Sustainable business - October 2011

Excellence in leadership

Issue 3 | 2011 | ÂŁ12

Top finance and business insight in this issue

Excellence in leadership

Simone Rossi, CFO of EDF Energy, on the FD’s role in driving sustainability Duncan Magrath, CFO of Balfour Beatty, on sustainability strategies Jochen Zeitz, CEO and chairman of Puma, on obtaining buy-in across the business Gill James, group head of sustainability at Standard Chartered, on social responsibility Elizabeth Seeger, from private-equity firm KKR, on investing in responsible businesses

Sustainability

Sustainable business ISSUE 3 2011

The strategies being adopted by those leading the way in ensuring their businesses are sustainable

3 Excellence in leadership | Issue 3, 2011

FOREWORD

Cover photography: Alberto Antoniazzi/Synergy Art . This page: Illustration: Masao Yamazaki/Dutch Uncle

Sustainable business eading companies recognise that discusses how his finance team is approaching two key areas of sustainability. First, he outlines how the team is successful sustainability performance driving the company’s response to the carbon reduction translates into successful bottom-line commitment in the UK. He then moves on to illustrate business performance – and that how the finance function is playing a crucial role in the investors are attracted to companies management of supply chain relationships by ensuring that focus on long-term profitability the firm only does business with companies that share and competitive advantage. The growing environmental and economic a common approach to sustainability requirements.

Elsewhere, Nick Topazio, CIMA’s head of corporate pressures we are all facing means that reporting, elaborates on why acting in a sustainable manner sustainable practices must be makes good business sense (p22) and has a positive impact embedded in the DNA of all organisations if they are to on society in general. “The critical areas of the business enjoy long-term business success. And, I would model that organisations and their boards must focus on are maintain, as companies innovate to better secure their cost leadership, durability of the supply chain, motivating long-term viability, finance professionals will play an staff and attracting and retaining customers. And in each increasingly important role in this process. CIMA is of these areas directors of successful committed to developing a route companies have widened their focus map that will help companies tackle beyond the traditional business sustainability as a business issue.

CFOs can ensure that Acting sustainably should never organisations stay on the right drivers,” he says.

Also in this issue, we take mean that the drive for profit is track by linking sustainability to a look at the work being done by abandoned. The world is business performance sportswear giant Puma to place increasingly competitive and only sustainability at the heart of its those companies with robust business strategy. Earlier this year, Puma became the first business models generating durable long-term major organisation to publish an environmental P&L. profitability and cash flow will prosper. Clearly, the road The company’s chairman and chief executive, Jochen Zeitz, to sustainability is a marathon rather than a sprint and it explains “the problem in business is that if we don’t put a is essential that organisations in both the private and figure on something, then we don’t manage it”. public sectors utilise the skills of management I very much hope that the articles in this issue of accountants if they are to measure, develop and report Excellence in Leadership help to provide a sharper focus sustainable strategies effectively. on what is needed to create a robust framework for One of our most recent reports, ‘Sustainability business sustainability and a clearer view of the Performance Management: how CFOs can unlock value’, challenges on the road ahead. details how senior finance professionals are ideally positioned serve as leading agents for change. CFOs have the tools to ensure that organisations stay on the right track by linking sustainability to business performance Charles Tilley, and overseeing effective implementation, accurate chief executive, measurement and credible reporting.

CIMA This issue of Excellence in Leadership looks at the possibilities ahead by sharing the knowledge and experiences of CFOs from a number of global brands.

In our interview with three leading finance chiefs (p8), Duncan Magrath, from construction giant Balfour Beatty,

Excellence in Leadership is the official publication of CIMAplus. For more information visit: www.cimaglobal.com/cimaplus

5 Excellence in leadership | Issue 3, 2011

CONTENTS Sustainable strategies Three top CFOs discuss the business benefits of sustainability p8

Sustainability pays The private equity firms cashing in on responsible companies p26 3 Foreword 6 Vital statistics

Sustainability

8 Sustainable strategies Finance and strategy chiefs from Balfour Beatty, ABB and EDF Energy explain the business benefits of their sustainability strategies.

14 Leading the way Why sportswear firm Puma is ahead of the game in embedding sustainability right across the organisation.

18 Water scarcity The UN says two-thirds of the world could face water “stress” situations by 2025.

CIMA’s Sandra Rapacioli looks at what’s being done to counter the problem.

Grasp the opportunity Why sustainability is more than just a “nice to have” p22 22 Good business sense Too many firms are unaware that sustainability is a business issue – not just a green one.

26 Sound investing How private equity firms are reaping the benefits of investing in responsible companies.

33 Get involved with CIMA 34 Innovate to survive New CIMA research looks at some innovative approaches to global climate change.

36 Management control The usefulness of control systems in formulating and implementing sustainability strategies.

40 Social awareness Gill James, group head of sustainability at Standard Chartered, explains why the bank has begun to measure its value beyond the bottom line – starting with Ghana.

Other topics

42 M&A integration Top tips and advice for companies on how to achieve a smooth postmerger integration.

46 CFO priorities From an economy in turmoil to a demand for growth, new research from Robert Half UK has surveyed exactly what’s weighing on the minds of today’s executives.

48 The year ahead Two CFOs from major organisations in different sectors set out what will be top of their agendas in 2012.

52 Lease versus buy Many companies are concerned that new lease accounting rules will make their accounts more volatile.

Li Li Lian from the IASB explains the changes.

56 Supply chain efficiency How organisations can find big wins by tightening their supply chain processes.

63 CIMA events 65 Next issue 66 CIMA directory

Editorial advisory board Malinga Arsakularatne chief financial officer, Hemas Holdings

Bogi Nils Bogason chief financial officer, Icelandair Group

George Riding chief financial officer, Middle East and north Africa, SAP

Jeff van der Eems chief financial officer, United Biscuits

David Blackwood group finance director, Yule Catto & Co

Kai Peters chief executive, Ashridge Business School

Arul Sivagananathan managing director, Hayleys BSI

Jennice Zhu finance director, Unilever China

3 Excellence in leadership | Issue 3, 2011

FOREWORD

Cover Illustration: Alberto Antoniazzi/Synergy Art . This page: Illustration: Masao Yamazaki/Dutch Uncle

Sustainable business eading companies recognise that Duncan Magrath, from construction giant Balfour Beatty, discusses how his finance team is approaching two key successful sustainability performance areas of sustainability. First, he outlines how the team is translates into successful bottom-line driving the company’s response to the carbon reduction business performance – and that commitment in the UK. He then moves on to illustrate investors are attracted to companies how the finance function is playing a crucial role in the that focus on long-term profitability management of supply chain relationships by ensuring and competitive advantage. The growing environmental and economic the firm only does business with companies that share a common approach to sustainability requirements. pressures we are all facing means that Elsewhere, Nick Topazio, CIMA’s head of corporate sustainable practices must be reporting, elaborates on why acting in a sustainable manner embedded in the DNA of all organisations if they are to makes good business sense (p22) and has a positive impact enjoy long-term business success. And, I would on society in general. “The critical areas of the business maintain, as companies innovate to better secure their model that organisations and their boards must focus on are long-term viability, finance professionals will play an cost leadership, durability of the supply chain, motivating increasingly important role in this process. CIMA is staff and attracting and retaining committed to developing a route customers. And in each of these areas map that will help companies tackle directors of successful companies have sustainability as a business issue.

CFOs can ensure that Acting sustainably should never organisations stay on the right widened their focus beyond the mean that the drive for profit is track by linking sustainability to traditional business drivers,” he says.

Also in this issue, we take abandoned. The themes explored at business performance a look at the work being done by this year’s CIMA World Conference Puma to place sustainability at the show that the world is increasingly heart of its business strategy. Earlier this year, Puma became competitive and only those companies with robust the first major organisation to publish an environmental P&L. business models generating durable long-term The company’s chairman and chief executive, Jochen Zeitz, profitability and cash flow will prosper. Clearly, the road explains “the problem in business is that if we don’t put a to sustainability is a marathon rather than a sprint and it figure on something, then we don’t manage it”. is essential that organisations in both the private and I very much hope that the articles in this issue of public sectors utilise the skills of management Excellence in Leadership help to provide a sharper focus accountants if they are to measure, develop and report on what is needed to create a robust framework for sustainable strategies effectively. business sustainability and a clearer view of the One of our most recent reports, ‘Sustainability challenges on the road ahead.

Performance Management: how CFOs can unlock value’, details how senior finance professionals are ideally positioned serve as leading agents for change. CFOs have the tools to ensure that organisations stay on the right Charles Tilley, track by linking sustainability to business performance chief executive, and overseeing effective implementation, accurate CIMA measurement and credible reporting.

This issue of Excellence in Leadership looks at the possibilities ahead by sharing the knowledge and experiences of CFOs from a number of global brands.

In our interview with three leading finance chiefs (p8),

Excellence in Leadership is the official publication of CIMAplus. For more information visit: www.cimaglobal.com/cimaplus

6 Excellence in leadership | Issue 3, 2011 CIMA is the Chartered Institute of Management Accountants 26 Chapter Street, London SW1P 4NP 020 7663 5441 www.cimaglobal.com

VITAL STATISTICS Sustainability stats:

4,614.5m

Tonnes of greenhouse gas emitted by the EU in 2009

17%

overall reduction in greenhouse gas emitted since 1999

Greenhouse gas emissions by source sector, EU-27, 2009 (% based on data in million tonnes CO2 equivalent)

59.1% 20.2% 7% Energy, excluding transport

Transport

Industrial

Source: Eurostat “Climate change statistics”

CFO concerns:

Factors that are having a negative impact on the business include: Lack of time to complete work and projects 36% Lack of permanent employees to complete work and projects 19% Inadequate commercial skills 18%

Source: Robert Half International The products and service 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 the individual authors and not necessarily those of CIMA or Seven. While every effort has been made to ensure the accuracy of the information in this publication, neither Seven nor CIMA accepts responsibility for errors or omissions.

CIMA contact: Senior product specialist Ana Barco Email: ana.barco @cimaglobal.com Excellence in Leadership is published for CIMA by Seven, 3-7 Herbal Hill, London EC1R 5EJ. Tel: 020 7775 7775.

Commissioning editor Dawn Cowie Group editor Jon Watkins Group art director Simon Campbell Junior designer Josh Farley Chief sub editor Steve McCubbin Senior sub editor Graeme Allen Picture editor Nicola Duffy Senior picture researcher Alex Kelly Editorial director Peter Dean Client director Jessica Gibson Creative director Michael Booth Production manager Mike Doukanaris Account director Jake Cassels Business development Tina Hanks Advertising manager Andrew Walker Email: andrew.walker@ seven.co.uk Tel: 020 7775 5717 Chief executive Sean King Chairman Tim Trotter © Seven © CIMA Cover artwork Alberto Antoniazzi The contents of this publication are subject to worldwide copyright protection and reproduction in whole or in part, whether mechanical or electronic, is expressly forbidden without the prior written consent of CIMA/ Seven. All rights reserved.

Origination by Wyndeham Pre-Press Ltd. Printed in the UK

by Wyndeham Plymouth.

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Building a sustainable future

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The term “sustainability” has become a muchused part of the language of business. But what does it mean in practice to finance chiefs? We ask the CFOs of infrastructure giant Balfour Beatty, power and technology group ABB and power supplier EDF Energy to explain the business benefits of their sustainability strategies

Photography: Getty Images

Can you give an example of how sustainability thinking has influenced your company’s overall business strategy, long-term goals or growth plans?

Duncan Magrath, Balfour Beatty: We’re working together to make sustainability an integral part of our culture and a recognised strength of Balfour Beatty worldwide.

We celebrated our centenary in 2009 and a sustainable approach means ensuring we’re around for the next 100 years and beyond. We have the global scale and breadth of activities across the infrastructure life cycle to make a very positive social, environmental and economic impact and this is at the heart of our long-term strategy.

Sustainability touches every aspect of our business.

It affects our behaviours, impacts our costs, creates new business opportunities, sharpens our competitive edge and helps us contribute to our customers’ long-term profitability.

We recognise that we cannot sell more sustainable solutions to our customers if we are not sustainable ourselves and this is a key motivation in driving change through our business. We see the sustainability agenda as a huge business opportunity and a chance to help our customers to meet their own sustainability requirements. Demand for the development of green energy infrastructure and greener/zero carbon buildings is increasing and our customers expect us to deliver more sustainable solutions for them.

Michel Demaré, ABB: Concern about climate change and global efforts towards a more sustainable, low-carbon energy supply system strongly influence our business strategy and growth plans. Our energy-efficiency portfolio, and our solutions for the renewable energy sector and for efficient and smart power grids, are crucial in the development of a more sustainable energy system.

These are growth areas for ABB. About 45 per cent of our offering is, in one way or another, related to energy efficiency.

Increasing pressure on scarce natural resources, such as clean water, metals and minerals, calls for solutions where industry and society “use less to do more”.

