Finance Professionals Meeting Today’s Business Challenges
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The document discusses the challenges facing businesses globally and the role of professional accountants in business (PAIBs) in addressing these challenges. It notes increasing economic, social, and environmental pressures on businesses from factors like globalization and technology changes. PAIBs need to help organizations respond effectively by gaining credibility, driving better decisions, and facilitating an understanding of long-term value creation beyond financial measures. The document advocates for PAIBs to develop a broader set of skills beyond financial expertise to support strategic decision making and navigate complex issues around sustainability, risk management, and integrated reporting.
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Finance Professionals Meeting Today’s Business Challenges
- 1. Finance Professionals Meeting Today’s Business Challenges Charles Tilley Chair, IFAC PAIB Committee Executive Chairman, CGMA Research Foundation ICAP CFO Conference 28 September 2016
- 2. Page 2 | Proprietary and Copyrighted Information • Global, regional, and local economic pressures, including: – Sustainable development agenda – Post-Brexit IMF global growth downgrade; bond yields at record lows – China deceleration, commodity prices, weighing on developing countries • Continued concern of threat of significant failures of individual companies • Response: more regulation of governance, reporting, assurance Recent Global Outlook
- 3. Page 3 | Proprietary and Copyrighted Information The Issues Facing Business – The Perfect Storm Globalisation Talent Technology / Digitisation Urbanisation Societal expectations / Regulations Environmental resource constraints
- 4. Page 4 | Proprietary and Copyrighted Information Value is more than financial Source: OCEAN TOMO LLC January,1,2015 The Most Important Determinants of Value
- 5. Page 5 | Proprietary and Copyrighted Information A Better Business Agenda Our goal: work towards better public sector and business – trusted for a better society PAIBs need to gain credibility and visibility in their organisations PAIBs must be part of the solution and help organisations respond to the challenges they face
- 6. Page 6 | Proprietary and Copyrighted Information CFOs and PAIBs Supporting the Business CFO Summit • Supporting effective governance, compliance and control, and business ethics • Effective, trusted, proactive in leadership, navigating the business, and strategic and operational decision making
- 7. Page 7 | Proprietary and Copyrighted Information • Shifting emphasis from maximizing profits for shareholders to maintaining value creation in a sustainable manner • Professional accountants as chief value officers can facilitate an understanding of value creation in an organization Chief Financial Officer to Chief Value Officer
- 8. Page 8 | Proprietary and Copyrighted Information An Evolution for the Finance Function – Financial Reporting to Integrated Reporting My main task is only to make sure the numbers are right. My main task is to make sure numbers make sense. My main task is to manage information flows. My main task is to explain how we create value with our capitals. My main task is to make sure we think integrated.
- 9. Page 9 | Proprietary and Copyrighted Information Research findings demonstrate many organisations are struggling to: Overcome bureaucracy and achieve agile decision making. Build greater levels of trust and improve collaboration. Take a long-term view and define the right metrics. Turn huge volumes of data into strategic insight. Build the decision- making skills of senior leaders. Joining the Dots: Decision Making for a New Era (CIMA 2016)
- 10. Page 10 | Proprietary and Copyrighted Information Rethinking the Business Model VALUEDefine Deliver Create Capture Markets Technology Society Risk and opportunity Identify stakeholders Prioritise stakeholders Identify needs of stakeholders Formulate value proposition Partners Resources Processes Activities Outputs Segments Channels Revenues Sharing SurplusCosts
- 11. Page 11 | Proprietary and Copyrighted Information PAIBs Are Critical in Meeting the Challenges • Need effective PAIBs to drive organizational success – Influence―drive better decisions about strategy and execution – Value―cause-and-effect between inputs and outcomes – Relevance―information to drive decisions – Trust―protection of financial and non-financial assets ….while operating in a rapidly changing, uncertain, and complex environment. • These are reflected in the 4 Global Management Accounting Principles and IFAC PAIB’s Competent and Versatile publication
- 12. Page 12 | Proprietary and Copyrighted Information A Profession Relevant to Professional Accountants in Business
- 13. Page 13 | Proprietary and Copyrighted Information • PAIBs facilitating better business and public sector – trusted for a better society • PAIBs have to be seen as part of the solution and help organisations respond to the challenges they face • PAIBs need to gain credibility and visibility in their organizations The Importance of the Professional Accountants in Business Agenda
