Excellence in Leadership July 2012

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Issue 2 | 2012 | £12

R I S Kthe

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In an increasingly volatile business environment, we ask leading global finance chiefs for the key to successful strategic risk management

Jeff van der Eems, of United Biscuits, on economic pressures Grace Horton, of Capita Health, on reaching the top

Richard Hutton, of Greggs, on reputational risk Jackie Hunt, of Standard Life, on market volatility

Mark Hawkins, of Autodesk, on managing M&A risk Leo Martin, of GoodCorporation, on ethical behaviour

3Excellence in leadership | Issue 2, 2012

A common feature of corporate failure and disasters in recent years has been shortcomings in the company board’s oversight of risk. It is now increasingly recognised that there needs to be a step change in the board’s focus on risk. But what does this look like in practice?

CIMA’s head of corporate governance, Gillian Lees, looks at some common pitfalls relating to risk registers and outlines details of the Good Governance Forum’s new report and toolkit which has been designed to ensure that boards are suitably equipped to forecast any turbulence ahead (p21.)

In the last year, Autodesk – the company that provides the animation software behind screen blockbusters such as Toy Story and The Da Vinci Code – has embarked on an extensive M&A spree. So far, CFO Mark Hawkins has

overseen the acquisition of 29 companies – and in an environment where the next deal might break the business – we ask Mark how he takes risk on board and what role finance plays in protecting the business while, at the same time, helping it to grow (p21).

New legislation can sometimes be a minefield when it comes to risk. Leo Martin, director of responsible business advisors, GoodCorporation, stresses the need for the right approach to the UK Bribery Act (p30), while leading insurance experts give an overview on how to avoid the hidden risks associated with the EU’s Environmental Liability Directive (p38).

With all this in mind, I very much hope this issue will provide some useful ground rules to help you meet the VUCA challenges ahead.

In a recent CIMA survey of business leaders, the institute found that the term VUCA (volatile, uncertain, complex and ambiguous) was often used to describe the current economic climate. And, as the recently retired CFO of Nestlé, Jim Singh, pointed out, these developments are, “challenging company strategies and putting at risk their ability to achieve their global ambitions”.

Clearly, complexity is testing the mettle of the world’s business leaders and perhaps now, more than ever, prudent risk management plays a pivotal role in developing organisations that are both successful and sustainable. This is no easy task. At a time when risk governance is becoming more important and more challenging, it can often feel like learning to ride a bicycle in the middle of a hurricane.

To help organisations weather the storm, this issue studies the spectrum of strategic risk management – from reputational risk, to integrating risk into strategy and the challenge of risk governance – and extracts some pearls of wisdom from key players.

To gauge the current climate, we talk to three leading finance chiefs about the key challenges they are facing and the different techniques they use to assess their risk position (p8). Atul Patel, group FD at IT security firm NCC Group, also discusses the increasing threat from cybercrime, while Jeff van der Eems, COO of United Biscuits, and Jackie Hunt, CFO at Standard Life, discuss their response to the eurozone debt crisis.

When it comes to reputational risk, business leaders need to hone their skills in both insight and foresight. UK high street bakery chain, Greggs, is a case in point. The company was suddenly put under the spotlight following the so-called ‘Pasty Tax’ introduced in the last budget. The subsequent media fracas led to Greggs’ share price tumbling by 5.37 per cent and wiped £30m off its value. Here, the company’s finance director, Richard Hutton, tells us what it is like to be in the eye of the storm and how he and his business utilised the situation to drum up public support for its successful pasty tax protest (p14).

Charles Tilley,chief executive, CIMA

FOREWORD

Strategic Risk Management

A common feature of corporate failure and disasters in recent years has been shortcomings in the company board’s

oversight of risk

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

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CIMA is the Chartered Institute of Management Accountants 26 Chapter Street, London SW1P 4NP 020 7663 5441 www.cimaglobal.com

CIMA contact: Senior product specialist Ana BarcoEmail: ana.barco @cimaglobal.com

Excellence in Leadership is published for CIMA by Seven, 3-7 Herbal Hill, London EC1R 5EJ. Tel: 020 7775 7775.

Group editor Jon WatkinsGroup art director Simon CampbellJunior designer Josh FarleyChief sub editor Steve McCubbinSenior sub editorGraeme AllenPicture editor Nicola Duffy Senior picture researcher Alex Kelly Editorial director Peter Dean Managing directorJessica Gibson Creative director Michael Booth Production manager Mike Doukanaris Group publishing director Rachael StilwellCommercial account developmentHilton YoungAdvertising manager Andrew WalkerEmail: [email protected]: 020 7775 5717

Chief executive Sean King Chairman Tim Trotter

© Seven © CIMA

Cover artwork Gallery Stock

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 Rhapsody.

Printed in the UK by Wyndeham Press Group.

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.

VITAL STATISTICS

60% 61%

Focus on risk

Top five risks facing business – 2009 compared with 2011

Anticipated challenges for companies’ risk functions over the next two years

A rise in business continuity

Sixty per cent of financial services companies are more focused on protecting themselves against risk than they are in investing to innovate and grow (40 per cent)Source: SAP survey of 100 Financial Services companies 2012

Sixty-one per cent of managers say that their organisation has BCM in place, compared with just 49 per cent two years ago.CMI business continuity management (BCM) research 2012

Source: Lloyd’s Risk Index 2011

Source: Accenture 2011 Global Risk Management Study

61% 2012

49% 2010

2009Cost and availability of credit Currency fluctuation Insolvency risk Loss of customers Major asset price volatility

2011Loss of customersTalent and skills shortagesReputational riskCurrency fluctuationChanging legislation

Reducing costs Aligning with the overall business strategy

Implementing regulatory demands

Improving risk management and modelling

Data management (availability, consistency, organisation)

47% 43% 41% 41% 40%

Excellence in leadership | Issue 2, 20124

FOREWORD

A common feature of corporate failure and disasters in recent years has been shortcomings in the company board’s oversight of risk. It is now increasingly recognised that there needs to be a step change in the board’s focus on risk. But what does this look like in practice?

CIMA’s head of corporate governance, Gillian Lees, looks at some common pitfalls relating to risk registers and outlines details of the Good Governance Forum’s new report and toolkit which has been designed to ensure that boards are suitably equipped to forecast any turbulence ahead (p42.)

In the last year, Autodesk – the company that provides the animation software behind screen blockbusters such as Toy Story and The Da Vinci Code – has embarked on an extensive M&A spree. So far, CFO Mark Hawkins has overseen the acquisition of 29 companies – and in an

environment where the next deal might break the business – we ask Mark how he takes risk on board and what role finance plays in protecting the business while, at the same time, helping it to grow (p21).

New legislation can sometimes be a minefield when it comes to risk.

Leo Martin, director of responsible business advisors, GoodCorporation, stresses the need for the right approach to the UK Bribery Act (p30), while leading insurance experts give an overview on how to avoid the hidden risks associated with the EU’s Environmental Liability Directive (p38).

With all this in mind, I very much hope this issue will provide some useful ground rules to help you meet the VUCA challenges ahead.

In a recent CIMA survey of business leaders, the institute found that the term VUCA (volatile, uncertain, complex and ambiguous) was often used to describe the current economic climate. And, as the recently retired CFO of Nestlé, Jim Singh, pointed out, these developments are, “challenging company strategies and putting at risk their ability to achieve their global ambitions”.

Clearly, complexity is testing the mettle of the world’s business leaders and perhaps now, more than ever, prudent risk management plays a pivotal role in developing organisations that are both successful and sustainable. This is no easy task. At a time when risk governance is becoming more important and more challenging, it can often feel like learning to ride a bicycle in the middle of a hurricane.

To help organisations weather the storm, this issue studies the spectrum of strategic risk management – from reputational risk, to integrating risk into strategy and the challenge of risk governance – and extracts some pearls of wisdom from key players.

To gauge the current climate, we talk to three leading finance chiefs about the key challenges they are facing and the different techniques they use to assess their risk position (p8). Atul Patel, group FD at IT security firm NCC Group, also discusses the increasing threat from cybercrime, while Jeff van der Eems, COO of United Biscuits, and Jackie Hunt, CFO at Standard Life, discuss their response to the eurozone debt crisis.

When it comes to reputational risk, business leaders need to hone their skills in both insight and foresight. UK high street bakery chain, Greggs, is a case in point. The company was suddenly put under the spotlight following the so-called ‘Pasty Tax’ introduced in the last budget. The subsequent media fracas led to Greggs’ share price tumbling by 5.37 per cent and wiped £30m off its value. Here, the company’s finance director, Richard Hutton, tells us what it is like to be in the eye of the storm and how he and his business utilised the situation to drum up public support for its successful pasty tax protest (p14).

Charles Tilley,chief executive, CIMA

Strategic risk management

A common feature of corporate failure and disasters in recent years

has been shortcomings in the company board’s oversight of risk

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

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Editorial advisory boardMalinga Arsakularatnechief financial officer, Hemas Holdings

David Blackwoodgroup finance director, Yule Catto & Co

George Ridingchief financial officer, Middle East and north Africa, SAP

Arul Sivagananathanmanaging director, Hayleys BSI

Bogi Nils Bogasonchief financial officer, Icelandair Group

Kai Peterschief executive, Ashridge Business School

Jeff van der Eemschief financial officer, United Biscuits

Jennice Zhufinance director, Unilever China

CONTENTS

4 Foreword6 Vital statistics

Strategic risk management8 Talking strategyAtul Patel, of IT firm NCC Group, Jeff van der Eems, of United Biscuits, and Jackie Hunt, of Standard Life, share their strategies for effective risk management

14 Reputational riskThe UK government’s now infamous “pasty tax” announcement caused the share price of bakery chain Greggs to plummet. FD Richard Hutton explains how the firm responded

21 Integrating risk into your strategyAutodesk CFO Mark Hawkins on how his business managed

Ethical businessWith a renewed focus on ethical behaviour, a top-down approach is key to obtaining buy-in p30

Managing risk Leading finance chiefs share their views on strategic risk management p8

Challenging timesWhy finance is key to assessing risk in the modern world p42

the risks of multiple mergers and acquisitions over a short period of time

26 Business continuityIn an increasingly volatile business world, planning for the unexpected is no mean feat. Neil Hodge explores the effect of extreme weather on businesses, among other risks

30 Staying ethicalRecent changes, such as the Bribery Act in the UK, have heralded a renewed focus on ethical behaviour within business. GoodCorporation’s Leo Martin explains that a top-down approach is vital

37 Get involved with CIMA 38 Environmental issue How can European organisations deal with the

risks and insurance issues arising from some of the world’s toughest rules on protecting the environment?