We have, in the past couple of years, established Marketing and Customer Solutions (MC) led by my colleague Brice Koch, which is a cross-divisional organisation that contains customer-facing businesses, called industry sector initiatives (ISI), including wind, water, solar and rail. Our service and energy efficiency businesses, and the global account management team that serves ABB’s larger transnational customers, are also part of MC. The areas covered by the ISIs and energy efficiency are core themes for ABB and together they will represent substantial growth opportunities during the coming years. All these are driven by the customer and stakeholder need for more sustainable solutions.

Simone Rossi, EDF Energy: Our chief executive, Vincent De Rivaz, acted as a sustainability ambassador to the Prince of Wales in 2009 and 2010 and led an inquiry into the leadership skills needed for a sustainable economy.

As a result of that we’ve taken a lead role in setting up the Prince of Wales Sustainability Council.

Equally, since 2007 we have supported the Prince of Wales Accounting for Sustainability project (A4S), which is playing a key role in ensuring that we are not battling to meet 21st-century challenges with, at best, 20th-century decision-making and reporting systems.

A4S has been instrumental in the establishment of the International Integrated Reporting Committee, whose objective is to develop reporting standards that link governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, »

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integrated reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organisation is really performing.

Our entire business strategy is based on delivering secure, affordable low-carbon energy. We know the production of energy is one of the biggest risks to the environment and are taking steps to reduce that impact.

For EDF Energy, sustainability means providing the energy which is vital to society in a way that better protects the natural environment and secures affordable, low-carbon energy for the long term. We have a huge contribution to make by reducing the carbon intensity of electricity generation, as well as within our offices and sites across the country.

In 2009 we published 15 sustainability commitments, which we will achieve between 2012 and 2020, covering: building a world-class culture, reducing carbon and waste, delivering low-carbon nuclear power responsibly, helping our customers, building a world-class culture and serving our communities.

What role should the finance team play in decisions about a company’s sustainability strategy?

Duncan Magrath, Balfour Beatty: At Balfour Beatty we believe that sustainability is a collective responsibility – everyone has a role to play and that includes finance.

Finance teams are already playing a key role in helping to shape our response to the carbon reduction commitment in the UK. Measuring our carbon emissions is only the first step. Investment in better metering and opportunities to reduce energy use (and save costs) come next. Finance will play an important role in the decision-making process around this.

Finance also plays a role in the management of supply chain relationships, ensuring that we only do business with businesses that share our approach to sustainability and contracts are awarded accordingly.

Michel Demaré, ABB: Clearly, the finance team should and does influence the sustainability strategy. Successful sustainability management helps us identify and manage risk that could severely damage our business and our reputation – both having a financing and potential financing impact for the company. These could concern all of the areas ABB manages through our Sustainability Group function – security, safety, environment, human rights and other aspects of our operations and investments in sensitive countries and regions.

Simone Rossi, EDF Energy: Our business strategy is based on sustainability so it is something that is owned by the whole organisation. Our sustainability commitments were worked up by a core team in consultation with the business and external stakeholders.

Finance is responsible for ensuring the business sets itself appropriate targets, which deliver increased value at acceptable risk, and that our performance is reported on accurately. As with any other business objective our

sustainability commitments are owned by the CEO and delivered by the business. In accordance with good governance practices, finance provides oversight.

How does the finance team integrate risk management practices into sustainability programmes?

Duncan Magrath, Balfour Beatty: At a macro level, sustainability can be a much more challenging issue to look at in terms of risk. Our risk management framework needs to ensure that we make the right decisions on project engagement. We examine a wide range of risks.

For example, we are currently developing thinking around climate change adaptation. How might a changing climate impact a project with a 25-year life?

The group’s risk management policy requires all divisions and the operating companies within them to identify and assess the risks to which they are exposed and which could impact their ability to deliver theirs and the group’s objectives. In developing our risk profile we consider all risks, including financial, commercial, HR, information technology, and project-delivery risks.

Michel Demaré, ABB: We have embedded the assessment of sustainability-related risks in our enterprise risk management (ERM) programme, so there is day-to-day cooperation between sustainability experts and finance colleagues under the ERM umbrella, and they work together to identify and mitigate these risks.

The executive committee and the board of directors receive reports on the ERM process annually and some sustainability-related risks are assessed on a monthly basis in business and project risk reviews. We take a value-chain view of these risks, starting with customer projects, supply chain and local considerations. We also apply the same principles to assess potential acquisitions or joint-venture deals. With operations in more than 100 countries and 130,000 people, we also view this in a completely global context.

Simone Rossi, EDF Energy: Sustainability and risk management are interlinked – the sustainability commitments we have made articulate mitigating actions to the most material risks our business places on society and the environment. This is particularly important to us as a nuclear business because, obviously, safety is paramount. We are also impacted by external events, such as the problems that have occurred in Japan as a result of the earthquake there. The risks associated with the delivery of our stated commitments need to be clearly defined as we start our reporting process.

What lessons have you learned about how to measure the social and environmental impact of your business?

Duncan Magrath, Balfour Beatty: Firstly, it’s not a perfect science. Measuring environmental impacts, such as carbon and waste, is more straightforward than community-based measures, such as the impact of our

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operations on local communities. It takes time to generate good quality data and that should not act as an excuse for getting started.

We have also used the opportunity of implementing new systems to capture better quality data at source. For example, online expense forms will capture the number of miles travelled by train so that we can measure our direct impact on the environment more accurately and timely.

We have recognised the importance of transparency around our sustainability programme and have opened up to both external measurement, through a variety of metrics, including the Dow Jones Sustainability Index and Business in the Community’s Corporate Responsibility Index, and to assurance through an external third-party auditor.

Michel Demaré, ABB: We have a comprehensive set of performance indicators to measure, control and report on our social and environmental impact, using the commonly accepted Global Reporting Initiative standard. An obvious learning is that the more the indicators and sustainability practices are integrated in the business operations, the better you can control your impact. Sustainability cannot be an add-on; it must be integrated in the day-to-day business. In our own operations, we will move more towards resource optimisation targets, which will have the effect of reducing scrap and energy use. Overall, sustainability is a natural factor in our day-to-day management as it is such an important driver of our business development.

Simone Rossi, EDF Energy: One thing we are very much aware of is that there is a lot to learn. We didn’t

get it right straight away and we’re still learning.

Unlike typical financial reporting (which has a 500-year history) there is little in the way, reporting standards. We recognise that having internationally accepted reporting standards, such as those being developed by the Integrated International Reporting Committee, are vital to consistency and transparency.

Can you quantify some of the business or financial performance benefits resulting from your approach to sustainability?

Duncan Magrath, Balfour Beatty: It is still early days for the business as a whole in our sustainability journey.

We measured for the first time last year the value of sustainable goods and services to our business – by that I mean recognised green building schemes such as Leadership in Energy and Environmental Design in the US and Building Research Establishment Environmental Assessment Method in the UK. Worldwide, we estimate that one-fifth of our revenues are sustainability-related and expect this to grow in coming years.

On a project level we have many examples of how sustainability contributes to the business in terms of winning work and reducing project costs. For example, the A421 road project, completed at the end of last year, incorporated thousands of car tyres as lightweight fill, as well as hundreds of thousands of tonnes of power station ash, high levels of recycled asphalt and recycled glass for drainage trenches. These alternative materials reduced project costs by well over £3m and avoided more than 70,000 tonnes of embodied carbon.

We are just about to complete the iconic Tamar Building project in Hong Kong. Here, our operating company, Gammon, took a long-term life cycle impact »

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approach to its cost model and won the business accordingly. Our challenge is to turn these examples of sustainability best practice into common practice. That’s when we will have truly embedded sustainability into our operations.

emerging transport and heating markets.

• Realising cost and operational efficiency gains from cutting waste.

• Increasing employee and customer engagement, acquisition and loyalty.

• Earning a leadership corporate reputation.

industry. As we continue to embed a sustainable approach across our operations we are minimising risk at the same time.

Michel Demaré, ABB: Our success is directly measured by our top line. Internally, we also save energy, which is driven by global targets, and every cent saved on energy use goes to the bottom line. It’s simply good for the business and good for us financially.

Another measure is the financial benefits of our sustainability programmes; for example, carbon emissions at ABB sites in Switzerland have fallen by 60 per cent since 1990 thanks to ongoing building retrofits and factory upgrades that also save the company, on average, $2m per year. There are many similar examples throughout ABB. Simone Rossi, EDF Energy: Our approach to sustainability will increase value and competitive advantage for EDF and EDF Energy through: • Earning stakeholder trust and confidence.

• Shaping, not simply responding to, new regulation.

• Increasing our share of the growing decarbonised electricity market.

• Supplying decarbonised electricity to

To what extent do you feel that analysts and investors have started to factor a company’s approach to environmental, social, governance and sustainability issues into their investment analysis?

Duncan Magrath, Balfour Beatty: Progress in this area has perhaps not been as rapid as some would like, but there are signs that it is becoming more important. The impact on the investment case is more obvious where issues have a direct and immediate financial impact, such as CRC energy-efficiency legislation. However, I think the way in which the company tackles these areas is part of the investment community’s assessment of the overall quality of management, and that has a tangible impact on the valuation placed upon the shares. It will, to an extent, revolve around whether an investor is taking a short- or long-term view of the investment horizon. However, from a negative position even the short-term investment proposition can be affected by specific environmental or governance events, as we have seen recently with a couple of examples in the oil and gas

To access CIMA’s work on sustainability visit www.cimaglobal.com/sustainability

Duncan Magrath Magrath is a chartered accountant and an engineering graduate. He was appointed to the board of Balfour Beatty as CFO in 2008 after joining the company as deputy finance director in 2006. Before that he was director of investor relations and financial strategy at Exel plc, following a number of senior financial roles in the UK and the US.

Michel Demaré Demaré was appointed CFO of ABB in February 2005 after three years as vice president and CFO of Baxter Europe, part of US healthcare group Baxter International.

Before this he had an international finance career with The Dow Chemical Company between 1984 and 2002.

Simone Rossi Rossi joined EDF Energy in April 2011 as CFO after 18 months spent in the US as CFO of Constellation Energy Nuclear Group in Baltimore. Before that, he spent five years at Edison in Milan, Italy, as head of strategy and subsequently as a director with responsibility for planning, control and IT.

Michel Demaré, ABB: Today, investors are more interested in these aspects than before.

Socially responsible investment funds, pension funds and also some mainstream investors ask us about health and safety, environmental, labour, human rights and sourcing risk. And some large events in the past couple of years, including in the Gulf of Mexico, Japan and on the security front in Egypt, northern Africa and the Middle East, have highlighted external risks and we are being asked by both investors and the media what mitigation measures we are taking. We do have contingency plans for a number of scenarios and our country and regional management teams undergo regular crisis management training as part of our resilience process. While we do a lot to identify and eliminate risk in the business – and even though it is not possible to predict the exact nature of the next external event that could affect ABB – we do know that we have trained teams to mitigate the worst effects. The upside is that this systematic approach to these kinds of risk gives confidence to our financial stakeholders. n

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Crunching the numbers Sports goods supplier Puma was the first-ever company to quantify the environmental impact of its operations and supply chain in a set of accounts.

Jochen Zeitz, the company’s chairman and chief executive, talks to Dawn Cowie about the need to translate sustainability goals into a language that business understands

T

he idea for Puma’s environmental profit and loss account (E P&L) came to Jochen Zeitz, the company’s chairman and chief executive, while he was on holiday last year. Perhaps it was the idyllic surrounds, but his mind wandered to the latest methods used by environmental experts to value the ecosystem and he got to thinking about how these might be applied to the business world.

“The next logical step would be for business to take that knowledge and translate it into monetary values that a company could relate to its managers.

“When you’re an environmental expert working for a non-governmental organisation, subjects such as biodiversity

are part of day-to-day language, but it is not so in business,” he says. “The problem in business is that if we don’t put a figure on something, then we don’t manage it.”

The hard numbers The first results of Puma’s E P&L, published this May, were revealing for those inside and outside the company.

Overall, the analysis placed a value of €7.3m on the ecological impact of Puma’s direct operations, which was almost entirely due to greenhouse gas (GSG) emissions. However, this amounted to just 7.7 per cent of Puma’s total ecological impact, valued at €94.4m, once GSG emissions and water consumption across its entire supply chain were taken into consideration.

By far the largest contribution to this environmental impact was by its tier four

suppliers involved in raw material production, such as cotton farming and oil drilling. Their impact was valued at €41.4m, or 44 per cent of the total supply chain, which was made up of GSG emissions valued at €16.7m and water consumption valued at €24.7m.

Tier three suppliers involved in the processing of raw materials by leather tanneries, the chemicals industry and oil refineries also made a significant contribution to the overall impact (€25.1m or 26 per cent). There were also smaller contributions by tier two suppliers, such as

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embroiderers and printers, and tier one suppliers involved in the manufacture of Puma’s products.

“The whole idea behind the E P&L was to bring transparency to something that is hard to grasp when you are still stuck in the old paradigm, where natural resources and the environment have no limits, and therefore the externalities of doing business aren’t brought into the equation.

The E P&L forces people to think about environmental and economic factors that are not taken into consideration from the point of view of a traditional P&L. It gives

the business a tool that can be used to come up with practical solutions to the problem,” says Zeitz.

