP, Strategic Sourcing Worldwide for independent research firm Gartner. Huntley focuses on analysis of offshore and domestic outsourcing, strategy and contract negotiation, and with her broad view of the market she has seen a growing tendency for companies to panic. ‘The punch of the economic downturn means firms are very tactical in their approach, but today’s reality in not the same as downstream reality. Companies need an outsourcing strategy that is true and its focus may be cost, but they have to look at how to get long-term success as well,’ she says. Companies may need to act quickly to improve their prospects, but Huntley believes that they cannot ignore the fact that outsourcing deals are multi-year contracts

that can greatly affect the structure of a business, so cannot be viewed solely in a tactical light.

Reassessing risk Approached with the right diligence and a clear set of goals, Huntley believes that outsourcing can be highly advantageous to companies in their attempts to combat the economic downturn. She notes, however, that clients must not be too simplistic in their approach to using third parties to help cut costs.

‘Risk assessment is very important to corporates right now, so they need rigour in their approach to risk analysis.’ ‘Saving money is not just about taking heads out, which is disruptive to business. Companies need to look at whether a service provider could cut costs in other ways, perhaps by taking on less customised work and moving to a more standardised set of services. Clients will still get business benefit, but in a different way,’ she says.

productivity dips and cultural issues to factor in. Risk can blossom,’ she observes. A recent Gartner report examining the suitability of 30 countries for offshoring found, for instance, that Vietnam is the cheapest location, but has problems due to a lack of infrastructure, language skills and IP protection. ‘For any outsourcing decision you need a risk assessment and a risk mitigation plan. You need to have brakes, know the risks and how to circumvent them. It might take more time, but this mitigates the risk and means there is less disruption when outsourcing is implemented,’ Huntley comments. ‘I tell clients to sit down with all the stakeholders in their business, not just IT, and identify all the risks and concerns. Risk assessment is very important to corporates right now, so they need rigour in their approach to risk analysis,’ she adds. Balancing business value, cost and risk is never easy, but a little time taken to clarify a sourcing strategy could yield great rewards down the line. ■

She also warns against pushing services offshore solely to access cheaper labour. ‘Offshore is cheaper, but there may be performance implications and other risks, such as availability of labour. There may be

Further information Gartner Website: www.gartner.com Excellence in Leadership

CIM010_002_Gartner.indd 77

21/3/09 19:14:50

Head

Excellence in Leadership June 2009

Performance Management Measuring and improving corporate performance

In our next edition Performance measures

Business intelligence – the leaders’ perspective

When choosing performance measures what are the key challenges involved in making decisions about trade offs? Wim Van Der Stede, CIMA Professor, London School of Economics

There is an increased interest in understanding how enterprises can effectively leverage data to extract business value. What is the perception of its value from those outside the IT function and how can this value be enhanced for strategic and operational business decision making? Dr. Markus Löffler, Principal, McKinsey & Company

Managing the performance of a mega-project Having been responsible for the construction and performance of the Sizewell B nuclear power station, the Channel Tunnel rail link and now the infrastructure for the 2012 Olympic Games, John Armitt discusses making mega-projects perform on target and on budget. John Armitt, CBE, Chairman of the Olympic Delivery Authority and former CEO, Network Rail

Programme and project management How best to engage with stakeholders and make best use of performance related intelligence to generate reports and analysis from established databases, provide interpretation and assist with the reporting of results. Stephen Dauncey, Finance Director, the Highways Agency

CPM and the credit crunch As we head deeper into a recession, the corporate survivors will be those that fully comprehend how their businesses ‘tick’ from the shop floor to board level. How can Corporate Performance Management (CPM) systems aid an organisation in monitoring, understanding and improving its performance? Darren Shapland, CFO and Director, J Sainsbury plc

Performance and globalisation Balancing short and long term performance management objectives in a globalised world: how can companies stay ‘always on and always connected’? Toby Wilson, Finance Director, Microsoft UK

Performing in emerging markets While many organisations have built major markets in China, they still aren’t reaching their full potential. According to a five-year study of multinational firms in China, the land of the dragon will continue to remain out of reach unless firms stop relying on familiar and conventional ways of thinking. Mark Easterby-Smith, Lancaster University Management School and Shenxue Li, University of Strathclyde Business School