- 14. Page 14 | Proprietary and Copyrighted Information IFAC Working Together with its Members and Regional Organizations Working together to ensure a profession relevant to PAIBs by: − Identifying trends and priorities for the profession − Sharing knowledge on emerging themes and issues − Equipping PAOs to better support their PAIBs − Advocacy: Identifying significant opportunities to place PAIBs and PAIB issues in the spotlight
- 15. Page 15 | Proprietary and Copyrighted Information Delivering Value to Your Organization • PAIBs need to build on their deep financial acumen by developing skills and competencies needed • Helping us to – Apply our professional qualities in complex and uncertain environments – Be strategically aware and with business understanding to enable our effective contribution to the achievement of business objectives – Engage in emerging areas such as Integrated Reporting, managing uncertainty and risk, and performance management & analytics • Engage with the ICAP PAIB Committee for support
- 16. www.ifac.org
Editor's Notes
- The Sustainable Development Goals – turning these into national policy initiatives will impact business. The Goals represent an agenda for people, planet, and prosperity that will guide the actions and financing decisions of governments and business. They are putting into the spotlight the need for responsible business through accountable governance and accountable relationships as a fundamental premise of capital and financial markets. This sustainable development agenda is in the context of low growth. Brexit has global economic implications – every medium term forecast is expecting a slow down in 2017 and despite indicators showing continued growth of the UK economy now, partly because of the drop in the £, next year and 2018 has to present challenges. The sustainable development agenda must be viewed as a business opportunity to innovate and improve value creation over time. Interest rate policy divergence between USA and the rest of the western world – expected rising in Fed interest rates vs. continued cuts to zero and negative interest rates in the other western economies – EU, UK, etc over the next 6 months will present challenges but also what innovations in financial products for business might this drive. Quant Easing – what is going to be the long term effect of all this QE – where is the new normality and when will it emerge. Such large scale QE has never been done before, never seen such large scale interventions – the latest QE by the BoE has significantly increased UK national debt. The next Uber disruptor – heavy expectations are that the most significant of these, again a next generation, will emerge from the UK high tech centre in the lower part of North London – where else are these hot spots and how can conventional business models adapt and prepare better for the wave of the unexpected. This is a big wave than we have seen at any point in time since the Spinning Jenny and Jethro Tull
- The Middle East and Gulf countries of course have specific challenges at this time with a challenging environment for economic growth and government spending. More broadly, the role of professional accountants in business and finance leaders in particular is more expansive, involved and complex because the business world is increasingly complex. We experiencing constant regulatory change, and the speed of technological change is mind-boggling. The trends and issues facing are things that we have to help our organizations respond to. Twenty years ago, personal computers were becoming small and affordable enough for families to buy for home use. Ten years ago there were no iPads… iPhones… or social media. IBM’s Watson computer—just an idea less than 10 years ago—can now diagnose cancer faster than any human. Anyone with a smartphone has more computing power than NASA did in 1985. Technology will be increasingly woven into the fabric of our profession. Professionals and firms must become experts in order to ensure relevance. We’ll need to advise clients and employers on technology tools, and leverage them to our advantage. Impact of digital world is bringing about major structural change through greater mobile technology, connectivity and volumes/speed of data. The world’s stock of data is doubling every 20 months while the number of internet-connected devices has reached 12bn and mobile phone payments are expected to exceed $1trn by 2017. McKinsey identified 12 disruptive technologies which could have potential impact of $14-33trn per year in 2025. These developments facilitate a data-driven and technological era of business – leading to new business models and creating greater potential for customisation. For accountants, digitisation and disruptive technology are key challenges for their role in organizations. Other key trends include ‘trust in business’, need for better regulation, and attracting talent. In terms of the Middle East, some of these trends and issues present specific challenges for business leaders and government: Geopolitical risk and the impact on business and trade Increasing regulatory and compliance requirements, and taxation, e.g., VAT Creating jobs for the young For governments: Enhancing public financial management, including improved accounting and reporting arrangements, is essential to supporting more effective and efficient public services, increasing economic growth and minimising the incidence of fraud and corruption. Accountants will have a significant role to play in helping the region to address weak accountability mechanisms and need for transparency.