42 Challenging times In light of a host of corporate failures and difficulties in recent years, assessing risk is right at the top of the boardroom agenda. However, Gillian Lees explains that getting it right is no easy task

46 Effective coachingWith the summer sports season upon us, a wealth of coaching styles and techniques will be on show. Phil Sheridan, managing director of Robert Half UK, helps identify the styles that can help you develop your career

48 Making it to the top Grace Horton, of Capita Health, Richard Davison, of Cobra Group, and Paul Allerton, of KFH, explain how they made it to their current positions

52 Finance on the line Participants at a recent roundtable discussion, in partnership with Reed Finance, assessed how finance can help with product innovation

56 Growing influenceHow the finance function can become a genuine business partner

63 CIMA events

66 CIMA directory

65 Next issue

Risky business

8

What are the biggest risks facing your organisation right now and how are you dealing with them? van der Eems: As a provider of many of Britain’s best-loved snacks, the biggest risk facing United Biscuits is the economic pressure being faced by UK consumers. We provide affordable treats to millions of consumers every day, but even these purchases come under pressure if consumers have less money in their pockets and face an increasingly anxious future. We work hard to make sure we offer excellent value, high-quality products. We’ve been a successful business because we recognise the need to constantly find new ways of serving our customers.

Hunt: The volatility within the financial markets has been one of the key risk factors for us over the past few years. Not only does market volatility affect asset values, it affects consumer confidence, making customers less likely to make financial decisions. That type of economic uncertainty can impact on our business.

We’ve put a lot of emphasis on managing risk over the past few years. We’ve de-risked our balance sheet to make it less susceptible to market volatility and have refocused the group to focus on the areas where we can maintain our competitive advantage.

This has allowed us to achieve continued growth, and to retain one of the strongest balance sheets in our sector over the past four years.

Patel: The most significant risk we face is reputational. Our business is based on providing independent escrow and IT assurance to clients, so it’s critical that we continue to deliver a high-quality service. We have processes in place to make sure that we maintain high-quality standards in everything that we do.

What are the main risks facing your particular sector? van der Eems: Pressures on consumer discretionary income and rising commodity and input costs are causing ripples across the whole industry.

Hunt: The insurance industry emerged from the 2008 banking crisis relatively unscathed, but we have not been immune to the economic uncertainty we’ve seen in the years that have followed. On the back of all that uncertainty, I believe that regulation needs to be a carefully considered factor.

In the UK, the FSA’s Retail Distribution Review is due to be implemented in early 2013. This will be a hugely positive change for the industry, giving consumers greater confidence in the type of financial advice they receive. Separately, Solvency II is an EU-wide regulation that is due to be implemented in 2014 and focuses on making sure that insurers maintain a strong capital position against their liabilities. I’m very supportive of these changes – I believe they will ultimately benefit policyholders and consumers – but I’m also conscious that too

much regulation can stifle business. Getting the regulatory balance right is of key importance so that the industry can continue to be competitive internationally.

Patel: The technology sector has, like most sectors, been hit hard by the global recession and is continuing to feel the effects. With harder times comes an increase in overall risk to businesses as more pressure builds within organisations and on individuals. Furthermore, organisations are looking to reduce spend in non-core or non-critical areas, and this can lead to a reduced focus on risk.

Due to the nature of services we provide, we haven’t been impacted by the recession as much as others in the sector. However, what we have seen is the rise of a new risk that affects all sectors: cybercrime. Both commercial and public bodies have seen an increase in incidents of malicious hacking. Many of these attacks have been high-profile, and media reporting of hacking has intensified. We’ve seen a significant increase in demand for our services in this area.

Has the importance of risk management within your company changed since the recession? If so, how? How much of your time and resources are now devoted to risk management? van der Eems: Risk management has been an important part of United Biscuit’s governance for many years. I chair a risk

How do leading finance chiefs measure and tackle risk within their organisations? We quiz Atul Patel, group FD at IT security firm NCC

Group; Jeff van der Eems, COO of United Biscuits, and Jackie Hunt, CFO at Standard Life


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operating council, which meets regularly and includes the top managers in the business. We have mapped out and assessed our key operational and strategic risk areas, assigned responsibility and developed mitigation plans covering each risk. Most importantly, we recognise business is fluid and there is a need to constantly evaluate and assess new areas of risk.

Hunt: Risk management has played a central role at Standard Life for many years now. Our enterprise risk- management framework enables the risks to the group to be identified, assessed, controlled and monitored consistently, objectively and holistically.

Our risk management has not changed as a result of the recession and continues to support our strategic objective of generating sustainable, high-quality returns for shareholders.

It is important to achieve a balance between risk management and capital generation and I feel we do this, focusing our time and resources to each appropriately.

Patel: The importance of risk management within the business has increased as the scale of the business has grown and activities have expanded into new geographies. Consequently, it has been very important for the business to develop its risk-management processes and procedures.

Risk management is something that I think about every day and something that I see as a key part of my role. How much of a risk does the eurozone debt crisis pose to your organisation? As Europe grows more volatile, what are you doing to reduce the company’s exposure to currency swings?

van der Eems: As the world becomes increasingly integrated, significant economic turbulence anywhere impacts all businesses, whether the impact involves our consumers in the eurozone, changing input prices, or currency fluctuations. With respect to currency, we monitor developments and forecasts closely, seek to balance our various cash flows as much as possible and use financial instruments to reduce risk.

Hunt: The eurozone crisis has had an impact on the financial services sector in a number of areas. Standard Life’s direct exposure to affected eurozone countries has been minimal, however, with the last reported exposure sitting at less than £50m. There has been significant price volatility in sovereign bonds, reflecting the increased credit risk that a sovereign might default on its debt obligations. In the absence of mitigating action, this could result in a mismatch between the value of an insurer’s assets and its liabilities, ultimately resulting in an erosion of its solvency margin. But Standard Life has managed this well and our solvency margin remains strong.

Higher risk weighting of affected sovereign debt also increases the amount of regulatory capital that an insurance company must hold against related investments. The contagion effect spills over into other areas, impacting investments in both debt and equity markets. This can affect corporations who themselves have exposures to sovereign debt. The proliferation flows down to investments in third countries, or institutions within them, and impacts companies with large exposures to sovereign and corporate debt in the affected eurozone economies.

We have seen that markets react quickly, sometimes in a knee-jerk fashion, and we have witnessed increases in

spreads on any affected sovereign credit default swaps, interest rate swaps and FX pricing – each reflecting the perceived higher risk of default.

What is important in each of these areas is to identify the risks to the business and ensure that the appropriate risk management framework is deployed to identify, monitor, assess and control those risks.

We have responded to the eurozone crisis in a number of ways. We proactively manage the benchmarks of our fixed-income portfolios and act very early to remove exposures to peripheral sovereign debt. We have restricted our holdings of cash and cash equivalents to banks that we assess to be of appropriate credit standing, and we monitor currency exposures on a regular basis to make sure that undue risks are identified and that corrective action is taken if needed.

Patel: Our overall exposure to the eurozone is relatively low due to the small scale of operations in it. The majority of our international business is in the US.

Do you have a risk committee? If not, why not? If so, is it a non-executive committee, an executive director committee, a committee of functional experts or a hybrid of all three? van der Eems: Our risk operating council (ROC) has been in existence for many years now, with me as chairman. The ROC consists of the top executive management in the business and includes the participation of our internal auditor, KPMG. We bring in internal and external subject experts on a regular basis and report our activities and findings to the board’s Audit Committee each year.

Hunt: We have a board-level risk and capital committee, which consists of four

‘Risk management is something I think about every day and something that I see as a key part of my role’

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non-executive directors. That committee works closely with our group chief risk officer, as well as myself, chief executive David Nish and chairman Gerry Grimstone. The committee supports the board’s governance over strategic risk management and the use of capital. From its start-up in 2010, the committee has made significant developments and is now well established in its role. It provides quality support and analysis to help manage risk across the group.

We also have executive level enterprise risk-management committees at both group and business-unit level. These meet monthly and are chaired by the relevant chief executive and supported by the chief risk officer.

Managing risk is central to supporting the group’s strategy and helps us to ensure sustainable growth in the long term.

Patel: We formally review and assess risk at our operational board meetings. We measure the potential impact of risks and identify mitigating actions to manage them. The outcome is then reviewed at our audit committee, which is made up of non-executives.

What measurement techniques do you use to assess your risk positions? van der Eems: United Biscuits uses a risk map to identify risks in terms of significance and likelihood. We then assign responsibilities for each risk and develop and audit mitigation plans. Furthermore, we constantly review and update our risk map.

Hunt: The group uses a range of internal risk and capital models. We use internally defined cash and capital risk metrics to assess risk exposures across the

organisation’s range of businesses, activities and projects.

Standard Life carries out a group- wide programme of stress and scenario testing. This provides us with a full understanding of the risks we are running and their potential impact, consequential capital requirements and appropriate mitigating actions.

Patel: We use two scales – one measuring the probability of a particular risk occurring, and one measuring the potential impact on the business in terms of financial consequence if the risk materialises. These are then graphed and reviewed to understand the key risks to the business and mitigating actions identified. We have recently decided to score the risks, assuming that the mitigating action is put in place, i.e. looking at gross risk and net risk. n


Jeff van der Eems van der Eems worked at PepsiCo for 12 years in a series of senior finance and strategy roles, rising through the ranks to become CFO for PepsiCo UK and Ireland, where he was responsible for Walkers Snackfoods, Pepsi-Cola, Quaker Foods and Tropicana. He was appointed CFO of United Biscuits in 2005 and promoted to COO a year later, following the acquisition of United Biscuits by Blackstone and PAI.

Jackie Hunt Hunt was working as CFO of Norwich Union Insurance, a subsidiary of insurance group Aviva, when the opportunity for a deputy CFO position at Standard Life arose. She joined the company in 2009 and became CFO in 2010. She also chairs the Association of British Insurers financial regulation and taxation committee.

Atul PatelA chartered accountant, Patel cut his teeth at PwC before joining its management consultancy division. He was a divisional finance director within Tribal Group, responsible for the government and health divisions, before joining NCC Group as group finance director in 2011.


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UK bakery chain Greggs saw £30m wiped off its value following chancellor George Osborne’s announcement to put VAT on hot takeaway

food. That decision has since been reversed, but finance director Richard Hutton sets out how

the company responded to the media storm


Something aboutGreggs

16

It’s been a roller coaster few months for us at Greggs. Just 60 years after opening its first bakery shop, the company now boasts more than 1,600 stores. But not long after announcing plans to open 90 more came the bombshell in chancellor George Osborne’s Budget: the decision to levy tax on baked savoury goods, such as pies, pasties and sausage rolls, and all

food that is sold “above ambient air temperature”. The chancellor claimed that this would bring bakeries and supermarkets selling hot food in line with fast-food outlets that already have to charge VAT.

But beneath the crust, it was not that straightforward and the decision has now been reversed. The chancellor’s proposal to impose VAT on freshly baked products was ill-thought-through and unworkable. Not only would it have been an additional tax on consumers when their spending is already under enormous pressure, it would also have had far-reaching consequences for the entire bakery industry.

The so-called “pasty tax” meant that VAT would have been charged on freshly baked food, depending on how long after it is taken out of the oven it happened to be sold. That would have created enormous complications and confusion for both staff and customers.

We sell more than 300 million savouries a year – our best-selling product is our famed sausage roll – and legislation that requires bakers to check the temperature of a product before it is sold would have been completely impractical.

The announcement caused the company’s share price to tumble by 5.37 per cent, meaning £30m was wiped off its value [although it has since bounced back].

And then came another reputational blow. The following week, as Osborne appeared before the Treasury Select Committee, he claimed: “I can’t remember the last time I bought a pasty in Greggs.”