So what are the business benefits of Puma’s efforts? Zeitz is reluctant to quantify the value of the company’s sustainability initiatives in dollars and cents. “It’s a conviction and mission to make the company the most desirable and sustainable lifestyle business and we have been communicating about our sustainability to the outside world for the past 13 years,” he says. “I ultimately believe it will benefit the business. I think it is the

only way to go and is the right thing to do.

Those are three reasons to do it and there are no reasons not to do it.”

New ways of working So how have the findings of the E P&L been translated into business goals? “The first stage is to make the information that we have uncovered in the P&L available and the next is to try to develop practical decisions about how we reduce and mitigate the size of our footprint. In addition, we have to take into account the problems that climate change and water »

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scarcity will create for the business in future − we would rather be ahead of the curve when it comes to managing those risks,” he says.

The clear message of the exercise was that if Puma wants to reduce its environmental impact then its main focus should be on the production and processing of raw materials for use in its products, rather than in the manufacturing stage or the operational footprint of the business.

One way of doing this is to ask suppliers to suggest alternative ways to produce the raw materials used in the process. Another approach is for Puma to challenge its product design and development teams to come up with alternative designs that use different materials (including biodegradable ones) in smaller amounts in order to reduce the energy and water used in sourcing, manufacturing and transportation. A third priority is to ensure that once materials are produced, they remain in use for as long as possible − for example, through the recycling of rubber.

A recent design innovation was Puma’s “clever little bag”, an alternative to the shoebox. It uses 65 per cent less paper to make, reduces water, energy and diesel consumption during manufacturing by more than 60 per cent a year and cuts Puma’s carbon emissions by 10,000 tonnes annually.

Finally, the company is actively involved in cross-industry co-operation to find ways in which excess materials can be re-used by other industries − for example,

the use of polymers by the chemicals industry. These types of collaborations will be needed in order to find new solutions to issues, such as rubber recycling, and to create global standards of practice. Puma already works closely with the chemical industry and is committed to eliminate the discharges of all hazardous chemicals from the whole life cycle of its product production by 2020.

Reporting change Reporting has been at the heart of Puma’s sustainability strategy for the past 13 years through projects such as the Global Reporting Initiative (GRI), an organisation that produces a comprehensive sustainability reporting framework that is used worldwide.

But putting a monetary value on its environmental impacts has added several new elements to its approach to sustainability. First, by mirroring the language of business the E P&L has helped managers to understand the environmental problems that the company faces, which has given new impetus to develop practical solutions. Secondly, it has created a marker that has grabbed the attention of government bodies and industry leading companies, which Zeitz hopes will help to develop global standards and better practices. It also helps Puma to prepare for a time when legislation may require disclosure on these issues.

Next year, the company plans to push another new reporting frontier when it publishes the first-ever social P&L, which will measure social factors, such as wages

Jochen Zeitz Zeitz began his professional career with Colgate-Palmolive in New York and Hamburg. In 1990 he joined Puma and in 1993 was appointed chairman and CEO of the company, becoming the youngest chairman in German history to head a public company at the age of 30. He spearheaded – and held primary responsibility for – the worldwide restructuring of Puma, which was in financial difficulties at the time. The Puma share price gained around 4,000 per cent in 13 years, from €8.6 in 1993 to an all-time high of €350 in April 2007.

Photography: Getty Images, Rex Features

‘We have a conviction and mission to make the company the most desirable and sustainable lifestyle business’

paid. Zeitz is certain that business has to be the force that drives progress towards a more sustainable world. “Regulation is not going to do it,” he says. “Reporting on the issues prepares the ground for innovation, which will ultimately create new markets for carbon or water, and new industries and businesses will pop up.

That will bring change to the way we do business,” he says.

By taking a lead, Puma is also setting a positive example for its suppliers around the world. The lion’s share of Puma’s suppliers and its largest ecological impact is in the Asia-Pacific region; this is the source of €70.7m, or three-quarters of its total impact. As a result, improving reporting on sustainability within its Asian supply chain is a key part of its overall sustainability strategy.

Over the past year, 20 of Puma’s key suppliers in South-East Asia and other major sourcing regions have received GRI-certified training on transparent measurement and reporting on their sustainability performance, and from this year will issue their own sustainability reports. n

18 Excellence in leadership | Issue 3, 2011

Apocalypse H20: water’s true value Such is the increasing demand for clean water that the UN estimates that two-thirds of the world could face water “stress” situations by 2025.

Sandra Rapacioli, CIMA’s research and development manager, reports on the preventative measures under way

T

he World Bank states that global demand for fresh water is doubling every 21 years. Like many others, this natural resource – once considered abundant – is running low. More than half of China’s cities are already struggling to get clean water to their residents. Recent water crises have shut down entire regions.

The environmental and social challenges are immense, and constricted water resources may quickly change the way we

Key facts Source: UN

% 40

do business. Successful business models may be threatened by the usage of raw materials, production methods and investor sensitivities and capacity levels that shift in the wake of constrained water availability. As potable water becomes scarcer, even in developed regions, prices will also rise.

Water intensive industries, such as beverages and agriculture, are obviously at risk, and this is where we find many of the companies leading the discussion and implementation of water sustainability. Even sectors less obviously in danger must consider the potential

of Fortune 1000 companies said the impact of a water shortage on their business would be “severe” or “catastrophic”

threat to their business. Ford, for example, uses about 400,000 litres of water for each car it makes.

Risk response Many organisations have started to respond seriously to this issue; measuring and reducing their water consumption both within their operations and supply chain. They are examining how to protect biodiversity and the ecosystem services it provides – of which water is a vital component.

These ecosystems are valuable. In 1997 a group of experts attempting to quantify the price of replacing these ecosystem services calculated their value at more than $33trn. That was nearly twice the value of the global GNP at the time.

CIMA’s latest report, “Apocalypse H20: case studies on Puma and Rio Tinto” focuses specifically on two companies that are leading the way in the area of water management and valuation.

Puma: measuring indirect costs As you may already have read in these pages, in May 2011 Puma became the first organisation to create an economic valuation of the ecological impact of water consumption and GHG emissions along its value chain. Their total environmental impact was valued at €94.4m – equivalent to 46 per cent of Puma’s net profits. Dr Richard Mattison is the CEO of Trucost, an environmental consultancy that worked with Puma in completing the water valuation. Mattison explains that the sportswear company was unusual in that it looked at indirect as well as direct costs,

BN 5.5

people will live in water-stressed areas by 2025, according to the United Nations – that’s roughly two-thirds of the Earth’s population

2,400

litres of water are needed to make one hamburger

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Photography: Reuters

Excellence in leadership | Issue 3, 2011

including the impact on ecosystems and the difficulty of replenishing supplies.

“These indirect impacts are generally not valued into the market price,” he says.

“Companies that understand their dependence on natural resources along the value chain are well placed to manage underlying risk from the rising cost of raw materials and scarcity of supply issues.”

• For more information on the strategic importance of Puma’s environmental

% 50

profit and loss account you can read our interview with Jochen Zeitz, chief executive and chairman of Puma, on page 14.

Rio Tinto: stemming the leaks In 2005 Rio Tinto – one of the world’s largest mining and resources companies – began to take a more strategic view of water. Working with the Sustainable Minerals Institute at the University

of global wetlands have been lost. About one-third of our drinking water comes from wetland areas

X 2

In India the future demand for water is expected to climb to levels that are double today’s supply by 2030

of Queensland, the multinational started building a better understanding of the monetary and non-monetary value of water.

Its water strategy covers three key areas: improving water performance, accounting for the value of water and engaging with others on water issues.

• Improving water performance is often the first and most obvious step as companies tackle water issues. At Rio »

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of the world’s population already lives in areas with moderate to high water stress

20 Excellence in leadership | Issue 3, 2011

Tinto improved water performance is expected to lead to reduced operating costs and less environmental and social impact from its operations.

• Accounting for water management takes water management to the next level of sophistication and complexity.

Rio Tinto developed a framework to help the firm consider the level of risk and

opportunity associated with water issues.

• Engaging with others on water issues offers multi-faceted benefits for Rio Tinto.

By being part of the conversation with other businesses, government agencies, non-government organisations, community groups and others, Rio Tinto has the opportunity to understand better the myriad concerns about water

sustainability and to incorporate this knowledge into its operations and strategy.

For both Puma and Rio Tinto, financial impacts were a critical part of their water risk evaluation.

Therefore, it is essential that management accountants understand the business risks and impact on company performance posed by resource shortages. n

The finance professional’s role How should finance professionals become involved in water scarcity issues?

All companies rely on water to operate, so water scarcity is a significant factor that holds the potential of damaging or destroying many business models. Businesses need to start using water more efficiently to minimise their exposure to the immediate risks or future water scarcity. As part of this effort, management accountants must understand the business risks and potential impact on company performance posed by water and other natural resource shortages.

In June 2011 Timberland, the global footwear and outdoor clothing company, created the position of vice president for corporate responsibility, reporting directly to the company’s CFO – a move that was hailed by sustainability blogs as a significant step forward.

One, Doc’s Green Blog,

noted on 11 July 2011: “Most sustainability actions of firms are basically dollarsand-cents decisions (energy savings, cost reduction, waste reduction, supplier behaviour, building management, transportation efficiency and the like)… Accounting systems essentially similar to financial accounting and control systems have to be set up. Why not create these systems within the finance department, where the expertise for such systems resides?”

Today’s management accountants have the skills to help their companies create sustainable business models. They can provide the right information to help decision-makers understand the true cost of business so they can utilise resources more efficiently for both the short and long term.

They can also apply financial and commercial rigour and “speak the language” of business,

supporting the integration of sustainability across an organisation.

When financial value is attributed to a company’s environmental impact, top management begins listening intently.

Water management offers short-term opportunities to create efficiencies in a company’s own operations, as well as the potential for driving down costs along the supply chain.

Finance professionals can provide cost leadership in this area.

In safeguarding long-term value, they can help identify business risks and opportunities posed by water shortages, using risk management and analytic and forecasting capabilities to calculate a company’s current and future “water footprint”.

Today’s management accountants can also help ensure that today’s business decisions in this area will continue to deliver long-term value.

Questions finance professionals should ask: As a starting point, as finance professionals become involved in water sustainability discussions within their organisations, there are key questions that should be considered: How would short- or long-term water shortages impact your company’s operations?

Has your company traced water inputs, flows and outputs throughout its operations?

Has your company analysed the water usage and other environmental impacts all along its supply chain?

Has your company written water-management plans for each of its operational centres?

How would price increases for water or other diminishing resources impact operations?

Is your company exploring the value of water beyond the purchase or procurement price?

22 Excellence in leadership | Issue 3, 2011

Sustainability’s business case

23 Excellence in leadership | Issue 3, 2011

Many organisations are embracing sustainability because they feel they should but, as Nick Topazio explains, what should be driving uptake is that sustainability makes good business sense

Photography: Getty Images

I

s it possible for companies to fully embrace the profit motive, yet at the same time be seen as good citizens acting in the public interest? The answer lies in the time horizon over which the business strategy is formulated.

Short-termism does not tend to allow these two objectives to exist side by side. What is needed is a more long-term view; one in which both commercial organisations and society realise that they have a symbiotic relationship – they both need each other in order to thrive.

Businesses around the world must wake up to the fact that acting in a sustainable manner makes good business sense, as this usually results in more successful operations that generate reliable cash flows. Society also needs responsible commercial organisations to generate the tax revenue needed to run public bodies, provide employment for its citizens and produce the goods and services needed to fuel the economy.

Acting sustainably does not mean that the drive for profit is abandoned.

The world is increasingly competitive and only those companies with robust business models generating durable long-term profitability and cash flow will thrive. The critical areas of the business model that organisations and their boards must focus on are cost leadership, durability of the supply chain, motivating staff and attracting and retaining customers. And in each of these areas directors of successful companies have widened their focus beyond the traditional business drivers.

Cost leadership Cost leadership requires continual efforts to increase efficiency and reduce the cost of resources utilised by the business model. Lowering costs allows organisations to generate higher margins at more competitive pricing levels. The sustainability focus for cost leadership is a decreased use of the world’s finite resources while operating at a similar level of production. This both reduces the cost base per unit of production and improves planetary sustainability.

Supply chain For a business to succeed in the long term, it needs security of supply of the basic resources needed to produce the goods or services that it sells. Durability of the supply chain is therefore a key component of a successful business model. Paying a fair wage to suppliers of those basic resources is one way in which supply chain security and responsible business strategies coincide.

Workforce A successful business needs a committed and motivated workforce. Promoting an ethos of “doing the right thing even when no one is looking” will both help the business and the wider community.

Ethical behaviour reduces the threat of fraud within an organisation and enhances the reputation of an organisation among its wider stakeholder group.

Customers No business can survive without customers and customers require the right

product. Understanding the provenance of materials used in the manufacture of products or to sustain services is becoming an increasing part of what customers perceive to be the “right product”. For example, it is important for a growing proportion of consumers to know that no child labour has been used in the manufacture of clothing.