- This graph shows the break up of the market capitalization of S&P’s top 500 US companies. It shows that 40 years ago over 80% of market cap was explained by net assets in the f/s. Now that position has completely reversed less than 20% can be explained through the balance sheet. What explains the rest? Other factors, such as relationships, intellectual and human capital, make up an increasing proportion of a company’s value. INSTEAD OF FOCUSING ON FINACIAL CAPITAL, <IR> INTRODUCED A MULTILE CAPITALS MODEL. SOME CALL THE DIFFERENCE INTELLECTUAL CAPITAL – <IR> BREAKS THAT DOWN SLIGHTLY DIFFERENTLY, BUT THE RESULT IS SIMILAR. <IR> enables the clear and concise communication of value creation, allowing investors to evaluate how all relevant capitals that a business uses and affects are incorporated. The IIRC is not trying to monetize everything (which is a common misperception), but rather is trying to ensure investors have the information they need to assess the ability of an organization to create value over time.
- There are many great examples of organizations with effective finance functions and PAIBs helping to lead their organizations to success. Companies like Unilever, Proctor and Gamble, Siemens and Shell to name a few build strong business-focused finance functions with PAIBs at the heart. Some of these organizations are here in the room today and can share their stories with us all. Finance function and individual PAIB effectiveness requires an understanding of the business, its external environment, its objectives and business model. This is a first step. For CFOs, their individual effectiveness requires much more than it did in the past. Leon van Schalkwyk FCMA, CGMA, Group Executive: Strategic Finance, Impala Platinum the South African mining company also highlights the importance of gaining credibility for the company’s PAIBs and management accountants. “There is no point in having management accountants who understand the business unless their understanding is appreciated and taken notice of by management. Having the right people with the right knowledge in place is essential. Having the right people presenting and getting involved in the different activities and on behalf of the entire company has also been key to our success over the years.”
- Old role Number cruncher Prior to the 1990s, the main emphasis was typically as the guardian of the financial health of an organization, overseeing and implementing adequate financial control infrastructure. This met the needs, in particular, of large divisional industrial corporations that strived for financial control and transparency across many divisions and business units. CFOs and PAIBs have never been more stretched and scrutinized. Their stewardship role - supporting effective governance, compliance and control, and business ethics- is a hygiene factor Now they are effective and trusted business partners, proactive in their organization’s leadership, setting direction and decision making. The tension between these responsibilities must be managed with integrity and without compromising one another
- Mervyn King is publishing a new book “Chief Value Officer”, which puts forward the role of CFO as changing from maximizing profits for shareholders to maintaining value creation in a sustainable manner. Mervyn is putting forward the CFO as now more of a value officer than a financial officer. Consequently, the CFO should be known as the Chief Value Officer. The basis of this perspective is: The information and analysis they provide to support decisions needs to include a better, more expansive understanding of the disparate sources and drivers of longer term value to enable better strategy and implementation through changes to the business model. Financial statements on their own are critical but not sufficient in discharging the board’s duty to be accountable. Integrated thinking and reporting provides a way and an additional incentive for CFOs, and their finance teams, to focus on the information and the decisions that matter to the company and its potential success. Professional accountants as chief value officers can facilitate an understanding of value creation in a company.
- How GENERALI the global insurance company describes its transition to Integrated thinking and reporting
- While many are struggling to make headway in their decision-making capability, there is a group of organisations at the other end of the spectrum. These companies are using high-calibre decision-making to drive performance and bottom-line results, as well as making their organisation an attractive and stimulating environment for talented people. We call these organisations ‘Integrated Thinkers’ and they are characterised by strong implementation of the Global Management Accounting Principles that provide a foundation for effective decision-making and the creation of value in large organisations. These principles are: Influence, Relevance, Trust and Analysis. In our survey, we found a distinct group of organisations – 25% of our total respondents – that have an advanced capability in these four areas. They are breaking down silos and bureaucratic hurdles, making sense of large volumes of data, ensuring management intelligence is aligned with the business model, and building trust and transparency between a firm’s leadership team and its people. Organisations in the survey that demonstrated Integrated Thinking: • cited better performance, relative to others in their industry • are more effective at executing decisions once the decision has been reached • see fewer of their strategic initiatives fail because of delays in decision-making • are also less susceptible to delivering flawed information to decision-makers.