Cue retorts from Greggs that the chancellor had “lost touch”, damage-control claims from prime minister David Cameron that he’s a keen

pasty-eater, and a stream of publicity-seeking politicians lining up to buy sausage rolls.

Greggs was catapulted into the spotlight. Our logo appeared alongside television news reports, tabloid headlines and broadsheet opinion pieces. But we used the PR storm to drum up public support, inviting our customers to sign petitions at our stores and teaming up with the National Association of Master Bakers to organise a pasty-tax protest outside Downing Street.

We have always looked at changes to the tax treatment of our products as a risk because of the potential impact on pricing, and therefore our competitive position. If the VAT proposal had gone ahead in October, we would have had no choice but to pass it on to customers. For ordinary, hard-working families, putting 20 per cent on to a product that is freshly baked would have made a severe dent in their pockets when they can ill afford it.

The tax levy would have involved years of litigation to resolve ambiguities in the new definition of “hot food”.


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We campaigned for a much simpler definition that would achieve the Treasury’s objectives, while still allowing bakers to bake fresh food for customers. We got terrific public support and hoped that common sense would prevail.

While we dominated the headlines in relation to the pasty tax, the biggest risk to the bakery chain was economic. Throughout the recession, inflation and unemployment have eroded the level of people’s disposable income, and this affects their purchasing behaviour.

Last year, our pre-tax profits were up 15 per cent to £60.5m. But after stripping out exceptional items, profits rose just 1.1 per cent.

Still the number-one retailer of freshly baked savouries by sales volume in the UK, we have responded by introducing special promotions and innovations to our product range.

At the end of last year, for example, we launched our Superstar doughnut range – available in Jaffa Cake, strawberry milkshake, triple choc vanilla and coconut snowball flavours – marketed with an X Factor-style campaign on Facebook.

We sold more than 1.4 million of the doughnuts in the first four weeks. When we introduced the new blueberry burst flavour in February, we handed out 500,000 buy-one-get-one-free vouchers.

We take the view that consumer spending will remain in the doldrums for some time yet and we will continue to cut our cloth accordingly.

The challenging economic climate also means that we have to keep a close eye on our suppliers. We make our own products; we have ten regional bakeries supplying our shops, a central savoury production unit and a fleet of 375 delivery vehicles. But we still have to ship in the raw ingredients, such as flour and wheat.

Since the recession, we’ve spent more time on the risk inherent in our supply chain. We know that our suppliers, like so many other businesses, are under tremendous pressure from weaker demand so we’re working with them to ensure continuity of supply, while also developing adequate contingency plans.

Serving six million customers every week and employing more than 20,000 people across the country, we have to manage risk carefully. It is a “vital constituent” of every single board meeting. We also have a dedicated risk committee, comprising the executive directors and the heads of each specialist function in the business. We have criteria for assessing the impact and likelihood of risks. We track lead indicators weekly or monthly so that we can catch potential problems early on.

But the big risk, of course, is the one you don’t know about, as some very high-profile cases have proven in recent years. You can’t run a business without risk, but you do have to sit back regularly and just ask yourself: “What haven’t we thought about?” or “What are we relying on?” n


Richard Hutton Hutton qualified as a chartered accountant with KPMG and gained career experience with Procter & Gamble before joining Greggs in 1998. He was appointed finance director in 2006. He is also a trustee of the Greggs Foundation.

‘We’ve spent more time on the risk inherent in our supply chain. We know our suppliers are under pressure from weaker demand’

Integrating risk into strategy

Companies must box clever when it comes to maximising

M&A opportunities and minimising the inherent risks.

Mark Hawkins, CFO of Autodesk, explains how his business has done just that

21


For a business with revenues that topped $1.7bn in 2010, the name Autodesk is not well known. But the company, which has its headquarters in San Rafael, California, provides the software behind the animation and CGI spectaculars that populate

multiplex cinemas. Recent Academy Awards have provided a suitably

glitzy showcase for Autodesk’s capabilities. Toy Story, Wall-E, The Curious Case of Benjamin Button, Monsters vs Aliens, The Da Vinci Code and Pirates of the Caribbean: The Curse of the Black Pearl – have all benefited from Autodesk’s imaging software. Beyond film, its imaging software is used in engineering, healthcare and design across a wide range of industries.

Mark Hawkins has been CFO since April 2009 (before joining Autodesk, he was CFO and senior vice president of finance and IT at Logitech International, where he had global financial duties, and was responsible for global information technology solutions). Since then, it has been his job to continue the impressive growth that the company has seen over the past five years.

That growth was, in part, powered by a growing reliance on imaging software beyond its original niche markets and into the mass market. In order to capitalise on that organic growth, Autodesk has

embarked on an acquisition spree, buying up 29 individual companies in the past year alone.

“Part of the Autodesk business model has always been around continuing to provide a value proposition to the customer,” explains Hawkins. Having established a reputation as a highly innovative company, Hawkins has overseen the acquisitions, most of which have been relatively small.

“It could be acquiring intellectual property, it could be acquiring small companies that are pre-revenue, for example. We would take that technology and maybe include it in a suite of activities we can offer the customer that they would find really useful in their job.”

So what has been the guiding light behind such a string of deals? “A lot of our M&A [merger and acquisition] work has been around continuing to fortify the depth of our offering,” says Hawkins. “So last year, for example, we did 29 transactions, and I think roughly eight of them were more intellectual property-oriented. The rest were what I would call relatively small acquisitions, but they brought capabilities to us that really help our future growth.”

Hawkins, having spent his entire career guiding tech companies through intensely competitive waters during the Silicon Valley boom, has a theory as to why these types of acquisitions are so apropos for technology businesses. “What I see in Silicon Valley, and having been in technology for 31 years,


is that the smaller profile M&As are the ones that seem to pay a nice return over time, on average.”

“If you do studies on M&A and focus on the strategic risk-management elements, conventional wisdom would say smaller deals carry less risk to the enterprise. With massive M&A deals, people have to be very thoughtful, because they could present more risk to a company.”

With that in mind, Hawkins has been central in developing a methodology for assessing and completing deals in the fastest time possible.

And the CFO is clearly experienced in the business of designing a robust growth strategy, having started at Hewlett-Packard when it was a $3bn company and left it when it had organically achieved a turnover of more than $50bn. Added to that, his stint at Dell started when the PC maker was in the $20bn value range, and finished somewhere north of $56bn.

For him, finance must take the lead in spotting potential growth opportunities and managing the risk inherent in each one.

“I’m used to huge growth and spotting opportunities, and I think in every environment one’s in, it’s about your contribution that allows you to have an impact and an influence,” says Hawkins.

“My personal experience on strategic management of key investments, and indeed the management of key risks, (given that any acquisition is both an investment and a risk), is that when you get the collection of thoughts from a technology viewpoint, from a business

viewpoint and from a financial viewpoint, you tend to make a more balanced decision.”

However, the role of CFO in the new generation of massive technology companies does present some unique challenges. The cost of missing out on a piece of vital software or hardware can be enormous, while the industry is littered with the wreckages of mergers and acquisitions that went spectacularly wrong.

In an environment where the next deal might break the business, how does Hawkins take that risk on board and ensure the business is protected? What role does finance play in protecting the business, but allowing it to grow at the same time?

“I think that a lot of the time people have what I would call an underdeveloped understanding of risk and the role that a CFO would play,” he says. “Risk comes in different shapes and sizes. We should be the champion for preserving the wellbeing of our company. When it comes to risk for our investments, we should be the champions to make sure that the governance of our company is in place for our treasury investments, but the risk from a commercial standpoint, and the risk from a strategic investment, is a different topic.”

“I think if a business applies the credit mentality of credit-management risk to a commercial sales transaction, it doesn’t feel quite right. It’s a different kind of thinking that one needs to apply. And then if you apply the way you’re doing credit for X number of days for a customer, as opposed to an M&A acquisition, that’s a different mentality. »

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“I would hope that my team brings a conservative and prudent approach to any of those, but it’s a different approach.”

Now, three years and 30-odd acquisitions in, Hawkins believes he has got the methodology of assessing each deal down to a fine art. “With an M&A deal, even a small one, there are all sorts of different risks. So I have a team, we call them ‘finance business partners’, who are assigned to each of the different product groups of the company, and also to each of the different divisions of the company. They are all on the staff of each of these other executive leaders.”

Their role, Hawkins explains, is to be his “point person” for the finance organisation and bring the full force and capability of finance towards the topic they’re dealing with.

“So if they’re making a proposal on an acquisition, they will be the author of the business case. That will all be vetted through my cross-functional team, all the tax, treasury, IR, corporate accounting, revenue recognition, division finance, sales finance and the rest.

“That gets cleared long before I ever see it myself, and the CEO will see this at the end, but after people have knitted that whole plan together and addressed the questions and issues.

“It is a very tough process, and we have to move fast. People are accountable, their name is on the list,” says Hawkins. Developing this sense of accountability – a growing trend among CFOs of large corporates seeking better management performance from their finance staff – has been central to empowering finance to grasp the nettle of strategic risk management and make a clear contribution.

In addition, helping his team to develop a set of risk-management tools to fit each scenario has been critical in allowing Hawkins to let the mechanics of Autodesk’s M&A strategy run smoothly once the decision to do the deal is imminent.

“After that we go into the actual commercial negotiations and the due diligence,” says Hawkins. “We have a due diligence team, to which my team is central, across all the capabilities, and then there’s an integration team – again, in which my team is ever present across the capabilities.

“So you can see, having done 29 of these in a year, that we don’t go and hire a ton of people. We know how to get through these quickly and do them in a prudent and commercially sensible way. So they’re ever present, on the front, middle and back end of the deal.”

In order to achieve that, Hawkins believes that, for a business like Autodesk, the CFO must be free of the shackles of day-to-day risk assessment and be able to take a longer term view of the risks that the business will face in the coming years. And that can only be achieved if the CFO is an all-rounder.

“If you look at the CFOs who are making it to the top of big companies, most of them have general management experience, and so now, instead of somebody being a narrow financial executive who has managed two or three or ten people, it becomes more about how you relate to the whole, from the top of a corporation,” he explains.

Of course, that might come easier to some than others. “If you’ve never managed large divisions of people, with all the complexities that that entails, how do you even connect, react and relate to the issues of the day at CEO staff level, or at board level?” says Hawkins.

“I think it’s an absolute necessity to have somebody with that kind of breadth. I’m not saying, for every company, but if you’re talking about a company at a world-class level, on a world-class scale, I think it’s essential.”

No doubt there will be more deals to be done in the coming months in order to keep Autodesk ahead of its competitors. And that, Hawkins believes, is the best risk-management strategy of all. n


MARK HAWKINSHawkins has been the executive vice president and chief financial officer of Autodesk since 2009. He was previously the CFO and senior vice president of finance and IT at Logitech International SA for three years. Before that, Hawkins worked with Dell in Austin, Texas, where he held two vice president posts. He joined Dell in 2000, having spent the previous 19 years of his career in a variety of posts around the world within Hewlett-Packard.