The role of government and regulators Although there are many examples of where the drive for long-term profitability currently coincides with the wider sustainability agenda, there are instances where current business behaviour needs to be adjusted to recognise environmental concerns. This is where governments and regulators around the world need to step in. They must accelerate the recognition of some environmental costs within business models. While an organisation consuming natural resources at an unsustainable rate, such as fish stocks, rain forest or fresh water, may not otherwise feel the impact of their current actions for several decades, it is the role of government to develop pricing mechanisms or regulation that cause the organisation to bring forward recognition in their current business planning.

It is essential that the corporate reporting system not only allows, but actively promotes, this new corporate philosophy which is required to drive business forward as it battles to meet 21st-century challenges. There is currently much mistrust in the actions of commercial organisations, and in many »

24 Excellence in leadership | Issue 3, 2011

circles the term “corporate behaviour” has become synonymous with greed, self-interest and detachment from the real world. Nevertheless, there are many companies that have successfully adopted business strategies that recognise the public interest, yet are still focused on long-term sustainable profitability, and the corporate reporting system must be allowed to develop to allow effective communication of their stories.

Shared value One manifestation of this notion of enhancing business competitiveness, yet at the same time advancing the economic and social conditions in the communities in which the business operates, is the concept of shared value. This was first explored by Michael Porter and Mark Kramer in a December 2006 Harvard Business Review article, “Strategy and Society: The link between competitive advantage and corporate social responsibility”. Porter and Kramer described three ways in which companies: Re-conceive products and markets Perhaps some of the greatest global needs are societal needs, such as clean drinking

Shared value in practice: Nestlé Nestlé, the world’s leading nutrition, health and wellness company, has three focus areas for its shared value initiatives: nutrition, water and rural development. Founded in 1866 in Switzerland, the company now employs more than 250,000 people in more than 400 factories, of which some are in developing countries and more than half in rural areas.

Nestlé’s perspective is that for a company to be successful over time and create value for shareholders, it must also create value for society. This vision of “shared value

water, healthcare, nutrition, housing and care for the aged. In advanced economies demand for products and services that meet society’s needs is growing rapidly.

Food producers are concentrating more on nutrition and less on attributes that more overtly drive consumption, such as taste. Energy companies now market products and services designed to reduce energy usage, helping to make the industry more sustainable. The need to meet demand requires innovation and imagination, a re-conceiving of products and the markets served.

Redefine productivity in the value chain Traditional measures of productivity focus on maximising output from a given set of resources. These measures tended to be short term in nature as the idea was to measure and improve and then re-measure and improve again – a long cycle between change and impact assessment would, it was thought, promote inefficiency. Newer thinking recognises that the cost-set is broader and in the longer-term includes externalities that have not previously been taken into account. For instance, efforts to minimise pollution have long been seen as

creation” is built upon a bedrock of compliance with the highest legal, business practice and conduct standards. The company has moved beyond the basic sustainability need to protect the future by meeting the needs of the present, without compromising future generations, to the creation of value for shareholders and society as part of an integrated business strategy.

Nestlé shared value highlights for 2010: l Nutrition – more than 6,500 products renovated for health or nutrition considerations reducing salt, fat and sugar levels.

inevitably increasing business costs and so thought to only be worthwhile if mandated by regulation and taxes. However, there is growing awareness of the benefits to business through greater resource utilisation, efficiencies, quality and brand reputation.

Enable local industry cluster development No industry operates in isolation. The success of any organisation is affected by its supply chain for the products and services that it uses in its own operations. Traditional raw material suppliers, energy providers, transport and the logistical infrastructure quickly spring to mind as examples here.

But in addition there are broader public assets supporting business development, such as schools and universities, clean water provision, legal systems and enforcement and trade associations. Poor cluster development can increase business costs through greater training needs, theft and the need for sickness cover, so shared value can be achieved through work with the local community to build a supportive industry cluster at the company’s locations. n To access CIMA’s work on sustainability visit www.cimaglobal.com/sustainability

l Ninety billion servings fortified with key micronutrients and affordable fortified milk now available in 75 countries. l Water – reduced water withdrawal per tonne of product, including an 80 per cent water saving in coffee production. l Rural development – training of nearly 150,000 farmers around the world through Nestlé’s capacitybuilding programme.

For these initiatives to be sustainable they need to make business sense. Nestlé reports significant resource consumption savings over the course of the first decade of this millennium. It has

reduced measured per tonne of manufactured product water consumption by 61 per cent, waste water generation by 66 per cent, energy consumption by 44 per cent and greenhouse gases by 51 per cent. And over the past 20 years the use of packing materials has been reduced by 500,000 tonnes.

Shared value has been described as the next evolution in capitalism, a business environment in which companies develop a sense of social purpose to sit alongside the profit motive, and as such re-establish the standing of business within the community as a force for good, rather than a force to make the rich richer.

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Smart investing

27 Excellence in leadership | Issue 3, 2011

Photography: Getty Images

Responsible investment is not just the right thing to do, it is also essential for smart private-equity investing, according to investment firm Kohlberg Kravis Roberts & Co. We find out how the firm factors environmental, social and governance issues into its investment due diligence and the active ownership of companies

A

n environmental advocacy group might sound like a strange bedfellow for a private equity investor.

But Kohlberg Kravis Roberts & Co (KKR) tends to leave no stone unturned in its pursuit of higher returns.

KKR’s unlikely partnership with the Environmental Defense Fund (EDF), a US not-forprofit group that promotes environmental best practice, has proved to be a real stimulus for performance improvements across the private equity firm’s portfolio of companies over the past four years.

The partnership is based on the simple idea that there was a lot of economic and environmental value that could be captured by taking a systematic and

proactive approach to the management of environmental issues. As a long-term private equity investor we have deep relationships with a variety of businesses across different industries.

That means we have a unique opportunity to focus on environmental issues and apply the lessons across our portfolio of companies,” says Elizabeth Seeger, an environmental expert who joined KKR’s operations team KKR Capstone from EDF in 2008.

The Green Portfolio Programme The collaboration led to the creation of the Green Portfolio Program, a joint initiative aimed at measuring and improving the environmental performance of KKR’s private equity portfolio companies. For KKR, it was an opportunity to learn about cutting-edge practices and how best to apply them, while EDF saw it as a way of »

29 Excellence in leadership | Issue 3, 2011

working with one partner to achieve change across a number of companies.

The programme is based on a set of tools and processes, much like any other operational improvement exercise, which can be applied to different business models. It begins with the identification of high-priority areas for particular companies, then puts metrics in place to measure their environmental impact, pinpoints activities that will produce the greatest performance improvements and, finally, requires the tracking and reporting of results over time.

“The programme really focuses on ensuring that each company uses the most appropriate metrics for its business,” says Seeger. “For example, US retailer Dollar General uses a different productivity metric for its stores and its distribution centres. The way we track performance has to be customised so that it makes sense to the managers on the ground because they are the ones who are ultimately implementing these activities.”

Fleet efficiencies The strategies that companies take to tackle similar problems, such as reducing the greenhouse gas emissions (GHG) of its truck fleets, may also differ.

The approach taken by US bed and mattress maker Sealy, for example, included the use of software to increase the efficiency of delivery routes and improvements in items per load to reduce the number of deliveries needed.

The company decreased the GHG emissions from its fleet by 23 per cent in absolute terms in 2008, compared with the previous year, while fleet efficiency improved by 28 per cent (measured as GHG per truck stop) over the same period. This led to cost avoidance of $3.5m.

Similarly, the approach taken by food distribution business US Foodservice included the reduction of the idle time of its vehicles through driver training, the installation of maximum speed controls and investment in route-planning technologies.

Overall, it reduced GHG from its fleet operations by 13 per cent in absolute terms in 2008 and 2009. It also improved fleet efficiency by five per cent (measured in terms of GHG per tonne of product moved) compared with its 2007 level. These improvements resulted in cost avoidance of $14.6m.

“Although we are working with companies in different industries with distinct ownership models

‘The way we track performance has to be customised so that it makes sense to managers’ for their truck fleets, they are still able to learn from each other in terms of how they improve fleet efficiency,” says Seeger.

“One of the biggest challenges for a company is the choices it needs to make between different practices. We are really seeking to accelerate the adoption of new processes, practices and technologies by capturing information about what each company does so that others can learn from its successes or mistakes,” she says.

Sharing ideas KKR has created a number of forums where CFOs, CIOs or sustainability officers can get together with other stakeholders to share experiences. It recently held a meeting in Germany, for example, where the European CIOs of its portfolio companies learned about issues relating to green technology, such as the efficiency of data centres. “The meetings are designed to help companies to combine forces so that their CFOs or CIOs become better informed and more powerful because they don’t have to tackle every issue by themselves,” says Ludo Bammens, director of European corporate affairs at KKR. The private equity firm also launched a responsible sourcing initiative last year to provide tools and resources to help its portfolio companies to build good long-term relationships with suppliers and offer support in the handling of human rights issues in the supply chain. Again, this initiative was formed in partnership − this time with not-for-profit sustainability group BSR, which helped to develop a resource guide and workshops to highlight international standards and best practices.

About half of KKR’s portfolio companies have already participated in one of its executive training events focused on sustainable supply chain practices.

A risk assessment survey has also been developed to »

Elizabeth Seeger Seeger joined KKR in 2009. Elizabeth was previously a project manager in the Corporate Partnerships Programme of the Environmental Defense Fund. Prior to EDF, Seeger was a consultant with the Corporate Executive Board, where she advised companies across a broad range of industries in Europe and the US. Before that she was an Associate at the Environmental Law Institute, a non-profit organisation focused on environmental law and policy research and education.

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30 Excellence in leadership | Issue 3, 2011

help companies with supply chains in Asia to improve their sourcing policies over time.

“Many of our portfolio companies have moved their supply chains to emerging markets over the past five or six years and have therefore moved their ESG (environmental and social governance) issues to these emerging markets, too. As part of a portfolio of companies, however, there is support available so they don’t have to tackle these issues individually,” says Bammens.

‘One of the biggest challenges for a company is the choices it needs to make between different practices’

The private equity model KKR’s focus on environmental, social and governance ESG issues pre-dates the EDF partnership. “From a risk management point of view, ESG factors have been becoming more and more relevant over the past five or six years. We have had to become as diligent, thoughtful and professional about these factors in our investment thesis as we are about pure financial factors, such as Ebitda, debt rates or balance-sheet structure,” says Ludo Bammens, director of European corporate affairs at KKR. Bammens says that KKR might look at about 1,000 potential opportunities for every ten actual investments it makes, and for each one it must look at the ESG opportunities and challenges.

There has also been growing interest from investors in finding out more about how KKR has integrated these issues into its investment approach. This is understandable given that private equity funds are typically limited partnerships with a fixed investment period of ten years.

The need to provide assurance to investors has meant that ESG issues have become a standard part of the agenda at KKR’s annual investor conference and an opportunity to brief investors on the ESG performance of its portfolio companies.

In addition, the firm has launched ESG round tables, normally three times a year, where it brings together a selection of investors and sometimes portfolio companies to share their experiences and learn from one another. Stakeholder engagement has also led to the publication of KKR’s first sustainability report last year (see box, right, for more details).

“Investors want a certain degree of transparency about our processes so that they understand how we approach ESG issues in practice. They tend to want to know how we integrate these issues into the due diligence process and the active stewardship of our

portfolio companies,” says Bammens. “They want to know that we have the capability to manage and report on ESG issues so they can feel comfortable that we will make the right judgement calls.”

Reporting on sustainability KKR’s 2010 ESG report, “Creating Sustainable Value”, includes a wide range of details on KKR’s approach to ESG at the pre-investment stage, as well as examples of how it engages with its portfolio companies to improve sustainability performance over the long term.

One example of this are the details on due diligence activities ahead of its investment in South Korean company Oriental Brewery in 2009.

This included early engagement with regulatory authorities and trade unions to smooth the transaction process. It also involved an environmental performance assessment of the company, which revealed that it had a strong track record and led to the brewer becoming the first Asian member of the Green Portfolio Programme.

The sustainability report also highlights the steps involved in KKR’s ongoing stewardship of portfolio companies. The starting point is for an industry team to develop a 100-day plan with the company, as well as the key goals and steps needed to achieve this plan. For example, the 100-day plan for KKR’s 2009 investment included reducing energy use to lower the company’s costs and GHG emissions.

This plan is then presented to KKR’s Portfolio Management Committee (PMC), which advises on how the company can make improvements and how the private equity firm can provide additional resources, advice or support in handling challenges and opportunities. After the first 100 days a progress report is presented to the PMC with further goals for the year. After that, the PMC receives a monthly and quarterly financial report, and an annual report on the company’s overall performance. n

Ludo Bammens Bammens joined KKR in 2009 as the director of European corporate affairs. Before joining KKR, Bammens was the director of European public affairs at Coca-Cola Company Europe Group.

Prior to this he was vice president, public affairs and communications for the Europe Group of Coca-Cola Enterprises. He joined Coca-Cola from Janssen Pharmaceutica, where he was director of European public affairs.

From 1986-1991, Bammens was deputy chef de cabinet to King Baudouin of Belgium.

Bammens is honorary member of the executive board for the Belgian Banking and Market Supervisory Authority and a member of the Stakeholder Group of the European Securities and Market Authority.