Performance management and ‘taming tigers’ Tiger taming as a concept was originally developed as a tool for creating cultural change, building teams and helping people make the leap to leadership. How can it be used in the context of developing and pushing corporate performance? Stephen McCormick, Director of Strategy, The Home Office

Budgeting, planning and forecasting How the ‘beyond budgeting’ principles can be adapted to the financial services industry by: • exchanging ideas to facilitate the advancement of new performance management concepts and tools • identifying and sharing best practices and lessons learned at an executive level • supporting coordinated initiatives, such as benchmarking and learning programs Steve Player, Director, Financial Services Interest Group – FSIG, part of The Beyond Budgeting Round Table (BBRT)

Excellence in Leadership

CIM010_NextIssue2.indd 78

23/3/09 18:00:48

Head

Performance and business transformation How can the principles of lean and Six Sigma help to form the drivers for radical change for service delivery? Bernard Crump, CEO, NHS Institute for Innovation & Improvement

Also in the next edition: M&A and restructuring M&A from the finance perspective: day one - due diligence for integration. What are the procurement opportunities? How do you assess training needs for people on new systems, state of software licences and cross company standards? What are the steps to achieving a successful finance integration? Danny Davis, M&A expert, author, board and chair of the Global M&A Integration Conference Editorial contributors are subject to change

Collaborative organisational forms and the management accountant: what are the implications for the role of the management accountant, specifically in relation to control and governance of innovative organisational forms such as joint ventures and other collaborations? Louise Ross, CIMA

Risk and performance Better visibility through scenario planning â&#x20AC;&#x201C; mitigating risk and pushing performance. Jerome Andries, Vice-President, Middle East North Africa, GlaxoSmithKline and former CFO, Europe, Eli Lilly and Company

Reward and remuneration With such volatile economic conditions and now that executive reward packages are increasingly linked to business and share price performance what should be the best practice in terms of remuneration, reward and performance measurement in the finance department? Giles Capon, Partner, Ernst & Young

Excellence in Leadership Excellence in Leadership is a series of official quarterly publications specifically designed to address the CPD needs of the top tier of CIMA members. Excellence in Leadership is a must-read for this elite audience of CIMA members, helping to manage their career development while maintaining professional competence and employability. Visit www.excellence-leadership.com

Excellence in Leadership

CIM010_NextIssue2.indd 79

24/3/09 14:22:29

Head

People and performance Changing the culture of finance: if the ultimate goal is performance, what is the best way to manage changing the attitude, skills and focus of employees in a finance function reorganisation? Andy Roberts, Executive Vice President, Finance, Shell Gas & Power Collaborative organisational forms and the management accountant: What are the implications for the role of the management accountant, specifically in relation to control and governance of innovative organisational forms such as joint ventures and other collaborations? Louise Ross, CIMA

Editorial contributors are subject to change

Excellence in Leadership

CIM010_NextIssue2.indd 79

23/3/09 18:01:19

Head

2009: The energy challenge

Todayâ&#x20AC;&#x2122;s industry leaders face bigger challenges than ever before. How well equipped are you to face them?

leadership challenges Leading in a downturn Excellence in Leadership

CIM010_NextIssue2.indd 80

23/3/09 13:51:25

You may not be able to teach leadership, but it can be learnt. For our current crop of business leaders, the global economic downturn promises to be their steepest learning curve yet. The era of readily available credit and unbridled expansion is over; corporate buzzwords are now consolidation, cost cutting and survival. Leaders are being forced to refocus, reforecast and reform. This is not a time for nostalgia and selfpity, however, and leadership has to be about more than merely weathering the storm – it is in adversity that mettles are tested and reputations forged. Current events promise to transform the corporate landscape forever, but those emerging in rude health will have proven their capabilities in the toughest of environments. The questions currently outnumber the answers. How do we thrive rather than survive? Is growth still an option? Should