‘It you look at the top CFOs, it is more important how you relate to the whole from the top of a corporation’

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There can be no doubt that potential exposure to weather-related events has leapt up the corporate risk agenda. While organisations have increasingly looked at the likelihood of

business disruption and its potential impact, the general feeling among risk experts is that many businesses feel that the weather is simply too great a risk to quantify or control, and consequently aren’t adequately prepared for the fallout.

That could be a bad move. Weather-related risks have been responsible for the biggest corporate losses. In the past few years the world has witnessed a string of natural catastrophes, from earthquakes in Haiti, Chile, New Zealand and Japan, to floods throughout mainland Europe, the UK, Asia and Australia.

For example, the Pakistan floods in August 2010 were the worst in living memory, affecting millions of people and resulting in more than 1,500 deaths. That same year, the European floods that affected parts of the Czech Republic, Poland, Hungary, Slovakia and Germany, led to only a handful of fatalities, but caused losses of tens of millions of euros.

Meanwhile, the Icelandic volcano that erupted on 21 March 2010 and sent an ash cloud over Western Europe which lasted nearly a month, may have caused little physical damage or loss to insurers, but its disruption to air traffic led to significant losses to the travel industry.

In the past 40 years, climate or weather-related insurance claims have increased dramatically. According to figures from insurer Allianz Dresdner Economic Research, average insured claims per decade

have risen from less than $5bn during the 1970s and 1980s to more than $40bn by 2010. The same research points out that most insured catastrophe losses are concentrated in the US and Europe (60 per cent and 28 per cent respectively).

According to a new paper published by insurance brokers Marsh, the scale of the catastrophes experienced in 2011 exceeded previous loss-modelling predictions and has challenged established thinking on the nature of risk. The paper says that, post-2011, companies need to re-examine their risk-management strategies and introduce new methodologies to strengthen their operational and financial resilience.

In its paper, “Lessons Learned from the Catastrophes of 2011”, Marsh identifies five major risk and insurance topics arising from the events of 2011, namely denial of access; strike, riot, civil commotion or terrorism; the differences between flood and storm damage; contingent business interruption; and 72-hour insurance notification clauses.

According to Marsh, the list of catastrophic events from last year has raised concerns around the suitability of standard denial of access cover, which is typically only for short-term incidents. It also highlights the growing importance to businesses of contingent business interruption (CBI) insurance, especially in the wake of supply chain failures following the Japanese earthquake/tsunami and Thailand floods.

Steve Clayton, CFO (UK and Ireland) of Japanese electronics firm Fujitsu, says that the company’s Japanese operations were obviously put under strain following the country’s catastrophic earthquake and tsunami in March 2011.

The company quickly shifted production from those factories in the worst-hit areas to other plants in Japan that were not as badly affected. That helped to maintain a relatively good supply of components, and also allowed it to continue to ship products out of the country.

Clayton says that one of the key points that companies need to ensure in this type

Winds of change

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Neil Hodge examines how businesses can protect themselves against increasingly unpredictable weather patterns…


The cost of power failure

The past decade has seen two of the costliest power blackouts and business interruption events. On 14 August 2003 large portions of the Midwest and north-east US and Ontario, Canada, experienced an electric power blackout that lasted for up to four days.

The US Department of Energy puts the cost at $6bn – the majority of which were business losses. Canada is estimated to have seen its gross domestic product reduced by 0.7 per cent for the month of August as a direct result of the blackout, with a net loss of 18.9 million work hours.

Manufacturing industries were particularly hard-hit. Car manufacturer Daimler Chrysler lost production at 14 of its 31 plants and had to scrap 10,000 vehicles because there was no power to dry the cars going through the paint shops. At Ford Motor Company’s casting plant in Brook Park, Ohio, the outage caused molten metal to cool and solidify inside one of the plant’s furnaces, which delayed production by a week.

The earthquake and tsunami in Japan in March 2011 forced many companies to relocate operations and source materials from other suppliers. Sony was forced to shut down five of its six laptop battery factories, while Hitachi shut its LCD Tokyo factory because of damage and power cuts.


India prioritises BCM risk

The focus of robust business continuity planning has mainly been the developed areas of the US, Europe and Australasia. But this does not mean that rapidly developing markets elsewhere – that are perhaps more prone to natural catastrophes and power outages – are not taking business disruption seriously.

For example, in April the Securities and Exchange Board of India (SEBI) issued guidelines for regulated stock exchanges and depositories to help with their business continuity and disaster recovery plans following a review of their contingency measures. The guidance says that stock exchanges and depositories should have a business continuity plan in place, which should include having a disaster recovery site as part of the business continuity strategy set up in a different seismic zone. Furthermore, it says, stock exchanges should also have a “near site” to ensure zero data loss.

The guidance also recommends that exchanges and depositories should have a recovery time objective and recovery point objective of not more than 30 minutes and four hours, respectively. Disaster recovery drills should be conducted on a quarterly basis. Stock exchanges and depositories have been given three months to submit their business continuity and disaster recovery policy documents to SEBI.

of scenario is effective information sharing, particularly to sales teams. “These are the people who have direct contact with clients, and who need to have up-to-the-minute information about the capacity we can work at and whether there are any delays in our production processes and supply chains that could impact customers’ orders. A failure to pass on that data to our customers could be disastrous as they could look to source components from elsewhere.”

Fujitsu also benefited from having a “vendor neutral” policy that had been in place for ten years. “While we prefer to sell our own products, we will sell components and so on made by our competitors if it is what the customer wants and can meet a gap in the supply chain,” says Clayton. “Not all companies will do this – for example, Hewlett-Packard and IBM will only sell their own products. However, this policy has served us well and we think that it is certainly a good contingency to have in place under such circumstances.”

New Orleans-based Metairie Bank had a disaster recovery plan in place before Hurricane Katrina, which hit the southern US in 2005 and had an insured loss of $71bn. However, Bill Haacke, the bank’s CFO, says the plan was not sufficient for the magnitude of the disaster, which saw 80 per cent of New Orleans flooded. Government authorities closed the county where the bank operated for two weeks and Haacke started operating from the car park of the bank’s offsite data centre where it had evacuated to.

The bank says it now has a comprehensive contingency plan that covers everything from pandemics to hurricanes, and all employees know their role in the 200-page-long plan. The key to its development, says Haacke, was to get every department to provide their input and their views of risk to their own operational areas.

“You can’t have a plan unless everybody has an input,” says Haacke. “You can open a branch, but if your IT department can’t get the computers working, then you’re going to be operating offline with customers. That is going to involve accounting because accounting is going to ask how you are balancing your work. Everything is connected. If we can’t operate, we’re out of

business. So what’s the ROI on that?” he adds.

Aside from weather-related disruption, power cuts are now widely regarded as a potentially catastrophic risk. Research shows that the financial impacts from even a small power cut can be disastrous. Analyses from historic blackout events in the US show that a 30-minute power cut results in an average loss of $15,709 for medium and large industrial companies, and nearly $94,000 for an eight-hour interruption. Even short blackouts – which occur several times during a year in the US – add up to an annual estimated economic

loss of between $104bn to $164bn.The most frequent brownouts and

blackouts occur in emerging economies that have typically under-invested in their energy infrastructures, but that are also prone to extreme weather and natural hazards. For example, Latin America has one of the lowest number of power outages, but on average, they last the longest.

South Asia, on the other hand, has the highest number of power outages per year, but they usually only last a few hours. Not that the effects are not sharply felt. For example, a 12-hour power cut in India in 2001 cut off electricity to 226 million people, causing chaos on the rail system and paralysing major utilities and hospitals.

There are several courses of action that organisations can take, such as installing back-up power generators and having near-site emergency capabilities. But Michael Bruch, risk consultant at Allianz Global Corporate Specialty, warns that, “controlling that risk should not just be limited to having emergency back-up generators or being able to relocate their operations and workforce – it also needs to take into account the effect that a power cut could have on their supply chains as well. Risk managers need to ensure that their suppliers have equally robust measures in place as well.”

One company has even looked to the cloud as a solution for business continuity management. Seamus Hennessy, CFO of Wi-Fi networking company Ruckus Wireless, which has employees in 22 countries, has adopted cloud computing over the past few years to minimise the chances of one incident jeopardising the entire company’s ability to function. It proved to be an ingenious move: in 2011, after a six-hour power outage in the San Francisco area left Ruckus’ headquarters in Sunnyvale, California, in the dark, employees were able to access their email.

“If there is a fire in-building, or earthquake, or the offices are down, the key thing is how fast can we get up,” says Hennessy. “Everything we do and look at is business continuity across the world, and how can we get everybody productive,” he adds. nPh

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Adding values to complianceThe introduction of the UK Bribery Act has heralded a new approach to ethical behaviour. GoodCorporation director Leo Martin says a top-down approach represents the best way of staying on the right side of the law

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Compliance is the new must-have function in many businesses. Whereas compliance has historically existed in a narrow range of highly regulated sectors, such as banking and insurance, the passing of the UK Bribery Act is driving a broader cross-section of industries to set up compliance functions. While this may seem eminently sensible,

there is a danger that they merely become tick-box teams that irritate and annoy, ironically leading to an increased likelihood of the poor behaviour that they are designed to stamp out.

Until now, compliance functions have tended to emerge in order to fulfil a specific corporate need, usually responding to some specific industry regulations. Businesses in these situations have needed to reassure the regulators that they have understood the rules and are complying. In many of the situations where we have seen compliance functions to date, the emphasis has been on product safety and usage. In most cases, compliance has developed as a close associate of the legal function. »


What is interesting, however, is that although investment in compliance has grown, particularly in industries such as defence, manufacturing, pharmaceuticals and financial services, so too have the fines and penalties imposed for malpractice. In the heavily regulated and supposedly heavily compliant financial services sector, for example, complaints to the ombudsman have continued to soar, leading to record fines being imposed.

So although compliance has focused on the rules and regulations that govern the way in which a product is made and sold to its users, it hasn’t tackled other areas where malpractice may occur. Most of the fines imposed by the Financial Services Authority (FSA), for example, were for bad selling, not bad products. In short, compliance alone is not a guarantee that those within an organisation will do the right thing.

Fortunately, regulators have also noticed that compliance isn’t always working and are waking up to the fact that good behaviour is not simply created by having lots of rules, combined with an active compliance function. A good example of the change in thinking was the introduction of the Treating Customers Fairly (TCF) framework by the FSA. This should have forced companies to move away from tick-box compliance to more thoughtful ethics about how to sell, and to whom, by having a simple list of principles for banks to follow.

Unfortunately, rather than pushing companies to take more responsibility for how products are sold and to whom, TCF has become another absurd tick-box exercise, with hugely expensive compliance activity and nothing to show for it in terms of real benefits to consumers. Arguably, as the record levels of bank fines would suggest,

the compliance mentality applied to TCF has actually created a worse, not better environment, as far as sales behaviour is concerned.

This raises an interesting challenge for a wide range of organisations that now find themselves busy setting up compliance functions for the first time. The reason that many organisations are doing this is the introduction of the UK Bribery Act. This is the first time that a non-sector specific regulation has come into force that requires a compliance response. This is because a key requirement of the

‘Regulators have noticed that good behaviour is not simply created by having lots of rules, combined with an active compliance function’

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Act is that businesses put in place “adequate procedures” to prevent bribery. A compliance function is seen as necessary to respond to this demand, because adequate procedures need to be embedded across a wide range of functions and are beyond the scope and experience of most corporate lawyers working on their own.