33 Excellence in leadership | Issue 3, 2011

Get involved with CIMA Add value to your CPD portfolio

Writers and bloggers required

Excellence in Leadership is part of CIMAplus member service. Next year’s subscription is now available to renew with your membership. You can also buy it separately at www.cimaglobal.com/cimaplus

Would you like to contribute articles and blogs to Insight, CIMA’s e-magazine for members and students?

Insight reaches a global audience of 140,000 CIMA members and students. See our latest editions at www.cimaglobal.com/insight and contact us at web@cimaglobal.com to find out how to get involved.

We are also looking for members who are interested in sharing their expertise by blogging and engaging directly with their readership at our CIMAsphere online community.

To find out more about blogging options, email us at sphereinfo@cimaglobal.com

Working together to grow your business The CIMA growing business knowledge hub is the free online resource providing small- and medium-sized businesses with help and guidance in applying business skills, strategic expertise, commercial awareness and decision-making capability to drive profitability and business growth. www.cimaglobal.com/ growingbusiness

CIMA Annual Awards 2011: Recognising excellence

Photography: Getty Images

The judging process is complete and the shortlist for the awards has been announced. Visit the website to see who has made it through to the shortlist. Join us in the celebrations at the CIMA Annual Awards 2011.

Places are limited so book now to make sure you don’t miss out on this excellent opportunity to socialise and network. Book via the website at www.cimaglobal.com/awards Category sponsor: Hays Senior Finance

New products from CIMA Leveraging technology to deliver finance effectiveness and value

Ethical Lens CIMA has a new e-bulletin, Ethical Lens, which gives an overview of the latest news on ethics and sustainability from CIMA and beyond. Further help online includes CIMA’s Code of Ethics in full, ethical dilemmas, ethical checklists, information on helplines and an online library of resources, including a range of articles featured in CIMA publications, blogs and webcasts.

Access the e-bulletin and other resources via the ethics pages online at www.cimaglobal.com/ethics A number of thought leadership reports related to ethics and sustainability are available online at www.cimaglobal.com/sustainability

New REPORTS Finance transformation: what about SMEs?

A free webcast is available, which provides senior insight and commentary on the ways the finance function can leverage technology to gain further efficiencies and to liberate time and resource to better support its customers. www.cimaglobal.com/technology

This new report shows how leading organisations have transformed their finance functions to help improve their business’s performance. If SMEs are to drive growth they may need the professional support that management accountants can provide. This could be important for the UK’s economic recovery. www.cimaglobal.com/sme

supported by SAP

supported by Hays Senior Finance

34

Climate choices

New CIMA Research examines some innovative responses to global climate change

F

rom droughts and floods to the threat of disease and infrastructure damage, organisations in all sectors face a variety of risks relating to global climate change (GCC).

This demands action by public and private organisations to mitigate changes in the natural environment by reducing

their emissions, as well as adapting to actual or potential physical changes.

They must also respond to new laws and regulations, such as the UK’s Climate Change Act and the European Union’s Emissions Trading Scheme.

Recent research, supported by funding from CIMA, has revealed how organisations at the leading edge of responses to the GCC agenda are tackling these strategic issues. An executive summary of the findings, “Strategic

responses to global climate change: a UK analysis”, also explores the implications for management accountants and accounting practices.

Organisational responses Interviews with a cross-section of public and private-sector organisations highlighted that tackling GCC, even as a single organisation, requires a holistic approach as all production and consumption activities will be

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Photography: Getty Images

Excellence in leadership | Issue 3, 2011

affected as society seeks to develop a low-carbon economy.

The scale of economic transformation required will affect organisations’ direct operations and their relationships with suppliers, consumers, funders and regulators. As a result, several interviewees indicated that being involved in industry-wide initiatives had helped them to address the GCC agenda. The Scottish Whisky Association, for example, has tried to get its members to take a joint approach. Some industries, such as the UK water sector, have even put GCC responsiveness into a noncompetitive space in order to support the pace and scale of change required.

Organisations said they had undertaken a wide range of activities to mitigate their impact on the environment. These included investing in energy efficiency, as well as buying or generating their own lower carbon energy, and waste management practices that focused on recycling in order to displace the need for virgin raw materials, as well as reducing the carbon impacts of waste disposal.

Some were also investigating how different approaches to freight and logistics use could reduce their travel carbon footprints.

Interviewees also listed a number of ways to manage risks resulting from environmental changes. These included future-proofing infrastructure during the construction phase as a way of safeguarding new and existing investments and developing strategies to minimise the impact of physical changes on operational activities.

When organisations are redesigning particular working practices they also said they looked at all the possible interactions in the system in order to maximise the overall GCC benefits. For example, Procter & Gamble calculates the benefits of creating products that wash in cold water in terms of the savings on water bills that its customers could make and the market share it could gain, as well as the CO2 reductions.

Figure 1 (right) provides a generic summary of the various steps that interviewee organisations were following to address GCC issues. The ten-step plan also includes examples of the kinds of initiatives undertaken by the UK’s National Health Service, a trendsetter in this area.

The role of accounting There is a need for all parts of an organisation to be involved in supporting GCC responses and this includes the accounting function. All the organisations interviewed as part of the research project had, for example, been developing baseline data on their greenhouse gas (GHG) emissions and reported that information within and outside the organisation.

Accounting professionals had also been involved in ensuring that GHG Figure 1

10-step process to address GCC Establish consensus The case for a response and the appetite for response Develop data baseline GHG emissions footprint Develop a procurement plan Co-create a vision of a low-carbon future Support current and future leader Develop process standard for sector Place GCC in a wider sustainable dev. approach Fund the transition Ensure financial accountability, including GCC concern

Develop an adaptation plan

emissions are incorporated into current decision-making and performance measurement. KPMG said that it used the GHG impacts of travel when making decisions about how to deploy human resources.

Accountants were also providing information to support choices between a range of options for mitigating or adapting to environmental changes. Some new accounting tools are being developed. For example, some organisations are using marginal cost of abatement curves, which can be used to understand investment and trading opportunities related to carbon prices. However, accountants are largely adapting their current tools and approaches to the demands of the GCC agenda.

One clear message from the research is that education and training are needed to ensure accountants support their organisations in the transition to a low-carbon economy.

The executive summary of the report and a resource guide for GCC can be found at: www.cimaglobal.com/sustainability. n

Jan Bebbington Bebbington is professor of accounting and sustainable development at the School of Management at the University of St Andrews, and director of the St Andrews Sustainability Institute. Her main research interests are corporate social reporting on sustainable development; full cost accounting and modelling; and governance for sustainable development. She is a keynote speaker at the forthcoming CIMA World Congress in Cape Town.

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Strategising sustainability through management control Jeremy Moon, Jean-Pascal Gond, Suzana Grubnic and Christian Herzig on the usefulness of control systems in formulating and implementing sustainability strategies

S

ustainability control systems (SCSs) play an important role in the integration of sustainability within strategy. They support management in responding to growing stakeholder expectations and identifying and exploring new business opportunities.

However, they can only contribute to effective integration of sustainability within strategy when they inform conventional management control rather than when they are used as “autonomous strategic tools”. Short of this, sustainability control remains peripheral to, and decoupled from, core business activities and is unlikely to reshape strategy.

A CIMA-funded project, led by the International

Centre for Corporate Social Responsibility at Nottingham University Business School, explored the interplay of SCSs and “conventional” management control systems (MCSs). The study explains how strategic decision-making can be improved through better integration and use of these systems. Findings from three UK case companies show how relations between MCSs and SCSs can facilitate or prevent the integration of sustainability within strategy.

The study draws upon insights provided by: Boots UK, a retailer of health and beauty products; Halcrow, which specialises in the provision of planning, design and management services for infrastructure development worldwide; and The Commercial Group, an independently owned office services company.

37 Excellence in leadership | Issue 3, 2011

Control systems, strategy and sustainability Formal controls have an important role to play in strategic renewal, in the minimisation of organisational threats and in harnessing opportunities arising from competitive dynamics or internal competencies. The table on p39 shows a list of control systems used by top managers to ensure the achievement of organisational goals. Conventional MCSs commonly used by companies are presented in column one.

In response to the increasing complexity of global problems, such as climate change, new approaches to control for sustainability have been developed (see column three). They capture environmental and social issues in a broader and more systematic way than conventional (i.e. more financially orientated) MCSs and are often operated by groups other than the finance/ accounting team within the organisation.

Most of these new forms of management control originate from the environmental management accounting and eco-control fields that have emerged in the past 20 years (e.g. environmental cost accounting, material and energy flow accounting). They have also captured broader aspects of sustainability. Organisations have developed internal reporting and control systems to measure such aspects of sustainability performance as the value of stakeholder relationships (stakeholder value added). Similarly, the implementation of a sustainabilitybalanced scorecard enables the integration of market and non-market issues into business strategy. By contrast, the socio-eco-efficiency analysis (SEEA) developed by one of the world’s leading chemical companies, BASF, supports management in assessing investment projects in terms of their environmental and social impacts and in enhancing strategic decision-making (e.g. in the development of new markets).

While past research has often attended to the development and adoption of individual approaches to sustainability control, the CIMA study “Management Control for Sustainability Strategy” improves our understanding of the relationship between conventional and sustainability control, and of the organisational processes enabling control systems to advance sustainable strategic management within companies.

Photography: Getty Images

Integration and use of control systems for sustainability strategy The findings show that the uses and levels of integration of MCSs and SCSs help to explain the integration of sustainability within corporate strategy (see table, p39).

The concept of control system use is derived from Robert Simons (Harvard Business School). It suggests that executives may utilise control systems, either as “management by exception” tools (diagnostic use) in order to control and correct managers’ actions or as “actual strategic levers” (interactive use) to focus

managers’ attention on key goals and supporting changes aligned with higher strategic objectives.

Turning to the level of integration of the MCSs and SCSs, the study distinguishes integrative versus parallel (and disconnected) modes of operation. Building on research by Andrew J. Hoffman (Ross School of Business) and Max H. Bazerman (Harvard Business School), the study describes the degree of overlap between the two types of control systems through cognitive (e.g. how people who use the different systems think), organisational (e.g. how processes related to these systems are organised and structured) and technical dimensions (e.g. whether systems’ data are compatible).

Lessons learned The findings show that decision-making using the broadest foundation of economic, ecological and social data will be hampered if sustainability aspects are managed and reported through systems run in parallel to conventional MCSs. In specifying the modes of integration of MCSs and SCSs and explaining their uses, guidance to managers for improved strategic integration of sustainability can be given in two ways: strategic mobilisation and systemic integration.

Strategic mobilisation Changes in sustainability integration can take the form of strategic mobilisation, when a control system traditionally used in a diagnostic way is used interactively to deploy a strategy. As highlighted by Simons, CEOs can strategically mobilise a control system in order to reorient the strategy, especially when they are newly appointed. In selecting a control system to be used interactively, CEOs refocus managerial attention to the dimensions judged crucial to enact the new strategy and build a competitive advantage. The case of The Commercial Group shows how the interactive mobilisation of a control system helped to renew corporate strategy. Following the owner’s vision for the company to reduce its carbon footprint it engaged intensively with environmental and sustainability issues. It decided to employ a full-time environmental strategist and to become the first carbon-neutral company in its sector. Besides mobilising its organisational green culture, the environmental strategist of the company focused on the interactive control in project management. This mobilisation and creation of teams on specialist projects with their own unique budgets and evaluations helped the company to further its sustainability strategy, shape its culture and reflect on the organisational learning process.

However, in contrast with strategic mobilisation, there can also be a “demobilisation” of a given control system. This can happen, for example, when a CEO decides to de-emphasise a MCS that no longer corresponds with the strategy the CEO wishes to pursue. »

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Following this logic, a SCS which is interactively used around sustainability issues can come to be managed diagnostically once the uncertainties surrounding sustainability are perceived as controlled. In the case of The Commercial Group CO2 emissions have come to be controlled for and monitored through diagnostic use of a non-financial measurement system once the emission reduction and carbon neutrality target was reached and other aspects of the environmental strategy gained heightened attention.

Overall, the balance of interactive versus diagnostic uses of SCSs and MCSs reflects the strategic priorities and the willingness to actually enhance and/or deploy a sustainability strategy that can strengthen a firm’s competitive advantage.

Systemic integration In altering the levels of systems coupling managers and executives may also contribute to the facilitation or prevention of sustainability integration within strategy.

Several factors can contribute to alter the various dimensions of integration (cognitive, organisation, technical), leading to changes in systems coupling.

First, at a technical level the migration towards a new IT management system can enable the sharing of data from various systems, thus facilitating systems integration. In contrast to this, a move towards an enterprise resource planning system that cannot process sustainability data could jeopardise efforts to integrate SCSs and MCSs. The case of Halcrow shows the risk of sustainability marginalisation during a process of corporate growth and consolidation. The company initially focused on the implementation of an environmental standard and stand-alone environmental control system to trigger interest in sustainability.

However, this integration tended to disconnect the MCSs and SCSs rather than facilitate the integration of sustainability. As a consequence, the company integrated sustainability indicators in its balanced scorecard, which was rolled out at group level through a change management programme designed to move the whole business closer to the client. This integration offers a strong move towards improved sustainability control.