Leadership Challenges: Leading in a downturn will feature provocative comment and authoritative insight from leading figures at the sharp end of the business world and beyond, including:

one be looking for fresh opportunities in new markets? What ways are there to simultaneously plan for the future and address the present? Where does the balance lie between recruitment and retention? Leadership Challenges: Leading in a downturn will focus on the pressing issues facing senior CIMA members in today’s tough business environment. Published in June 2009 this special edition will address the following key areas: • The economic downturn • Regulation and governance • Globalisation • Market forces • The technology revolution • The energy debate • Environmental pressures • Human capital requirements • Responsible business

• Philippe Maso y Guell Rivet, Chief Executive, Axa Insurance UK • David Testa, CEO, Gatehouse

• Glynn Lowth, FCMA, President, CIMA

• Ram Charan, author of ‘Leaders at all levels’ and ‘The game changer’

• Neil Carson, Chief Executive, Johnson Matthey

• Leslie Kosoff, Executive Advisor and strategic turnaround expert

• Steve Holliday, CEO, National Grid • Jon Moulton, Founder and Managing Partner, Alchemy • Roger Steare, Visiting Professor, Organizational Ethics, Cass Business School • Jonathan Brooks, NED, Aveva Group

Excellence in Leadership

CIM010_NextIssue2.indd 81

23/3/09 13:52:10

Head

Directory 82

CIMA would like to thank the following organisations for their support in funding the Excellence in Leadership series:

Abbey UK Corporate Banking �� IBC www.abbeyukcb.com

EDF Energy �� OBC www.edfenergy.com/crc

AON eSolutions �� 16 www.aonriskconsole.com/rc

Gartner Outsourcing & IT Services Summit 2009 �� 76 www.gartner.com/outsourcing

CIPA - Cyprus Investment Promotion Agency ��71 www.cipa.org.cy

IBM �� 27 www.ibm.com/cognos/uk

CODA ��IFC www.coda-financials.co.uk

ICit Business Intelligence ��31 www.icitbi.com

Echo Research ��39 www.echoresearch.com

Global contacts CIMA UK – Head Office The Chartered Institute of Management Accountants 26 Chapter Street London SW1P 4NP United Kingdom T. +44 20 8849 2287 E. cima.contact@cimaglobal.com www.cimaglobal.com CIMA Australia Suite 1305 109 Pitt Street Sydney NSW 2000 Australia T. +61 (0) 29376 9900 E. sydney@cimaglobal.com www.cimaglobal.com/australia CIMA Botswana Plot 50676, 2nd Floor, Block B BIFM Building Fairgrounds Office Park Gaborone, Botswana Postal Address: PO Box 403475 Gaborone, Botswana Telefax. +267 395 2362 E. gaborone@cimaglobal.com www.cimaglobal.com/botswana CIMA China Unit 1905 Westgate Tower 1038 Nanjing Road (W) Shanghai 200041 P.R.China T. +86 21 5228 5119 E. shanghai@cimaglobal.com www.cimaglobal.com/china

CIMA Hong Kong Suites 1414–1415 14th Floor, Jardine House Hong Kong T. +852 2511 2003 E. hongkong@cimaglobal.com www.cimaglobal.com/hongkong

CIMA Southern Africa 1st Floor, South West Wing, 198 Oxford Road, Illovo Postal: PO Box 745, Northlands, 2116 T. +27 11 788 8723/ 0861 CIMA SA/246272 E. johannesburg@cimaglobal.com

CIMA India 233 DBS Corporate Centre 2nd Floor, Raheja Chambers Free Press Journal Road 213 Nariman Point Mumbai 400 021 India T. +91 22 3291 1383 E. india@cimaglobal.com www.cimaglobal.com/india

CIMA Sri Lanka 356 Elvitigala Mawatha Colombo 5 Sri Lanka T. +94 11 250 3880 E. colombo@cimaglobal.com www.cimaglobal.com/srilanka

CIMA Ireland 45–47 Pembroke Road Ballsbridge Dublin 4 T. +353 1 643 0400 E. dublin@cimaglobal.com www.cimaglobal.com/ireland

CIMA’s global offices may change during the year, so please visit the global web links for the most up-to-date contact details.