The UK Bribery Act has also created a sea change in mentality with respect to the behaviour of third parties. Whereas businesses were happy to be told by their lawyers that the best defence was to “know nothing” about suppliers, business partners, intermediaries and what they did on behalf of their organisation, the Act has turned this logic on its head.

It has forced companies to take an active interest in these same suppliers and intermediaries, going beyond just knowing who they are to taking greater responsibility for how they behave and what they do on an organisation’s behalf.

As we have seen, the risk is clearly that companies might now set up compliance functions with a strong tick-box mentality, which could actually increase the risk of non-compliance with the new Act. This is because tick-box compliance makes organisations complacent; it allows an organisation to assume that if it is compliant it is behaving properly and this attitude stops employees from engaging their brains and really thinking sensibly about behaviour and risk.

For these new compliance functions to succeed it is essential that they are centred on values and ethics first, with processes and procedures second. It is much better to lead with a clear tone and ethical stance from the top of the company than to rely on an army of compliance officers and due diligence forms

further down the pyramid. The best companies are keeping ethics in the title of this function to ensure that any compliance activity is embedded clearly in the framework of sound company values.

Good compliance therefore starts with tone from the top. It puts a strong focus on training and embedding good values, supporting those who speak up and challenge when something is not right.

The rise of compliance should be the saviour for ethics and corporate responsibility people rather than their death knell.

It should be giving them the tools and ideas to make good behaviour key to all operations, allowing them to engage with colleagues about how the organisation sells, buys, manages employees and deals with governments. It should enable them to work with lawyers on developing procedures and tools to help the business protect itself, all directed by a clear ethical framework.

Businesses need to understand that what they do and how they do it really matters, even when no one is watching. Where best practice is in operation, a business has policies and procedures in place designed to ensure that it is efficiently and effectively run, but this is driven by an ethical culture which demands that good behaviour is the norm throughout the hierarchy and that employees are empowered to speak up when they feel that something is wrong.

Not only is this responsible, it is also practical and makes sound business sense. Developing a company culture with ethical values at its core will be a major step towards demonstrating adequate procedures and ensuring not only that best practice will prevail, but that a company’s reputation will be both enhanced and protected. n

Leo MartinDirector of leading responsible business advisers GoodCorporation. The organisation works with multinationals, FTSE 100 companies and SMEs to help measure, manage and implement responsible business practices.Contact: [email protected]

‘Companies might set up compliance functions with a strong tick-box mentality, which could increase the risk of non-compliance’

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CIMA Ethics in Three MinutesCIMA has produced an animated video to help guide members on ethical business practice. The video, CIMA Ethics in Three Minutes, explains the code of ethics and how to apply it when facing an ethical dilemma.

More interesting ethical topics, including CIMA’s code of ethics in full, ethical dilemmas, ethical checklists, information on helplines and an online library of resources with a range of articles featured in CIMA publications, blogs and webcasts are also available online at www.cimaglobal.com/ethics.

CIMA is also seeking input from members around the world to its ethics agenda. If you wish to get involved,

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Get involved with CIMA


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get in touch at [email protected] for more information.

Now on CGMA.orgThe following resources are now available online:• Innovation outlook: framing the global

management accounting agenda 2012/13 This short paper highlights key areas of focus for CGMAs over the coming year and provides the basis for our forthcoming programme of outputs to help CGMAs to add value and develop their careers, whatever their role in the organisation.

• Strategic objective costing: Supporting the Balanced Scorecard The Balanced Scorecard (BSC) is a highly regarded performance management

and strategy formulation framework used by thousands of organisations globally. The Royal Botanic Garden Edinburgh has adapted the BSC in a way to meet the specific needs of its knowledge-based organisation. The system is known as strategic objective costing.

• Managing responsible business: a global survey on business ethics This CGMA survey report explores the importance placed on business ethics, ethical performance and ethical management within organisations, and the specific role played and challenges faced by individual CGMAs.

For more information, visit www.cgma.org.

Tough working environment

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In recent years, organisations have found that environmental disasters are as bad for their bank balance as they are for wildlife and natural habitats. By April this year, oil giant BP had paid $7.8bn in settlement costs to plaintiffs and a further $22bn in compensation and clean-up costs for the damage its Deepwater Horizon platform caused in the Gulf of Mexico.

But Europe also has some of the toughest environmental rules in existence. On 30 April 2004, the EU implemented the environmental liability directive. Its primary objective is to hold companies financially responsible for preventing and remedying any environmental damage caused by their operations. It has two fundamental components: the “precautionary principle”, which requires companies to take preventative measures when their activities pose an “imminent threat of environmental damage”, and the concept of “polluter pays”, which makes businesses legally and financially accountable for any environmental damage that they cause to water, air, land and protected animal species.

The directive has been applicable in EU member states since 2007, even in those countries that were late putting it into effect, such as the UK, which did not transpose it into English law as the Environmental Damage (Prevention and Remediation) Regulations until 2009.

Experts agree that the terms of the directive are wide-ranging and can result in potentially ruinous costs for companies that fall foul of the regulations. The insurance sector says that it is difficult to properly price the risk of environmental damage and underwrite such policies because while the directive might be clear, how it is transposed and enforced into 27 different sets of national law still remains unclear. This is partly because there are still relatively few examples of case law.

Tony Lennon, European manager at Chubb Environmental Solutions, says that organisations need to ensure that they do not make the mistake of trying to comply with the directive itself, but rather with how it has been transposed into national legislation in each EU member state.

“A directive is usually a minimum standard that all EU member states have to transpose into their national legal frameworks. They can be made more onerous by individual EU governments and can contain more stringent requirements than those set out in the directive. As a result, those organisations that think that they have a blanket policy that would cover all their sites throughout the EU should carry out a review,” he says.

For example, the UK has extended damage to natural habitats as set out in the directive to include sites of special scientific interest (SSSI). “Following the text of the directive is of limited use. It is national law that they need to follow – not a directive that now has 27 variations,” he says.

Insurance brokerage Guy Carpenter says that attempts to adapt local legislation to EU and international law are creating a “challenging” environment for insurers operating in the region. In April, it published its semi-annual report of the legislative developments it considers to have the biggest impact on insurers and reinsurers in continental Europe – one of which was a recent case in Italy regarding the impact of the EU directive on environmental liability.

“The path to enactment of EU directives is strewn with obstacles and involves conflicts with existing local legal provision and longstanding legal principles,” says David Lewin, managing director of Guy Carpenter. “We also found that the dominance of EU legislation does not prevent individual territories pursuing their own agendas to create new legal liabilities specific to their own jurisdictions,” he adds. »

How organisations should be dealing with the risks and

insurance issues arising from EU rules protecting the environment


And there are other key issues that organisations need to be aware of. Valerie Fogleman, a consultant at law firm Stevens & Bolton and professor of law at Cardiff University, says that there are differences between member states as to the extent a polluter should pay for the damage it has caused.

“Most EU countries have transposed the directive to apply joint and several liability, whereby any person who caused the damage is liable for the entire costs of its remediation. This can obviously be problematic. If five companies are liable for cleaning up a chemical spill, and two of them subsequently went into liquidation, then the remaining three are liable for the cost of remediating damage caused by the insolvent companies, as well as the damage caused by themselves,” she says.

“Conversely, some EU member states – such as Bulgaria, Denmark, France, Slovakia and Lithuania – have applied proportional liability, which means that a company would only pay the cost of remediating its share of the total damage. This could mean, therefore, that one company could be held responsible for, say, 70 per cent of the costs, while the other is held liable for 30 per cent. If one of these companies was not sufficiently financially viable to pay the costs, or became

insolvent, the member state may decide to pay the missing share of the costs,” she adds. “This is a potentially massive difference that companies need to be aware of.”

Since the directive is still relatively new, there have been few landmark rulings. However, a decision in March 2010 regarding the contamination of Sicily’s coastline by a succession of petrochemical companies since the 1960s implies that companies can be held liable for gradual pollution.

On 9 March 2010, in its first rulings on the directive, the European Court of Justice (ECJ) concluded that a member state may establish a “weak causal link” between an operator’s activities and diffuse pollution that a competent authority can use to require companies to clean up the pollution they have caused. In the case of Raffinerie Mediterranee (ERG) SpA v Ministero dello Sviluppo economico, the ECJ ruled that a member state may establish a rebuttable presumption if plausible evidence exists to link an operator’s activities to diffuse pollution – that is, pollution caused by many operators.

Thus, says Fogleman, “The number of companies that may have avoided liability under the directive for multi-source pollution is substantially less than would have been the case if the ECJ had ruled that the causal link was strong. The establishment of a weak causal link is especially relevant in cases of diffuse groundwater pollution due to the difficulty in tracing individual chemicals to their source.”

The directive is unusual in that it prompts member states to take measures to encourage the development of appropriate financial security instruments (surety bonds, trusts, letters of credit, escrow agreements, corporate guarantees, insurance policies and financial tests to show evidence of the ability to self-insure) for businesses to use these as guarantees to cover their liabilities.

While there are defences available – that the damage was caused by a third party, that the operator was complying with a compulsory order or with an official permit, or that the activity was not considered likely to cause environmental damage according to the state of scientific knowledge at the time – most companies accept that their financial health relies on sound risk management and risk awareness, as well as comprehensive insurance cover.

Yet experts point out that companies may be at risk because they believe that their public liability policies will cover all remediation and damages costs should an event take place. Furthermore, some organisations believe that the directive largely does not apply to them


because they are not involved in “high risk” industries, such as transport or manufacturing pesticides or chemicals. As a result, insurance brokers and lawyers say that companies need to review the legislation and re-examine their risks and controls.

Although public liability insurance does protect against “one-off” accidents, repeat or gradual pollution is not covered. Furthermore, the protection such insurance provides is becoming increasingly limited for instances of environmental damage. Increased levels of fines being imposed by the enforcement agencies (such as the UK’s Environment Agency) due to legislation breaches means that the risk of exposure to significant costs is increasing for all businesses – even those that are involved in the professional services sector.

Colin Read, an insurance law specialist at law firm Pinsent Masons, says that organisations need to look at environmental liability insurance policies to ensure that they have adequate coverage. “Traditional liability policies are ill-equipped to meet the challenges posed by the new legislation because the directive does not introduce a liability regime in the traditional sense,” he says.

“A standard public liability policy, for example, will cover the insured’s legal liability to pay damages to a third party for accidental injury, damage to property, nuisance or interference with some other right,” he says. “It will not normally cover the cost of clean-up operations that the insured is statutorily obliged to pay.”

Chubb’s Lennon says that because cover may not be explicitly excluded, some companies are at risk of having policies that afford them inadequate protection. “Some organisations tend to perceive environmental liability as a risk based on possible pollution or contamination, and so look for such terms in their insurance policies,” he says.

“But the directive specifically says that companies are liable for any environmental damage they cause, which is not limited to pollution. For example, building a car park on a field where rare flowers or wildlife thrive is not a pollution risk, but such damage is an environmental risk and therefore needs to be remediated under the directive. Risk managers need to make sure that their insurance cover is not limited to just incidences of pollution events, but all incidences of environmental damage,” he adds.