Second, at an organisational level, career management, job design and the transformation of functional boundaries may facilitate the transversal move of people across departments and, in turn, enhance exchanges of information by teams working with MCSs and SCSs. However, organisational changes may also enhance departmental boundaries and thus reduce the organisational integration of SCSs and MCSs. A good case in point is Boots UK, where responsibilities for monitoring and control of sustainability are shared and spread across the different business departments in order to keep CSR and sustainability embedded in what the

business does. The company recently attempted to strengthen the collaboration between the finance/ accounting and CSR/sustainabilty teams through integrating sustainability issues into the reporting verification process controlled by the finance/accounting department. Initially, this revealed some discrepancy between the two groups arising from their differing understandings and ways of looking at the role of accounting in general and procedures specifically.

However, the integration ultimately enhanced both the development of good formal and informal relationships between the members of the two teams and the legitimacy of requests for sustainability information from the finance/accounting department.

Third, at the cognitive level, arguments related to the business case for sustainability can help in overcoming cognitive barriers to sustainability integration, whereas the dominance of the shareholder view can make the integration of sustainability in managers’ cognitions more difficult. For example, Boots UK experienced a refocus on shareholder value as a consequence of a merger and a private equity buy-out a few years ago. The CSR/sustainability department managed to progress in integrating sustainability into wider management control and mobilised a similar set of systems to control for business and CSR objectives, resulting in important overlaps and hybridisation between these systems.

Together with its strong legacy of social responsibility, this enabled the company to move beyond a discursive coupling and to uncover business opportunities through a high level of integration of MCSs and SCSs. The combinations and accumulations of moves over these three dimensions result in changes in the level of system integration and can enable higher level coupling or, alternatively, undermine integration.

Levers of change The study also recognises that top managers have access to a wider range of controls than referred to above and follows Simons in recognising two further levers of control for strategic change and renewal. The “belief” lever refers to the creation of shared systems of internalised beliefs within the organisation in order to stimulate the adoption of appropriate behaviours (e.g. green organisational culture).

The “boundary” lever aims at drawing the “frontiers” of acceptable and unacceptable behaviours within the organisation and defines the zone within which opportunities can be exploited (e.g. code of conduct).

The findings show that both systems frame the operation of diagnostic and interactive sustainability control. Cultural levers of shared belief appeared particularly powerful in supporting sustainability integration in all three case companies. These reflected different combinations of company legacy, structure and managerial initiative. Cultural boundary levers

39 Excellence in leadership | Issue 3, 2011

contributed less overtly to integration, but appear to operate implicitly where well-embedded systems exist.

Conclusions The study has some practical conclusions.

• Providing an organisational diagnostic The dimensions of “integration” and “use” in configurations of control systems account for the complex processes of – and thus clarify the crucial role of – MCSs and SCSs in the progression of sustainability integration within strategy. The typology of configurations can be used as a repertoire for building an organisational diagnostic of the degree of sustainability integration within strategy. In so doing it can also help in identifying threats to integration.

• Considering boundary conditions Mobilising a SCS by using it interactively rather than diagnostically can push the corporation in the direction of sustainability integration within strategy. However, the strategic mobilisation of an SCS by top managers may not be enough to deploy a sustainability strategy as the “conventional” MCSs can remain a structuring force of actors’ behaviour. As a consequence, sustainability systems remain peripheral. The findings stress that integrating sustainability in control systems is necessary to enhance sustainability strategy. Sustainability may be integrated through a MCS that is dormant and which

does not inform the strategy. A more effective approach for managers willing to raise sustainability awareness is to integrate SCSs within the primary MCSs used interactively by executives.

• Developing paths There are contrasting processes of i) systemic integration vs. dissociation and ii) strategic mobilisation vs. demobilisation, and some paths may be easier than others to follow in order to elaborate a sustainability strategy. The cases reported here and in the CIMA study exemplify important levers and barriers to facilitate the progressive integration of sustainability.

• Enhancing staff interaction and competencies In using control systems, top managers shape culture by communicating values and preferences on a regular basis.

Interviewees across all companies were consistent in the high importance they attested to staff interaction around control systems. Barriers to staff interaction (e.g. organisational silos or different mindsets) can be overcome by dedicated cross-functional training programmes to build strong communities of practices across disciplines and departments. More generally, there seems to be a need for accounting education and training to foster the diverse competencies required to understand, make transparent and control the sustainability issues which are most relevant for both the company’s strategy and the society in this respect. n About the authors

Integration of sustainability within corporate strategy Management control system

Description of the management control system

Examples of sustainability control systems

Strategic planning

Long-range planning covering a five-10 year time period (based upon forecasts of competitive environments)

Sustainability planning

Budgeting

A plan specifying goals to be achieved in the next year; incorporates initial preparation and ongoing revisions

Environmental budgeting; sustainability budgeting

Financial measurement systems

More specific financial information than that contained in the budget (includes information such as RoI and EVA)

Environmental cost accounting; sustainability performance measurement systems (e.g. stakeholder value added)

Non-financial measurement systems

Measurements expressed in non-financial terms (e.g. introduction of new products, market positioning)

Material and energy flow accounting

Hybrid measurement systems

A set of financial and non-financial indicators to assess the achievement of strategic objectives (e.g. balanced scorecard and tableaux-de-bord).

Sustainability-balanced scorecard

Project management

Review of discrete blocks of organisational activity intended to ensure delivery to time and budget (e.g. to improve project attributes)

Socio-eco-efficiency analysis; environmental investment appraisal

Evaluation and reward

To direct the efforts of individuals and groups within an organisation (e.g. bonus payments)

Reward system based on multidimensional performance system

The authors are all from the Nottingham University Business School.

Jeremy Moon is professor of corporate social responsibility and director of International Centre for Corporate Social Responsibility.

Christian Herzig is a lecturer in sustainability accounting and reporting.

Dr Suzana Grubnic specialises in sustainability accounting and accountability.

Jean-Pascal Gond is with the International Centre for Corporate Social Responsibility.

40 Excellence in leadership | Issue 3, 2011

How to be socially useful Gill James, group head of sustainability at Standard Chartered, explains why the bank has begun to measure its value beyond the bottom line – starting with Ghana

T

he past few years of turmoil in the global financial industry have moved sustainability to the top of the agenda for most banks. It is now widely recognised that to restore public trust in the financial system, banks must demonstrate that they are not only financially responsible, but socially useful.

At Standard Chartered, we want to reaffirm and strengthen our long-held commitment to building a sustainable business.

As an international bank operating across Asia, Africa and the Middle East, we have a real opportunity to create value beyond the profits we make. By doing things “the right way”, we can have a positive social and economic impact on communities, at the same time as making money for our shareholders.

Sustainability sits firmly at the core of our business model. It goes beyond philanthropy, beyond the notion of corporate social responsibility and beyond protecting our reputation.

We take a broader approach, acknowledging the transformative impact that we can have on people and

economies by providing financial services effectively and responsibly.

In 2010 – for the first time in our 150-year history – we commissioned an independent study to map our socioeconomic footprint in one of our key markets, Ghana in West Africa.

Standard Chartered has been operating in Ghana for 114 years. It has 21 branches, 800 staff and 160,000 customers there, and offers a comprehensive range of wholesale and consumer banking services.

But what is the wider impact of all this on Ghana’s economy and society?

To answer this question, the report’s authors, professor Ethan B. Kapstein, INSEAD, and Dr René Kim of consultancy firm Steward Redqueen, used a social accounting matrix (SAM) – a wellestablished tool applied by governments the world over – to assess the direct, indirect and induced economic impact, or multiplier effect, of Standard Chartered Ghana’s activities.

The study – among the first of its kind to be published by a major financial institution – showed that the total economic impact of Standard Chartered’s operations and onshore financing in Ghana amounted to $400m of value-added in 2009, or about 2.6 per cent of Ghana’s GDP. Meanwhile, our activities supported

almost 156,000, or around 1.5 per cent of the Ghanaian workforce.

In 2009 we provided Ghanaian businesses, consumers and government agencies with nearly $900m of financing from onshore and offshore savings.

Specifically, we provided $17.2m to smalland medium-sized enterprises (SMEs) and our trade lending of $193m helped connect Ghana to international markets.

However, our contribution in Ghana is about a lot more than financing. We also want to help address some of the most pressing challenges facing Ghanaian communities by taking environmental and social impacts into account in the projects we finance – by investing directly in communities and by developing products and services that help lift people out of

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Photography: Panos Pictures

Excellence in leadership | Issue 3, 2011

poverty. Our Access 24/7 account, for example – which lets customers with as little as $7 open a bank account – has provided 23,000 previously “unbanked” Ghanaians with banking services. We also support and lend to the country’s emerging micro-finance industry.

What’s more, we enable Ghanaian trade and investment flows by making markets in commodities and financial instruments, thereby helping clients to manage risk in an ever-more volatile world. We also offer research and advice that can help Ghanaian companies grow beyond borders and explore new trade corridors, such as Africa and Asia.

New products help spur innovation. We were the first bank to provide ATMs, SMS banking and Visa debit cards in Ghana. We also train local staff and provide them with

opportunities to work in foreign markets.

In fact, Standard Chartered has become something of a training ground for senior bank staff in Ghana, with 13 alumni holding key banking sector positions in 2010, four being CEOs. The study also highlighted areas where we can improve, of course. As an example, it suggested we work more closely with governments and other privatesector firms to create a more favourable business environment for SMEs. Among a range of initiatives we are considering a training programme for SME customers to help strengthen their financial management skills.

The study on Ghana – along with a subsequent study of our impact in Indonesia – has deepened our

understanding of how we contribute to the societies in which we operate, and it will inform our strategy as we look to the future.

We will continue to build on this work to measure the impact of the products, services and community investment that we provide in our markets.

More broadly, the Ghana study underscores that international banks create economic and social value in myriad ways beyond the provision of credit.

Through core business – not just targeted sustainability initiatives – banks can be powerful contributors to progress in societies.

• To view the full report on Standard Chartered’s operations in Ghana, visit www.standardchartered.com n

42 Excellence in leadership | Issue 3, 2011

How to achieve a smooth post-merger integration ntegrating a newly acquired business into existing operations or into its new position in the corporate portfolio is a huge task and is probably the most important determinant of success of the acquisition. Surveys and academic studies alike point to the need for more thorough preparation for implementation.

Acquisition arithmetic is built on the idea that combination benefits or synergies must exceed any premium paid over and above the market’s judgement about the value of the target, plus applicable transaction costs. Success depends on capturing and maintaining those synergies.

TEN LESSONS FROM THE FRONT LINE 1. Decide as early as possible on the critical changes required to achieve the value drivers.

Every responsibly managed acquisition programme identifies value drivers that will produce the leading contributions to shareholder value from the transaction. These key areas and their successful implementation should be kept at the forefront of integration planning. The enormous amount of detail involved in integrating a newly acquired organisation can easily submerge the most important factors – the value drivers that will make the acquisition pay.

AOL Time Warner We have only to look at the gigantic AOL Time Warner merger to see the importance of integration. One of the largest mergers ever executed is seen, in retrospect, as a catastrophe. From its peak, the combined market capitalisation of the two companies declined by nearly $200bn in the face of all their respective difficulties and the market’s declining enthusiasm for the company.

Some of the decline in favour admittedly derived from exogenous circumstances. But a more fundamental problem had to do with integrating the two organisations. The prime value creation opportunity in this merger was the planned migration of AOL’s customer base to Time Warner’s cable network, capable of supporting broadband transmission. As part of the deal to get the merger through the FCC, the US regulatory agency charged with overseeing the telecommunications industry, access to the cable network had to be made available to all ISPs. The Time Warner people allegedly fought back and resisted this effort, thus scuppering the principal economic rationale for the deal.

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2. Design the integration programme during the due diligence phase.

As an example, Monsanto required the preparation of a “value capture summary” by the integration team leader, working with the due diligence team.

That document then becomes the “manifesto” for the integration team.

3. Assign separate project responsibility for integration.

GE Capital concluded that the job of integration manager is a separate, full-time job and one that is a professional and challenging function in its own right. They concluded that the job is best filled by “fast-track managers” who are on their way up and thus anxious to show what they can do when managing a project where a substantial change exercise is in progress.

Alternatively, “an old hand” can be appointed; someone who knows his or her way around the organisation, has lived through acquisitions and knows what works and what doesn’t.

Photography: Getty Images

4. Begin the planned actions right after completion.

There can be temptations to defer the start of integration. The penalties for deferral are not only the delay in securing the projected benefits, but increased lack of focus and commitment in the organisation as rumours abound. Failure to act quickly can often make the acquirer look indecisive and even devious when cost-saving actions are taken after initial business-asusual signals are given.

5. Tie priorities to strategic objectives.

A huge amount of administrative detail is involved in the integration of any business of substantial size into a new organisational home. This can cause the team to become swamped with detail. The danger is that the rationale for the deal – the principal value drivers – loses relative importance. It must be made clear to the team that the two or three basic value, creating ideas

for the deal are at the top of the agenda and must receive the team’s most careful attention and merits priority treatment.