CIMA Malaysia Lots 1.03b & 1.05, Level 1 KPMG TOWER First Avenue Bandar Utama 47800 Petaling Jaya Malaysia T. +60 3 7723 0230 E. kualalumpur@cimaglobal.com www.cimaglobal.com/malaysia

CIMA Zambia Plot No 6053, Sibweni Road Northmead, Lusaka Zambia Postal Address: Box 30640, Lusaka, Zambia T. +260 1 290 219 E. lusaka@cimaglobal.com www.cimaglobal.com/zambia

For a full list of global contacts, please visit: www.cimaglobal.com/ globalcontacts

CIMA Singapore 51, Goldhill Plaza #08-02 Singapore 308900 T. +65 6535 6822 E. singapore@cimaglobal.com www.cimaglobal.com/singapore

Excellence in Leadership

CIM010_Directory.indd 82

23/3/09 18:07:32

CIMA Supplier Payments advert MAR 09.qxd:Layout 1

FINANCE

DEPOSITS

RISK MANAGEMENT

20/3/09

12:15

I N T E R N AT I O N A L

Page 1

C O R P O R AT E M O N E Y M A N A G E M E N T

S U P P LY C H A I N

Release valuable working capital from your supply chain and protect your suppliers Abbey’s innovative supply chain and working capital solution allows early payment to your suppliers on a non recourse basis, whilst you benefit from a reduction in working capital, strengthened collaborative relationships with your suppliers and improvements in your cost of goods. Typically, suppliers pay to finance the period from the initial Goods Order until your payment is received. However, suppliers are often the party in the supply chain who face the highest finance cost. Your supplier will inevitably factor this cost into the price of goods or services that you purchase from them. Abbey Supplier Payments allows the supplier to receive an early payment in settlement of their invoices whilst you pay on the original invoice maturity date. By leveraging our relationship with you, we are able to make early non-recourse payments to your suppliers, many of whom may be SMEs, saving them money over traditional supplier financing arrangements, such as Factoring or Invoice Discounting.

To find out how more than 200,000 organisations already benefit from the supply chain expertise of the Santander Group, speak to Ian Armstrong

020 7756 5064 ian.armstrong@abbey.com www.abbeyukcb.com

If you use emails to request information for business purposes, please be aware that emails aren’t always secure and may be intercepted or changed after they have been sent. Abbey UK Corporate Banking is a brand name used by Abbey National Treasury Services plc (which also uses the brand name Santander Global Banking & Markets) and Abbey National plc. Registered Offices: Abbey National House, 2 Triton Square, Regent’s Place, London, NW1 3AN, United Kingdom. Registered Number 2338548 and 2294747 respectively. Registered in England. Abbey National Treasury Services plc and Abbey National plc are authorised and regulated by the Financial Services Authority. FSA registration number 146003 and 106054 respectively. Abbey National Treasury Services plc is a member of The London Stock Exchange. Abbey, Santander and the flame logo are registered trademarks. CIMA MAR 09

CIM010_ Abbey Advert.indd 1

20/3/09 13:52:12

edf_crc_a4.qxd:EDF

6/3/09

11:22

Page 1

“Good event to start us off on the road to CRC management”

“Excellent workshop “Excellent workshop. with clear information on Saved me lots of time” a very complex scheme”

Confused about what the

Carbon Reduction Commitment means for your business?

Get a clear explanation at Café Energy this April. In 2008, over 400 people attended our free half day workshops to learn about the mechanics, risks and opportunities of this new carbon trading scheme. Make a Café Energy workshop part of your preparations in 2009. Café Energy is all part of our drive to help you with energy. The CRC is easier when you know how.

Space is limited, book soon

I would like to attend a Café Energy workshop. My preferred session is: Bolton 28 April ‘09 9:45 – 12:30 13:45 – 16:30

Bristol 29 April ‘09 9:45 – 12:30 13:45 – 16:30

London 30 April ‘09 9:45 – 12:30 13:45 – 16:30

my contact details are: Name

Company name

Job title

Telephone

Address

Please fax back this form to: 020 7632 0794

CIM010_027 Advert.indd 1

or email all the details to: crc@edfenergy.com

20/3/09 08:27:28