- These changes are opportunities for accountants…. and we need to be prepared to be agile and to embrace them. Clients and employers want us to help them make sense of information overload, leverage new technologies, and provide advice, insights, and commentary—and we’re going to need to commit to continuous learning and idea sharing. This needs to be done within the context of the external environment and against a backdrop of strong ethical values (the blue boxes). The goal is better business trusted by society over the short, medium and long term. This is achieved by the organization’s strategy which is implemented through the business model. An effective management accounting system links the strategy to the business model through the performance management system and applied to (1) meeting customer needs, (2) achieving cost leadership, (3) managing cash and (4) managing risk and exploiting opportunity. The finance function must therefore contribute to responsible, entrepreneurial business behavior driven within businesses and public sector organizations through: Identifying where sustainable growth will come from through effective cost leadership, resource allocation and risk management. Innovating business models and products and services Developing and implementing strategies that meet customer demand, leverage technology and reduce environmental impact
- Influence is based on communication that provides insight: strategy development and execution is a conversation between colleagues at all levels in an organisation communication is tailored to the decision maker and to the decision being made ensure that communication facilitates better decisions Impact on value is analysed: provide insight into options and ensure cause and effect of decisions are known. The impact on value of pursuing an opportunity or mitigating a risk are known and where possible, quantified actions can then be prioritised by their impact on outcomes and value to the organisation Information is relevant: information is the best available and integrated information is reliable and accessible – and made available to the right people and the right time information is contextual – it can be drawn from inside or outside the organisation, from the past, present or future in the form of forecasted data, and can be either financial or non-financial. Stewardship builds trust: accountability and credibility – decisions are improved when people are held accountable for them business sustainability – short term commercial interests and always balanced against the long run impact on the organisation’s value and reputation integrity and ethics as captured by professional bodies’ codes of conduct and ethics
- I will now talk specifically about PAIBs, or Professional Accountants in Business This term can be somewhat misleading as it does not only cover those professional accountants in business In IFAC the term Professional Accountants in Business refers to all those members of the profession who work in commerce, industry, financial services, education, and the public and not-for-profit sectors. PAIBs work as employees, consultants, and self-employed owner-managers or advisers, and support their organizations in a wide range of job functions at various levels. They perform a variety of roles at all levels in an organization.
- There are many great examples of organizations with effective finance functions and PAIBs helping to lead their organizations to success. But there is a lot more to do for PAIBs to be seen as contributed to the success of their organizations and supporting a public interest role Finance function and individual PAIB effectiveness requires an understanding of the business, its external environment, its objectives and business model. This is a first step. For finance leaders, their individual effectiveness requires much more than it did in the past as they are expected to be business partners as well as stewards.
- Working together with IFAC, regional organizations like the GCCAAO here in the Middle East, and its members to: Identifying trends and priorities and actions for IFAC and the profession; Knowledge sharing; Equipping PAOs to better support their PAIBs, and ensuring PAIBs integrated in PAO activities & stakeholder engagement; Advocacy – identifying opportunities to place PAIBs in the spotlight; Position professional accountants as essential partners in the global economy. This requires articulating the value of accountants, framing accountants as integral to sustainable growth, and advocating for the profession in the public interest Link between accountants and better business and public sector guide IFAC’s strategy and work plan in relation to PAIBs Drive agenda in partnership with IFAC members―widen their agenda where appropriate
- PAIBs need to build on their deep financial acumen underpinned by accounting and analysis skills by developing professional skills and competences needed in terms of Applying their professional qualities in complex and uncertain environments, This has implications for professional judgment, which is more important than ever, and ethical leadership Strategic awareness and business understanding to enable their effective contribution to the achievement of business objectives Feeling comfortable working in emerging areas such as in business reporting (e.g., <IR>), the integration of risk and control into governance and management systems, and performance management (e.g., big data) Engage with the ICAP PAIB Committee for support and utilize resources such as the Global Knowledge Gateway.