6. If cross-border, be especially alert to cultural differences.

This advice seems so obvious that it hardly needs saying. Yet the annals of cross-border acquisitions are replete with stories of misunderstanding, alienation, intransigence and the like, all stemming from fundamental differences in culture concept between the countries involved.

Cultural disparity is, of course, not confined to international deals.

Cisco Systems The potential for culture conflict is taken very seriously at Cisco Systems, where a team that evaluates prospective acquisitions assesses cultural fit and recommends abandonment if the gulf is seen to be too wide. In one notable example, they saw the original art on the walls of the prospective target and concluded that it would not fit with the lean and austere management style at Cisco. The company says they have walked away from a number of possible acquisitions for reasons of this kind.

7. Plan the announcement with great care.

Almost invariably in large acquisitions and mergers, the public announcement of the transaction takes place at the same time as the internal announcement to the buying and bought organisations. If the buyer is a public company and insiders learn of it before the public knows, there is the danger of leaks to the press, which will affect the share prices of both companies and can cause legal and regulatory problems. If the public is told first, employees will be offended at the prospect of reading about it in the papers. »

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8. Communicate with the employees excessively.

Keeping everyone up to date with managerial thinking on integration is critically important. The clichĂŠ that people want to know where they stand is never more true than in an acquisition. The communications job should be vested in a high-talent manager. The CEO should play an active role and the organisation should be left with the impression that they are being told everything as quickly as possible, and that they can rely on the information they get to be candid, professionally devised and fair.

9. Be especially careful about integrating business systems.

Most acquisitions are predicated on bringing two organisations together. This invariably means facing up to the problems of how to deal with two different systems. Developing a greater understanding of how integration of business systems can be achieved should start with due diligence. Ultimately a decision must be taken on adopting a common system to prevent duplication and to facilitate integration of the two organisations.

Royal Bank of Scotland

Royal Bank of Scotland

In 2000, the Royal Bank of Scotland (RBS) successfully launched a takeover bid for NatWest, then the largest UK commercial and retail bank. NatWest was several times larger than RBS, a factor which many commentators considered would prove a major problem in implementing a successful integration into a single bank.

The prime difficulty for RBS was to retain and motivate key NatWest staff at a time when major reorganisations were beginning to result in major lay-offs of the most senior NatWest management. Compounding the problem was the fact that RBS had very little time before the acquisition to undertake detailed planning of the new, enlarged organisation and to reach fundamental decisions on the branding of different parts of the business.

Early in the acquisition implementation, RBS initiated a website, on which decisions affecting individual departments within the organisation were posted daily. Sometimes the website contained admissions that decisions had been delayed and that plans were not always proceeding as anticipated.

These admissions of fault lent credibility to the information posted on the website. As a result, staff had confidence that they were being told the truth and that if they wanted information, it would be provided as soon as it was available. Consequently, RBS did not see a mass defection of key staff since morale was maintained. Much of the credit for this success can be attributed to the effectiveness and openness of the communication.

When the Royal Bank of Scotland (RBS) acquired NatWest it discovered that almost all the systems in the two banks were different. In some cases the systems of RBS were superior; in some cases NatWest had manifestly superior systems. At first sight this would seem to present the ideal scenario of rationalising the systems of both banks, taking the superior systems from each. However, in this case, such action was not taken. The acquirer, RBS, faced the challenge of maintaining control of a complex acquisition of a much larger entity. For this reason, RBS chose to impose its own systems on the enlarged merged entity, abandoning, in some cases, systems and processes in operation at NatWest that were clearly superior. While this seemed a high price to pay, the principle of maintaining control and making the job of integration easier for its own managers was regarded as of the highest importance.

Remember, if you don’t communicate excessively, the rumour mill will do it for you.

10. Fundamentally, acquisition implementation is all about people.

The success of any acquisition is dependent upon the ways in which the people from the respective organisations can work together and can align their actions to the objectives and requirements of the acquisition. Board appointments, management changes, redundancies, changes to terms and conditions, etc, must be carefully assessed for their impact on acquirer and target. In any acquisition, when two organisations are brought together, the default position for the people is that they will want to continue doing much as they were doing before the acquisition. In order to foster the changes necessary to generate the acquisition synergies, specific mechanisms must be put in place to force new actions, otherwise the benefits of the merger will not be realised. n

46 Excellence in leadership | Issue 3, 2011

Busy days, sleepless nights From an economy in turmoil to a demand for growth, new research from Robert Half UK has surveyed exactly what’s weighing on the minds of today’s executives.

Managing director Phil Sheridan details the findings

anaging their company’s balance sheet continues to be a top priority for UK financial leaders, with more than half indicating that it is their most pressing concern – up from 44 per cent a year ago.

Cash flow and access to investment finance are also priorities, particularly in Scotland and northern England, where companies are looking for additional resources to help them leverage growth opportunities. This theme also emerged during our recent executive round-table series, held across the UK. Access to funding was a main discussion point with financial leaders who expressed that companies with in-depth financial analysis, strong relationships with lenders and a good story to tell were able to secure the financial backing they required. As SME businesses typically drive an economic recovery, their ability to grow and employ additional staff will play a major role in the overall growth in the UK over coming months.

The finance team plays a pivotal role in this growth agenda, as it has had to manage expenditures and efficiencies

47 Excellence in leadership | Issue 3, 2011

during the downturn and now also needs to incorporate growth into this mantra. As a result workloads are increasing, with finance professionals often being pulled between backroom functions and customer-facing roles. With many finance teams still stretched thin, financial leaders are finding it difficult for their teams to

Commerciality remains a constant theme throughout the finance department cope with the additional responsibilities.

When asked what was having a negative impact on their business, more than a third of CFOs indicated lack of time to complete work and projects, while almost one-fifth claimed that they are hampered by a lack of permanent employees.

CFOs say that revenue growth, business process improvement and product/service expansion will be their greatest priorities over the next 12 months. However, they are warning that to achieve this they will

need sufficient resources in place to address the growing business demands.

Commerciality remains a constant theme throughout the finance department, with professionals charged with partnering with business development teams and other departments in the quest for growth. Skills and capabilities were heightened during the recession and many finance professionals have played a major role in business transformation and steering their organisations in the decision-making process.

That said, nearly one in five CFOs indicated that inadequate commercial skills will have a negative impact on their business. Having been forced to make some tough decisions during the downturn, financial leaders continue to have to assess what makes sense for their organisation and ensure that their team is capable of delivering. Sourcing and retaining talent is a priority as having the right people on board can make all the difference.

Many companies unable to hire permanent staff are engaging interim finance professionals to help keep key initiatives on track, without companies having to incur the fixed costs of additional permanent head count. More than 60 per

cent of CFOs plan to use interim or temporary staff in the next 12 months, with more than half reporting operations management – including business process improvement, inventory planning and reporting and logistics – as their top use.

Credit management, commercial finance and financial systems upgrades are also key areas where financial leaders anticipate engaging interim support.

It is clear that CFOs are under increasing pressure to deliver growth for their businesses, but that they are often trying to do so with inadequate resources. We believe that CFOs need to look closely at the skills they will require from their finance colleagues over the coming months to ensure that they have the right skills to support the growth of the business. Interim or temporary specialist staff are likely to play an increasingly important role in meeting the current skills gap. l Robert Half is the world’s largest recruitment consultancy, specialising in accounting and finance placements on a temporary, interim and permanent basis.

For more information on the findings of the CFO survey and the Executive Round Table Series visit www.roberthalf. co.uk/news. n

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To lease or to buy?

53 Excellence in leadership | Issue 3, 2011

Many companies are concerned that new lease accounting rules will make their accounts more volatile and increase their liabilities. Li Li Lian from the IASB explains the need for the changes, while Kevin Davies of mining firm AngloGold Ashanti explains what it means in practice

L

easing is an important source of finance to businesses, particularly when funding is scarce or expensive.

Although they do so for valid business reasons, companies that lease assets tend to have smaller balance sheets and lower financial ratios, particularly leverage ratios, compared with those that buy them. This is because the asset and the related liability for financing the asset do not appear on their balance sheets.

The effect is that the financial statements of a company that buys its assets have limited comparability with those of a company that leases its assets. Consequently, investors and other users of financial statements often make adjustments to the reported amounts to put companies on a like-for-like basis.

Existing lease accounting has therefore been criticised because it fails to portray a complete picture of a company’s lease obligations. In light of that, the International Accounting Standards Board (IASB) and the US standard-setter, the Financial Accounting Standards Board (FASB), are working together on preparing a common, improved standard on lease accounting.

Photography: Gallery Stock

Flaws in the current model The existing lease accounting model, IAS17 Leases, requires lessees and lessors to classify their lease contracts as either finance or operating leases.

Finance leases are treated like a purchase (for the lessee) on its balance sheet or sale (for the lessor) of the leased item. Consequently, the finance lessee recognises the leased item and a liability to make lease payments on its balance sheet. The lessee depreciates the leased item and apportions the lease payments between a finance charge and a reduction of the outstanding liability.

A finance lessor would recognise a net investment in the lease that comprises a receivable from the lessee and

remaining rights to the underlying leased item. Finance income is recognised on a constant rate of return basis.

Operating leases are accounted for like services. An operating lessee would not typically recognise any assets or liabilities. Rather, the operating lessee recognises lease payments as an expense, typically on a straight-line basis over the lease term. The lessor would recognise the underlying item as its own asset and lease income on a straight-line basis over the lease term. US GAAP requirements for lease accounting are similar to IAS17.

Criticisms First, investors and other users of financial statements routinely make adjustments for operating leases in the financial statement of lessees when performing analysis.

However, the information available in the notes of a lessee’s statements is often insufficient to make reliable adjustments.

A second criticism is that having two different accounting treatments for similar transactions reduces comparability. The existing standards also provide opportunities to structure transactions to achieve a particular accounting outcome. If a lease is classified as an operating lease, for example, the lessee obtains a source of unrecognised financing.

Finally, the existing model is complex and it can often be difficult to assess and define the dividing line between an operating and a finance lease.

Some history about the project Most of the criticisms of existing lease accounting models relate to how lessees account for leases. Consequently, the IASB, and the FASB only proposed changes to the lessee accounting model when they first published some preliminary views on lease accounting in a discussion paper in March 2009. However, many respondents to that discussion paper (including many from the leasing industry) were concerned that the boards were not Âť

54 Excellence in leadership | Issue 3, 2011

addressing the lessee and lessor models together. Some viewed the lessee accounting model proposed in the discussion paper as inconsistent with the existing lessor accounting. The boards agreed and proposed changes to both sets of rules in an exposure draft in August 2010.

What next?

In July 2011, in light of the extent of change proposed from the exposure draft published in August 2010, the boards

decided that they would re-expose their updated proposals. The second exposure draft is expected to be published in early 2012.

The boards have committed to consider the effective dates of its new standards together. This is because they will need to consider the implications for all stakeholders to understand and implement the standards on a holistic basis. This should also help to reduce the overall burden arising from the proposed changes. n

New proposals For all leases, the boards are proposing a right-of-use approach.

Li Li Lian Lian is a technical manager working on the IASB’s leases project. At the IASB, Lian has also worked on the conceptual framework and service concession arrangement projects. A chartered accountant from Australia, she started her career in KPMG Malaysia before joining the International Public Sector Accounting Standards Board of the International Federation of Accountants (IFAC), where she worked as a technical manager on convergence of international public sector standards with IFRSs.

Lessee accounting

Lessor accounting

To illustrate the proposed model, consider a simple lease contract in which a lessee obtains the right to use the leased item that meets the definition of an asset and assumes an obligation to make payments that meet the definition of a liability.

Now consider the lessor’s position, once it obtains a receivable from the lessee, and retains any residual rights of the leased item at the end of the leased term (the residual asset).

Balance sheet

Profit and loss

Balance sheet

Profit and loss

Right-of-use asset (Cost = liability to make lease payments) which is subsequently depreciated

Interest expense on liability

Receivable (present value of the lease payments discounted using the rate charged in the contract)

Interest expense on liability

Liability to pay lease payments (present value of lease payments discounted using the rate charged in the contract or the lessee’s incremental borrowing rare)

Depreciation expense on right-of-use asset

Residual asset (allocated amount of the carrying amount)

Interest income on receivable and residual asset

The lessee presents the right-of-use asset on its balance sheet within the same class as assets owned so that investors and other users of financial statements are able to see all assets available for use by the lessee. For example, lessees would present right-of-use assets of equipment within property and plant equipment under the same class as similarly owned equipment.

The lessor model above assumes that the lessor can reliably determine the payments that relate to the lease component of the contract, and is reasonably assured of its estimate of the residual value of the lease item at the end of the lease.

A lessor that measures its leases of investment property at fair value will continue to recognise and measure its investment property at fair value on its balance sheet and recognises lease income on that property over the lease term.

55 Excellence in leadership | Issue 3, 2011

Leasing proposals from finance’s viewpoint It now appears that the joint lessee accounting model under IFRS and US GAAP is substantially complete, although both accounting standard setters have advised that they intend to re-expose the proposed leasing standard.