Lawyers point to a ruling from 2006 that highlights the problem. In 2003, Bartoline, a UK-based solvents manufacturer, had a fire at its East Yorkshire premises that led to fire-fighting foam and chemicals polluting two nearby watercourses. The Environment Agency

billed the company for the subsequent clean-up while Bartoline tried to recoup the costs – around £770,000 – from its insurer, Royal & Sun Alliance, which rejected the claim.

At the crux of the case was the definition of “damages”. The High Court ruled that a public liability policy covering legal liability for damages did not cover liability to repay clean-up costs incurred by the Environment Agency exercising its statutory powers, or the insured’s own costs in complying with the Agency’s work notices. Consequently, Bartoline was responsible for the remediation costs.

Fogleman says, “Public liability policies may cover some of the liabilities under the Environmental Damage (Prevention and Remediation) Regulations 2009, provided that the incidents causing environmental damage are sudden, unintended and unexpected.”

However, she adds, “It is highly unlikely that a court would consider that a public liability policy provides cover for all such liabilities, or liabilities under other environmental legislation, and may consider that it does not provide cover for any of them. Although the wording of some public liability policies may cover risks under environmental legislation, it is unlikely that most will do so. Endorsements designed to provide cover for statutory liabilities, known as Bartoline endorsements, are virtually all highly restrictive in scope. Insureds are thus faced with substantial environmental risks that are not insured under their public liability policies.”

Insurance, risk-management experts and lawyers instead recommend that companies opt for specialist environmental liability insurance, and ensure that the policy is tailored to their particular needs and levels of exposure. Another issue that companies have neglected to consider is the fact that directors, officers and individuals can be held liable and prosecuted for any damage caused to the environment or failure to comply with the legislation, even though the directive makes no reference to any criminal prosecution for a company or individual’s failure to comply.

“Individuals and companies cannot be prosecuted under the environmental liability directive. However, as the requirements of the directive are transposed into national legislation and can be covered by perhaps a dozen other laws, companies and their officers can be prosecuted for failure to comply with the directive under related legislation and traditional Directors and Officers policies may not cover all aspects of environmental damage and remediation. In short, directors need to be aware of this,” says Lennon. n


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The challenge of risk governance

In light of the corporate failures and difficulties of recent years such as Enron, Lehman Brothers and numerous others, there is now increasing

recognition that boards need to have a better understanding of risk. But what does this look like in practice? What risks should the board focus on? What information does the board need and how should it go about tackling this area? Does risk governance need a different approach from other aspects of the board’s business?

How can finance professionals support this effort effectively?Evidence suggests that few boards take a systematic approach to risk governance, which

is unfortunate, given how critical it is in today’s rapidly changing business environment. However, CIMA, as an active member of the influential Tomorrow’s Company Good Governance Forum (see box, p44), is at the forefront of developing

practical guidance on risk governance. This article summarises current thinking in this area and outlines some of the tools and approaches being developed.

Gillian Lees, CIMA’s head of corporate governance, on the best ways of assessing risk

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‘Change is becoming more rapid and yesterday’s trends, whether good

or bad, have become today’s realities’

The case for risk governanceWidespread acknowledgement of the need for improved risk governance has been triggered by two interrelated factors:• The shadow cast by the global financial

crisis of 2007-8, with broad agreement that it was exacerbated by corporate governance failures, in particular inadequate board oversight of strategy and risk.

• Increasingly volatile business conditions, driven by such factors as globalisation, rapid technological change and environmental pressures. This was a common thread in our recent in-depth interviews with 17 C-suite executives; for example, Jim Singh, CFO of Nestlé, told us that “…change is becoming more rapid, and yesterday’s trends, whether good or bad, have become today’s realities. And so

the way we define the world today is… a world of uncertainty, a world of volatility, a world that is very complex. And these developments are challenging company strategies and putting at risk their ability to achieve their global ambitions.”

Recent research by the UK Financial Reporting Council revealed that there has been a step change in focus on risk by UK boards. It’s more than likely that such findings would be replicated across global markets – for example, risk is a key component of the European Union’s focus on the corporate governance framework.

However, the same research also emphasised that boards must focus on the risks that are capable of undermining the strategy or long-term viability of the organisation. Reputational risk was highlighted as an area that needed greater attention.

The bad news, therefore, is that at a time when risk governance is becoming more important, it is also becoming more challenging – akin to learning to ride a bicycle in the midst of a hurricane.

The board’s responsibility for riskBroadly speaking, the board needs to focus on:• Understanding the organisation’s key risks

– especially those that could cause the entity to fail or suffer major difficulties.

• Determining the overall “risk appetite” of the organisation – that is, the level of risk that the organisation is prepared to take in pursuit of its goals.

• Obtaining reasonable assurance of the effectiveness of the systems in place to manage risk across the organisation.

Many organisations have made considerable progress to develop risk registers and maps over recent years. And even though many struggle to understand and apply the concept of risk appetite, there is greater awareness of its importance.

However, actual corporate calamities over the past decade indicate that boards need to consider these questions:• Are all the risks on the risk map?• Can we prevent crises turning into

reputational catastrophes?The 2012 Good Governance Forum

conference (“Boardrooms and Strategic Risk: How to avoid ruin and build long-term value”) sought to address these questions by focusing on the “new” risk landscape and improving boardroom conversations.

The new risk landscapeWhat is this new risk landscape? Some of the answers are provided by research from the Cass Business School report “Roads to Ruin”, which investigated 18 high-profile cases of “risk events” from the past decade.

These include the BP Texas City Refinery explosion of 2005 and the collapse of Northern Rock in 2007. A key objective of the research was to understand whether there were common underlying weaknesses that made some organisations more prone to a crisis – and for that crisis to escalate into a disaster.

The research identified seven key issues that are considered “dangerous underlying risks”. The most worrying point about them is that few of them, if any, appear on conventional risk registers. This is largely because they relate to “softer” issues, such


Tomorrow’s Company Good Governance ForumThe forum was set up in March 2010 by the leading UK-based business think tank, Tomorrow’s Company, in response to questions raised about the effectiveness of corporate governance as a result of the global financial crisis. The forum brings together key businesses, organisations and individuals to explore what good governance means, and to make practical recommendations to company boards and policy makers. One of the key purposes of the forum is to consider which issues are strategically critical to the wellbeing of companies over the longer term, including strategic risk. To date, the forum has published two reports:• “The Case for the Board Mandate”,

which provides a framework for board strategic decision-making

• “Improving the Quality of Boardroom Conversations”, which shows how boards can improve the quality of their conversations to become more effective and make better decisions.

www.tomorrowscorporategovernance.com

Gillian Lees Lees is head of Corporate Governance at CIMA and is responsible for developing CIMA’s thought leadership and policy responses on corporate governance across all its key markets.


‘It’s essential to understand how these risks interact with each other so that the board can protect itself’

Further background “Governing for Performance – New Directions in Corporate Governance”, CGMA report, January 2012 www.cgma.org

as inadequate leadership on ethos and culture, ineffective boards, organisational complexity and change, as well as poor communication and information flows. The problem is compounded by the fact that those responsible for risk management in the organisation may not have the status and confidence to flag such risks, especially when they relate to the behaviour of the board itself.

In essence, therefore, the new risk landscape requires recognition that there are both “hard” risks, such as systems failures and “human” risks. The “Roads to Ruin” research clearly shows that it is the latter which has the potential to tip the crises into reputational catastrophes from which the organisations studied in the research either failed or struggled to recover. So boards also need to understand the importance of “reputational catastrophe” risks.

Where does a board start? One of the co-authors of the report, Anthony Fitzsimmons, chairman of Reputability, advises that the first step is to recognise that there is a huge hole in your risk map. His advice is that the next time you are given one, you should draw a bold red circle on the front and write in it “Here be dragons”, just like ancient map-makers who recognised what they did not know.

The tricky bit follows as it is then essential to identify some of these more awkward, non-quantifiable risks – some of which might be taboo-, career-threatening or delicate to raise. These are the so-called elephants in the room, which may have been swept under the carpet for many years. It’s also essential to understand the whole picture of how these risks interact with

each other so that the board can understand how to protect itself from major calamities.

An important element of strengthening the board’s ability to stare these risks in the face is to understand the importance of effective boardroom conversations.

The boardroom conversationThe Good Governance Forum’s new guide focuses on the importance of boardroom conversations as the “magic dust” that underpins board effectiveness and considers ways in which boards strive to get the very best from the skills around the table.

Poor boardroom conversations can be a symptom of more fundamental issues that may impact board effectiveness – for example, dominant personalities, poor quality information, excessive focus on operating results rather than consideration of risk and strategy, as well as some of the “soft” risk factors mentioned above. The forum’s survey of FTSE 350 non-executive board members found that the most common reasons for ineffective conversations were:• Dominant personalities/groups

(79 per cent).• Inappropriate allocation of time to

discussion of matters requiring discussion or debate (52 per cent).

• Lack of preparation by board members and other attendees in advance of board meetings (50 per cent).

• Unhelpful manner of presenting information to the board (46 per cent).

The forthcoming toolkit to accompany the report therefore looks at how boards can improve their conversations by identifying danger signs – for example, groupthink,

along with underlying causes and suggested solutions. The finance professional has a particularly important role to play in ensuring that the board receives the most useful information to support better conversations and decision-making.

ConclusionTo achieve long-term success, company boards need to appreciate the changing risk landscape and ensure that they are well equipped to deal with its rigours.

Fortunately, this area is attracting considerable attention, with tools and frameworks being developed to support risk governance. Finance and risk professionals should also consider the need to incorporate the full range of risks, including the human ones, into risk maps, and to be aware of the challenge that this poses, such as whether they can be safely reported to the board. n

From football pitch to finance department: with a summer

of sport come lessons on identifying your career

coaching style

by Phil Sheridan, managing director, Robert Half UK

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Behind every great athlete there’s an expert coach. Research shows that outstanding finance professionals also cite role models, managers and mentors as having had a major impact on their development over the years and, according to a survey commissioned by Ernst & Young , 82 per cent of CFOs feel they have a duty to mentor and coach potential CFOs within their organisation.

The most successful relationships are brokered by coaches who understand their own coaching style, as well as how different employees are likely to react to it. Armed with this knowledge, coaches, managers and mentors can ensure that they have the most positive impact possible on their employees – and get the best performance out of their teams as a result.

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Coaching styles play a large part in any working relationship. To help understand your own coaching style, we’ve described the four main kinds of coaches below. They include key traits for the four types of coach, along with some tips to improve your coaching abilities. We’ve also created an online quiz to guide you through the process of working out which one you are at www.roberthalf.com/career-coaching.

1. Definitive coachYour take-charge personality and commercial thinking make you a natural leader. Highly competitive and results- focused, you play to win and you want your employees to do the same. You are excellent at setting objectives and raising the bar. You can quickly make difficult decisions or adapt your strategy to ensure the job gets done to deadline. Your staff know what is expected of them and you’re adept at allocating project roles that play on individuals’ strengths. Although you set clear expectations and look for ways to make projects more efficient, you don’t always provide enough information about how to achieve the outcomes you are seeking. This is okay for employees who prefer autonomy, but it can be challenging for those who want more direction.