Reviewing the various papers that both standard setters have discussed indicates that the following key differences arise from current accounting for leases by lessees: l Leases would no longer be classified as operating or capital.

Instead, all leases would be recorded on balance sheets using a financing model. l Lessees would no longer account for lease expense on a straight-line basis, except for leases of one year or less. l The assessment of certain key considerations would be required throughout the life of the lease.

One area that will give preparers issues in connection with applying various judgments is the revised definition of a lease. The standard setters decided that the concept of control would be applied in determining whether a contract is a lease or a service.

A service contract will get similar accounting to current operating lease accounting. The standard setters concluded that a contract would constitute a lease if it conveys the right to control the use of specified asset, and if the customer has the ability to direct the use and receive the benefits from use of that asset.

Certain guidance that the standard setters discussed in April 2011 indicates that if the

customer can specify the output or benefit from the use of the asset, but is unable to make decisions about the input or process that results in that output, then that would mean the customer does not have the ability to direct the use, and accordingly that contract would constitute a service contract.

This means preparers will have to understand all of the clauses in the various contracts that may be a lease to consider whether they are leases or service contracts. It could result in a significant number of “take or pay� and supply contracts being deemed service contracts rather than lease contracts.

Preparers will also have to consider other changes.

Contracts may contain clauses such as debt covenants with EBITDA ratio requirements.

The new accounting for leases will result in an increase in depreciation and reduction in lease expense, which will have the impact of increasing EBITDA as a result of the change in accounting. Other contracts may have clauses that give a negative effect to the ratio requirements.

Preparers therefore need to consider not just the accounting implications of the change in lease accounting, but changes that may be required in other contracts that have a bearing on financial statements presentations.

Where preparers identify a contract that actually contains lease and non-lease components the preparer will now have to separate the lease and service element and apply lease accounting to the lease element

and non-lease accounting to the service element.

An example of this would be where a chauffeured motor vehicle is acquired in terms of the lease; the driver would constitute the service element, the motor vehicle would constitute the lease element and the monthly costs would have to be separated in order to determine the correct accounting. The suggestions from the standard setters is that lessees would allocate payments to the lease and non-lease components on the basis of observing the purchase price of the individual components, and where these are not observable the lessee would account for the entire payment as a lease.

Preparers should therefore commence identifying observable prices in order to reduce the balance sheet classification of transaction, containing multiple elements.

The standard setters also concluded on cash flow presentations related to various lease components as follows: l Cash payments related to principal will be classified as a financing activity. l Cash payments related to interest should be classified in accordance with applicable IFRS or US GAAP requirements. l Cash payments for variable lease payments that are not included in the measurement of the lease liability should be included in operating activities. l Cash payments for short-term leases that are excluded from the lease liability should be included in operating activities.

Kevin Davies Kevin Davies is the head of the accounting technical department of AngloGold Ashanti, the third largest gold producer as at December 2009, with listings in Johannesburg and New York.

56

Unlocking the missing 20% Marc Day, professor of strategy and operations management at Henley Business School, and Jon Hughes and Duncan Brock of Future Purchasing on how some of the world’s leading brands found big wins in supply chain efficiency

57 Excellence in leadership | Issue 3, 2011

Photography: Getty Images

rocurement cost savings are a core deliverable that all senior finance professionals understand.

But high-quality, well-structured and sustainable cost management should also be a key capability of a procurement team which needs the well attuned support of the CFO. It should be one of three key objectives, along with value maximisation and risk mitigation in light of the current economic turbulence.

Systematic cost management requires a properly integrated strategy closely aligned to organisational goals, metrics and business requirements. Procurement maturity can be measured along a continuum spanning three broad scenarios, comprising a wide range of different tools, techniques, value levers and change models. Each provides opportunities for considerable cost down – we term this the “missing 20 per cent”.

Laggards and early improvers: launching and rapidly accelerating cost control In laggard organisations, procurement is fragmented, unfocused, under-resourced, under-led and with few disciplined ways of working. In the early days of procurement transformation there will be huge gaps in spend data, low compliance to contracts and framework agreements, with few of the value levers.

Several enablers are central to these quick win/early gain initiatives: • framing challenging but achievable targets; • setting clear expectations for timely delivery of cost savings across rolling 30:100 day cycles; • establishing steering groups with clear roles and responsibilities; • the introduction of performance measurement and project tracking; • the auditing of savings by the finance function; • and the initial launch of a category management-type process, together with competence development and performance coaching for the core team.

We detail three exemplars of transformation here: »

LG Electronics: Although one of the world’s biggest producers of handsets and flat-screen TVs, this sophistication was not reflected in the company’s procurement until recently. Having set a goal of reaching “the world’s top level” by 2011, LG achieved it with more than $5.5bn of savings, 17 per cent-plus of cost cuts, closely integrated supplier development with their top 50 suppliers, global commodity councils, quarterly structured reviews, weekly commodity updates and strictly defined roles, and responsibilities and accountabilities across the 2,000-strong team.

Lanxess: This speciality chemicals company has a raw material spend of 70 per cent of its €5bn sales turnover, but was a laggard in procurement with little focus or transparency on spend.

Governance has been transformed recently through a global category management structure and a procurement group that meets six times a year, has board reviews every six months, bi-monthly with business units and monthly with their executive sponsor.

This is supported by a strategy database and a procurement “radar screen” covering almost 1,000 contracts and supplier renegotiations.

Henkel: This German consumer goods and adhesives group launched a number of business initiatives, including procurement transformation, to close performance gaps with competitors such as P&G, BASF and Reckitt Benckiser. It introduced globally standardised processes, a “passport to purchasing excellence” and a purchasing campus emphasising advanced tools and breakthrough thinking.

58 Excellence in leadership | Issue 3, 2011

Credible achievers – extending, sustaining and renewing cost management A recent Aberdeen Group report into strategic sourcing highlights a considerable performance difference (often three to four times) between laggards and best-in-class organisations. It lends itself to benchmarking in terms of percentage spend under management; penetration of standardised category management processes; number of documented and fully implemented category plans; contract compliance; visibility of enterprise-wide spend and quantum of the savings pipeline.

Strengthening team competence to build next generation skills provides a high return on investment, which requires combining analytical training in the tools and techniques of cost management (such as cost modelling, value at risk analysis, cost forecasting, cost innovation, life-cycle costing and principled pricing) with strengthening the team’s behavioural repertoire to apply broader value propositions and more sustainable supplier-based cost-down initiatives. Two exemplars of improvement are: British Airways: Throughout the financial crisis procurement, as a highly credible function in the airline, played a pivotal role in cost management. As well as leading a 20 per cent-plus reduction in capital expenditure, for example, by renegotiating aircraft delivery times – BA secured £120m-plus of direct costs out with its top 250 suppliers.

BA also imposed very strict internal demand management, driven by weekly meetings of an Expenditure Control Group with the power to assess and stop discretionary spend. This took out more than £20m per month.

Lloyds Banking Group: In the banking sector a widely acknowledged performance metric is the cost: income ratio, which procurement impacts dramatically if there is a well-structured cost-improvement programme. Lloyds’ executive committee raised the business-wide annualised cost savings goal to £2bn from 2011, with procurement identified as the largest contributor after staff cuts. Savings have been monitored through a bespoke database, Procurement Benefits Online, with all savings closely tracked before reinvestment in group-wide projects.

Pathfinding innovators: pioneering new cost paradigms and business structures A small number of organisations are pursuing a deeper transformation in procurement to secure greater leverage of scale, scope, volumes, processes, capabilities and competencies.

Thames Water: The UK’s largest water company had been a slow, bureaucratic under-achiever in procurement, but underwent a major restructuring, with a number of wellplanned phases of change over several years.

Category management is streamlined and embedded as the core process, driving costs down and value up across 70-plus spend categories. Radical financial goals are built into the multi-billion pound capital investment spend. There has been a step-change in the cost base, with £1bn-plus reduced on like-for-like costs, approximating to a 20 per cent cost reduction while improving specifications, quality and service.

SAB Miller: The world’s second largest brewer has set up a global centre of excellence, Trinity Procurement, in the very taxefficient jurisdiction of Steinhausen in the canton of Zug in Switzerland to manage a spend in excess of $10bn by 2016 across brewing materials, packaging, capital equipment and non-production. It has been designed to operate economically, fiscally and entrepreneurially with markups on cost of goods sold and fees for service delivery to operating units. It interacts with regional hubs in South Africa, Colombia and Hong Kong. Local businesses are focusing on value engineering, value analysis and taking waste and cost out of operations with suppliers.

While great strides have been made in procurement, we believe that any organisation, no matter what the sector, can still identify and capture in excess of 20 per cent cost reductions. This may be a bold assertion but it is to be hoped a convincing one, in view of the many case examples demonstrating that reframing procurement in this way opens up a rich vein of additional cost-reduction opportunity. n

Marc Day Professor of strategy and operations management at Henley Business School, University of Reading, with 15 years’ experience of researching, consulting and teaching.

Jon Hughes Executive chairman and director of Future Purchasing, with 35 years’ experience in procurement change management. He is a winner of the UK’s Swinbank Award, handed out by CIPS.

Duncan Brock Director of Future Purchasing with extensive experience in procurement leadership and senior consulting roles. He has previously worked for Black & Decker, NTL, RSA and QP Group.

63 Excellence in leadership | Issue 3, 2011

EVENTS

CPD technical update:

Research event:

CIMA Mastercourse:

Risk management and disaster recovery

A strategic approach to sustainability

Better management accounting and reporting best practice

2 November 2011 Southampton

7 November 2011 ETC Venues, Pimlico, London

23 November 2011 London

Do you have the appropriate controls in place to prevent the occurrence of a “worst case” scenario? Would your organisation survive or would it be crippled, suspending your critical processes and disrupting service to your customers? A well-managed risk management strategy is the key to reducing risk and protecting stakeholder value.

What tools, techniques and models are being developed and used to take strategic approach to sustainability?

Attend a free informative event to find out more on the recent research, which gives guidance to organisations on how to consider sustainability in a strategic context.

This course will provide an up-to-date perspective on the imperative for increased external transparency brought about by recent, and impending, changes to statutory reporting and director responsibility.

Cost: £599 +VAT (£539 +VAT for CIMA members).

For more information, E. cima.techupdate@ cimaglobal.com

Book your place at www.cimaglobal. com/Events-and-cpd-courses/ Local-events-search/Research-events

Visit www.cimaglobal.com/ mastercourses/MAAR E. Mastercourses@cimaglobal.com

Further events North-west England and north Wales Dinner Dance 29 October, 7pm to 12am Chester Racecourse Cost: Members, students and guests: £40; new members and new fellows: £20 Join fellow members and students for a fantastic opportunity to let your hair down and socialise with some of the region’s most influential people in the accounting world.

Contact alexi.harrison @cimaglobal.com

Achieving effective business recovery in the current economic climate 3 November, 6.30pm Hilton Hotel, Bristol Cost: no charge What can be done when a company is in financial difficulty? Learn the solutions and strategies used to create an effective recovery and growth.

Contact Suzanne Allen, on 0117 9 609 734 or email region.two@cimaglobal.com

CIMA healthcare conference 9 November, 9am to 4pm CIMA, 26 Chapter Street, London, SW1P 4NP Cost: £250 plus VAT (£195 plus VAT for bookings made before 19 October) One-day conference for finance professionals working in the healthcare sector on the impact of consortia on health finance.

Contact 0845 026 4722, email conferences@cimaglobal.com, or visit www.cimaglobal.com/ executive

65 Excellence in leadership | Issue 3, 2011

IN THE NEXT ISSUE..

Strategic performance management Business intelligence A well-designed business intelligence programme can be an important driver of performance management. How do companies ensure they are using the most appropriate metrics and have the right approach to data collection?

Strategic approaches A look at the CFO’s role in driving organisational performance globally and the different strategic priorities that steer a company’s approach to performance management.

The balanced scorecard in action Organisations that choose to use the balanced scorecard to drive performance must make sure that it fits their particular strategy and set of circumstances.

M&A discipline Long, drawn-out takeovers can be a major distraction for bidders and target companies. We assess how CFOs on both sides can make the best use of performance management tools to ensure that staff keep their eye on the ball.

The performance cycle We look at how CFOs in cyclical industries approach performance management during the peaks and troughs of the economic cycle. What are the challenges in terms of the motivation of staff, the flexible use of human resources, cost control and achieving sustainable growth?

IFRS as a driver of performance The ongoing evolution of international financial reporting standards creates challenges and opportunities in terms of enterprise performance management.

How can CFOs go beyond compliance and achieve broader business benefits by improving working practices?

What is a good performance measure?

Analysis of the strategic performance measures used by different organisations.

What range of measures are available?

Employee share ownership How one company has created a strong culture of equity ownership among employees to support long-term growth.

A private equity approach What can CFOs in public companies learn from the tools and strategic approach to performance management used by private equity owners to create a performance culture?

66 Excellence in leadership | Issue 3, 2011

Global contacts CIMA UK 26 Chapter Street, London SW1P 4NP Tel: +44 (0) 20 8849 2251 Email: cima.contact @cimaglobal.com www.cimaglobal.com

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