2. Collaboration coachA generous coach with excellent listening skills, you are more than willing to “take one for the team” and spend a great deal of time working to develop those around you. You have a deep understanding of team dynamics and are good at fostering cooperation among diverse groups. You listen more than you speak and try to lead your team to find its own solutions, rather than telling them what to do. This helps your staff members build confidence in their abilities. You are also process-driven and enjoy working within well-established parameters. This can make it challenging when you are coaching staff members who thrive on entering uncharted territory; your tendency may be to play it safe rather than push the boundaries.

3. Persuader coachAn “ideas person”, you have creativity to spare and are always willing to help

your team brainstorm the next big idea or solution to a problem. You encourage your employees to think outside the usual parameters and you can easily adapt to change. If someone brings you a great idea, you will champion it and play on your strong negotiation skills. You relish innovative ways of thinking and reward your team for breaking new ground. You know your staff personally and are attuned to their dreams and aspirations. While your problem-solving style and passion make you fun to work for, you may take on more than your team can adequately manage, which can lead to employee frustration or even burn-out. Make sure you provide your team with sufficient resources to bring good ideas to life.

4. Diagnostic coachYou run your department like a well-oiled machine: organisation and careful planning are the hallmarks of your coaching style and your employees know what to expect each day. You encourage them to update their skills and use critical thinking to create solid business strategies; this comes from your natural problem-solving abilities. When they bring you ideas, you put them to the test and make sure they are worth the investment. Your careful analysis of situations can ward off most unpleasant outcomes but mistakes still happen. When they do, you may start to question everything. This can cause your employees to lose confidence and become risk-averse. When errors occur, try to get to the root of the problem but remember not to be overly critical.

5. What employees really wantHaving identified your coaching style, it helps to understand what your team will be looking for from you. The first point to learn is that your team believe that coaching will help them to develop as finance professionals. However, according to a survey of 500 British office workers, there is a big gap between expectation and reality. While 73 per cent of workers agreed that career coaching helps their job performance, 37 per cent said they received no career coaching from their direct manager.

On a more positive note, nearly half (47 per cent) of office workers believe that their manager is an effective career coach. When asked what makes an effective career coach, 35 per cent say knowledge and expertise are the top attributes, while 29 per cent say mutual trust and respect are more important.

Your coaching style – and how your employees react to it – can play a large part in your working relationship and the overall effectiveness of your team. Your team will work out what kind of leader you are and adjust their behaviour accordingly.

We recommend the following five tips for improving your coaching abilities:• Understand that coaching is one of

your responsibilities as a senior finance professional and make time within your working day to communicate with your team. You won’t be alone: 71 per cent of CFOs agree that they would like to improve their talent development skills, yet nearly half say that their schedule prevents them from devoting adequate time to talent development.

• Work through the quiz (www.roberthalf.com/career-coaching) to find out which coaching type you are and map your attributes onto the personalities of your team; who will respond best to which of your qualities?

• Accept that you may need to amend some of your behaviours to meet individual needs.

• Recognise that coaching is about “showing”, not just “telling”. It’s all about being an effective role model.

• Look for inspiration from the resources available to you. Your boss or your HR professional will be happy to help.

Listen to any successful athlete and they will cite mentors and coaches as their motivation to scale new heights of achievement. As a finance professional, you may be operating in a very different world to track or field events, but the principles are the same: you can be the inspiration for some truly great performances. n


Do you have what it takes to step up

to the top?We talk to three finance leaders about the skills needed to reach the summit

of the finance function

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Grace HortonHorton joined Capita in 2005 and took her first FD role in 2007. Since then, she has worked as FD in two divisions. Prior to joining Capita she worked for Nationwide Building Society and before that was group financial controller of Seymour Pierce Group.

I wanted to reach my potential, so when I left school and went to university I wanted to be successful. Once I’d decided that finance was for me, then FD was where I set my sights. You’re not sure you’ll get there, but I did want to reach that level.

I also wanted to make a difference, and even now I tell my staff that in order to make a real

difference to the business you’re working in you need to truly understand it. So I’ve always tried to take every opportunity that’s arisen to do that. Even if it’s outside finance, if it’s something that I think will add to my overall knowledge and my understanding of the things that drive the business, I will pursue those non-core skills.

It also helps with your credibility, and the fact is that you need to work closely with people to be a success yourself. If you want to be effective, then the people you’re working with have to respect you. I’ve always worked on the principle that as a senior finance professional you’re not there to be liked.

So sometimes you do have to speak up and deliver unpalatable news to the business, and that’s crucial – and if you do it properly then you will derive a lot of respect from that.

Earlier in your career, you tend to listen more, but as you grow into your job it’s important to probe and ask questions. If you sit quietly in fear of asking a stupid question, then you might miss out – and sometimes the seemingly stupid question is a good one.

I had that attitude in-built in me from the start. When you start out, everything seems rosy and everything works, but you soon learn that if you don’t ask questions, you can’t come up with solutions. If you don’t challenge, then the likelihood of bad decisions being made is greater.

Depending on the organisation, the importance of finance can vary. Where I am, it’s central to the company and we adopt a business-partnering approach. I’ve always encouraged my own team to get involved, not just with the wider business, but also clients and suppliers. The more they can understand contracts and agreements, the better. We have a lot of KPIs, SLAs and contractual obligations, and if you don’t understand those you can’t do the best job for the organisation.

I’ve had roles that might not have proved as successful or satisfying as I might have liked. That’s part of life, but unless you experience and try things, you’ll never learn. So aspiring FDs need to understand there’s no perfect career path.

You need to take the negatives and ask, “What would I do differently next time?” Mistakes also help you to realise what you don’t like doing, and that’s an important part of building a successful career.

Grace Horton, CFO, Capita Health ‘If you want to be effective, then

the people you’re working with have to respect you’


‘People look to you for inspiration. You have to use your personality and listen to your team’

Richard DavisonDavison was appointed CFO of the Cobra Group in July 1999. He qualified as a Chartered Accountant in 1975 after gaining an honours degree in statistics from University College London. In 1978, he became a senior partner in Cobra Group’s external auditors and tax advisers.

I made the switch from being an accountant to becoming a finance director at the Cobra Group in my forties, having been in the profession for 25 years. It was a late in life decision.

As part of my work, I recognised a client that was growing, and had got to the point where it needed an FD. And so I decided, having spoken to the chairman of the group, to make the

switch to FD. I think because I’d been in the profession and

had seen a broad spectrum of businesses, I understood how they worked. Working as an accountant certainly gave me the ability to deal with the unexpected.

And that is a slightly different background to those who come up through the ranks to become an FD through a commercial route.

When I made the switch to FD, I did draw on the experience of working with my previous clients – I saw what made a good management accountant for a start, and that was a real plus.

Rather than being in just one business and experiencing one management style, I saw a breadth of different types of management and that was a real help. I could learn from the mistakes of others.

I knew the client so, while it wasn’t easy, I did feel confident in my own skin. To have jumped into a business that I didn’t know would have been very difficult, but this wasn’t too bad.

Ultimately, the biggest challenge comes from managing people, particularly the teams around the world. I have about 50 people in my team; the senior ones are in the UK and Australia. Keeping them pulling in one direction at a distance is tough.

And the management challenge comes in a different form from accountancy. As a professional accountant, the focus is on providing a service and creating fees. In commerce, you’re looking at profitability, strategy and planning, so it’s certainly different.

I’m now a leader, and people do look to me for inspiration. You have to use your natural personality, and make sure you listen to your team. And that’s not just the finance people, but also the board. You have to do that to make sure you’re meeting their expectations. You might think you’re doing okay, but others may disagree, so listening to them is critical if you want to make a success of the role.

Leadership is important and working on your skills in that area can help, though I think that, to a large degree, leadership is innate. Clearly, technical skills can be taught, but the communication and leadership aspects aren’t as simple.

The biggest skill aspiring FDs have to master is communication. Anyone who reaches FD level wouldn’t get there without technical ability. My advice to them is simple: make sure you go into an industry that you understand and enjoy. I say that because I’ve enjoyed my time in both practice and business but I’ve seen people who haven’t. If that’s the case, then the chances are that you won’t succeed.

The second thing is to look at the people around you – above and below – and try to work out what their strengths and weaknesses are. That will make you a better FD. At the same time, don’t suffer fools.

Finally, know when to ask for help, and from whom. There’s a wealth of great advice out there and you need to know when to use it, and when not to. Too much advice can become self-defeating and a waste of money, so know which questions to ask.

Richard Davison, CFO, Cobra Group


KFH is a multi-disciplinary estate agency business operating out of 50 locations within London and employing nearly 600 people. I am responsible for three finance teams covering a wide range of services, both internal and external.

I first thought about aiming for the FD role when I passed my accountancy finals and was able to think about life beyond studying. I started thinking about how I could use the qualification and it was at that point when I thought, “I can do this.”

In terms of developing the skills that I thought would be of most use, starting off in practice meant that I worked with lots of different clients. In so doing, I realised that I got more of a buzz from helping move those businesses forward.

The skills I developed working with clients made me realise that these were the things that excited me and that I wanted to pursue.

Once I got the FD role, I focused on developing my ability to appreciate a broader picture; that meant developing a more strategic approach and working on my communication skills. I recognised that in a senior finance role you need to be able to talk to a broad range of people and stakeholders.

While I was on secondment at KFH the opportunity came up and the owners recognised that I could develop my skills and asked me to come across.

Those skills were mainly the “softer” ones – influencing, leadership and communication. I think they were always there within me, and I remember when I was studying enjoying the papers that focused on the softer skills more than the technical exams. I always knew that audit and tax weren’t for me.

The senior partner when I was in practice was always there as a sounding board and he always told

me to trust my instincts and to never be afraid to ask questions. He also stressed the importance of communicating with others and to be confident about what I was doing and what I brought to the business.

I always describe the FD role to those coming up through finance as being akin to that of a conductor of an orchestra. Ultimately, it is about recognising what resources you need to achieve a given outcome.

So that means you have to see the broader picture and realise that you can’t do it all yourself. There will be people who will be better than you at certain things – take tax, for example – so you have to have the confidence to put responsibility down the line to those that have those skills.

There is a danger that you think, “Well, I’m at the top so I need to be a specialist and expert in everything.” But that isn’t possible, and in that case you need to empower people who have those skills.

Also, never be afraid to try something new. You will inevitably make mistakes but the lessons they will teach you will be invaluable. So it’s about having the confidence to try out new things.

And I have this saying written on a T-shirt: “Enjoy what you do, and do what you enjoy.” Make sure you get the work-life balance right because you want to be able to come into work enthused about the task ahead. And you need to develop your external interests, it makes work easier if you’re an easier person to be around in the office.

The experiences of trying new things makes you a more rounded person and that’s one of the key attributes of a successful person.

Lastly, I want them to be visible and supportive of their colleagues. They should be there for the team, no matter the size of the business. Finance are there to support the business, so they shouldn’t hide.

Paul Allerton, group FD, KFH

Paul AllertonAllerton became the group finance director of estate agency Kinleigh, Folkard and Hayward in 1998, having joined the company three years earlier from London-based chartered accountancy Warrener Stewart. Before that, Allerton was with another accountancy practice, Littlejohn Frazer, from 1992. He had spent the previous three years with Sagar Croudson, based in Leeds.

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This feature is part of the CFO Priorities programme, which includes articles, papers and interviews. Supported by Robert Half. www.cimaglobal.com/priorities.

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Finance supporting

product innovation


This roundtable discussion at CIMA’s London office, attended by ten finance leaders from various sectors, began with a message from CIMA senior product specialist and discussion chair, Ana Barco, that there are various different areas in business where finance is already

partnering successfully.“What we’ve found through our own research,”

she said, “is that when finance works in this partnering role, the organisation can better meet its objectives.

“However, I think there’s an element that some organisations are doing this very well, some are thinking about it and others really think finance shouldn’t be getting that close.

“So it’s important to debate finance transformation, the future of management accounting, and finance’s customers and their expectations – and exactly what that means in terms of the finance function’s priorities when partnering. Where can we really add the greatest value?”

What’s driving transformation?On the topic of who is driving finance transformation and finance’s increased involvement in business decisions, Nigel Marsh from Reed said: “My experience is that it’s all about being intimately linked into the most senior team within the business, understanding the organisational goals and hopefully inputting into those and influencing them – then bringing that back out and setting the strategy that supports the overall goals for that business.”

The FD from a leading restaurant and hotel chain agreed this was key to finance’s success, adding:

“We need to be driven by the business agenda. We need to be responsive to, and help to shape, the business agenda. It’s a proactive shaping of that agenda, aligned with joined-up business priorities.”

The same FD told the discussion this was a “continual journey” for finance. “You need to continually refresh, as there will always be new ways of being more efficient, new challenges presented by the business and new skills presented,” he said.

Another participant, from the drinks sector, agreed, adding that the key was in changing the mind-set to ensure that the finance community is seen by other functions, such as sales and marketing, as having joint ownership. She added that she had seen change in her organisation in recent years: “As opposed to being solely responsible for the accurate reporting of what the numbers are, we now have strong joint ownership and involvement with other functions.”

However, a participant from the entertainment and media industry said that, in his organisation, things were at a different stage. “Our finance transformation is sort of back to front,” he said. “Historically, we have always been a very commercial finance team and I’m constantly sat around the table as the finance person, and on the other side there are commercial people. Finance has always done the business partnering, but, historically, have not put as much focus on standardisation of the processes.

“To counter that, we are moving to a shared service centre, but with the opposite motivation to that of other companies,” he added. “We think that by moving to a shared service centre and really having a focus on the process, the transactional side and the reporting, we’ll actually improve that side of things.”

At a recent CIMA roundtable discussion in partnership with Reed Finance, leading finance chiefs came together to explore how the finance function can become more influential in the innovation of the organisation’s products and services

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Finance in the futureA member of the discussion from the tobacco industry said that, in her view, outsourcing could mean finance faces a “scary future”. “From what I’ve seen, the amount of things not done at a market level can cause a problem,” she said. “There may be all manner of controls sitting in Romania or Poland or wherever your outsourcing centre may be, and what you see is that the team that you’re left with can focus on the value added income, but don’t know the basics because they haven’t had time to practise those skills.

“I find it a little bit frightening that all the skill, the technical finance skill, will sit in a different country and you’re left with people that are just kind of marketing people that like numbers.”

The participant from the restaurant and hotel sector countered that outsourcing is not an “all or nothing” process. “It depends where you’ve put the break points – how far you outsource and what you offshore, what you have in the retained team,” he said.

The representative from the drinks sector suggested that skills and development could also help avoid concerns about what’s left behind: “I think the career journey that you encourage, specifically with the younger staff, is really important here. Also, if anybody is going to be an FD, then at some point in their career they have to have had some experience in either the shared service centre or a commercial financial controller role. That’s how they will get the bread and butter, month-end experience as well.”

Customer expectations of financeAna Barco asked participants about their views on the expectations internal customers have of the finance function. “Are we knocking on the door and trying to provide services? If so, are we

providing the services they want – or are they thinking, ‘Oh, no, here comes finance’?”

A participant from a global services provider said that the nature of expectations comes from the top down. “One of the situations we have is that our chief executive is an accountant and, obviously, our CFO is an accountant, so while they have been coming through the ranks they have been putting in place key finance people – because they understand the value finance people bring and they trust them. So in our set-up, we’ve very much got permission to play, but then in some areas of the operation we get a lot of push-back, because people think that finance has got too much power.”

“So there’s this kind of balance – in that the door is open at a senior level, but then further down the organisation we get a bit of push-back from operational people.”

The participant from the tobacco sector added: “I find it really interesting that we’re talking about the customer. I don’t think it should ever be about a customer/service provider relationship and I’ve never experienced that in my organisation.

“It’s much more of a collaborative thing where, yes, we hold the purse strings, but we’re working together. I think that the best business partner is somebody from finance that knows enough about the business to come up with solutions themselves. That’s where we’ve gone wrong in the past, where we sit there, evaluate and analyse everything that they’ve come up with, and give them the result, rather than making suggestions for improvements. That’s the value of a business partner.”

Skills for successDiscussing the skills and experience required to be a business partner, one participant said: “Curiosity is the key for me. It’s about finding someone who’s going to always challenge, ask the questions, really be a partner for the operational people, who sometimes get a little bit blinded by their own ideas and what they want to achieve and loses the sense of the commerciality and the business contacts.”

The participant from the tobacco industry added that it was about finding a balance between a “non-finance understanding” and the “financial numeracy that an accountant brings to the table”.

“Probably half of my team are the technical types, and the other half are much more the type coming up with solutions for things,” she added. “So I think you can balance it. A good business partner can still be one of the more technical people, if they’ve got the right emotional intelligence.”


Finance driving companies’ products and servicesIn the next part of the discussion, Ana Barco asked the participants how finance is working tactically as well as strategically in the products and services that their organisations provide. “What are the big wins when finance does really get involved in the products and services?” she asked.

The attendee from the drinks sector told participants: “I think the biggest opportunity I see is the supply function, in terms of our focus on SKUs (stock keeping units), because there’s a wide spread of SKUs and when you look at the distribution there’s a long tail that we don’t perhaps need. Finance can help with rationalising that.”

“Take the contract life cycle. We’ve got a commercial finance team that would be involved, for example, in the bid stage,” added the participant from the global services provider, “so they’re putting together the bid itself and that is a vital role. We’ve then got an account start-up unit that sits within finance. A lot of the contracts we are bidding for have a very tight margin. So our commercial finance team is making judgements on a day-to-day basis around what is the right costing and pricing solution, and it’s really important that they are doing that.”

Gaining this involvement in decision-making around products can often require winning the confidence and respect of the senior management team in an organisation – as well as being transparent about decisions – the discussion heard.

“Commercial directors or executives appreciate transparency, in terms of this is why this decision has been made, rather than a series of closed-door conversations and budget decisions,” said the participant from the drinks sector. Having those conversations in a forum where there are clear KPIs and the logic can be seen helps.”

The discussion also heard that while finance teams often talk about management information, owning the financial data and providing decision support, finance is increasingly being asked to look at non-financial data, to use the skills, expertise and competencies it has for financial data, and transferring that into increased company performance.

“I don’t think that’s all by super design, however,” said the participant from the drinks sector. “I think that’s just a result of resources thinning out. We’ve got a classic situation in that when we look at supply forecasts and forecast accuracy, and how to motivate the sales teams to be more accurate in their forecasts, it’s very much a conversation that supply could have directly with sales. However, for some reason – perhaps because we’re further along the finance partnership journey, the supply team gets a little more comfort from involving finance.”

However, a participant from the auto industry added: “I think we’re really trying to get underneath the P&L to some extent. So rather than looking at a reduction in marketing spend as a saving of cash, we are able to assess that in terms of any potential loss of market share,” he said.

“We’re trying to get a little bit more sophisticated to understand where the opportunities are, what’s working and what isn’t working, because value for money is really important, not just control of budget spend.”

How has your finance team been welcomed to the table?The roundtable concluded by hearing that, often, finance looks like it’s pushing into other teams to try to help them, when sometimes they don’t really want help. Other times, finance’s help is only wanted to a certain degree.

One participant suggested that finance needs to be more demanding of its partners to really help to understand the products, the market and the competition.

However, another attendee argued: “Doesn’t that partly depend on the culture of the business? Because, as we’ve said earlier, some will invite you in, while some will feel it’s a little bit presumptive just to go and say, ‘I pretty much demand to come out and to do this’.

“In my view, it’s about being there, asking the right questions, having that enquiring mind, the right questioning skills, gathering your knowledge and then identifying where you can add value. I’m not saying I ask permission to come in, but over time you will get invited in because you’re seen to be adding value.” n

‘A lot of the contracts we are bidding for have a very tight margin. So our commercial finance team is making judgements on a day-to-day basis around what is the right costing’

This article is based on a CIMA senior roundtable, supported by Reed Finance

Finance fit for the future

In the latest of a series of CIMA roundtable discussions looking at the future of the finance function and effective finance transformation,

leading CFOs covered issues ranging from meeting the demands of the wider business to developing

the finance teams – and people of tomorrow

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L eading finance professionals outlined their views on how the finance function can be a more influential business partner, and develop the skills needed to be such,

at a roundtable discussion in London.Peter Simons, development and

innovation specialist at CIMA, launched the discussion by explaining that CIMA’s own research around this subject has revealed that there is strong demand for finance transformation within business. He said that the finance function faces a demand for more efficiency, a need to be more influential, and to be a genuine business partner. Achieving these things, he said, will help boost the status of management accountants and demonstrate they are engaged to improve business performance.

One participant from a financial services organisation said that in his sector, finance was already well on the way to achieving these aims. “I think that in a financial services company, management accountants tend to be the ones with the greatest business influence anyway,” he said. “Management accountants hold great influence over the direction of the business and the strategic side, as well as the operational finance areas. We are absolutely influencing the business and are part of the decision-making process from the roots up.”

Is performance management the key to influence?Asked whether a focus on performance management was crucial to finance gaining more influence, the same participant said it

was – but that the focus must be on future performance rather than just looking backwards. “Past performance is important but so is projected future performance,” he said. “A lot of our work is around scenario analysis – what’s going to happen in the future, how the business might look under certain scenarios – because we’re very capital-centric and there’s a lot of additional regulation from the FSA.”

A participant from the pharmaceutical sector agreed that performance management is important to becoming a genuine business partner, but added that being seen to add value is perhaps the most important issue: “We’re getting strong feedback now that the next generation of finance partnering is all around value identification, value enhancement, value delivery and working with the business to take performance management and

interpret and communicate it – to use it to help with the future. It’s changed entirely the role of finance partnering.”

Although there was a consensus around the table that finance professionals must develop the ability to be influential business partners, it was also agreed that successful finance teams need a mix of people and that some individuals are more comfortable in a more “traditional” role.

“What we have realised on our journey, which we’ve been on for a few years now,

is that for some people there is a recalibration and a capability change, but that not all of the people in the finance partner role have necessarily enjoyed that space, or been as good at it as we suspected,” commented a participant with experience across a variety of sectors.

Shared service centres enter the mixThe growth of shared service centres of excellence and finance partnering, which have created a new level of movement across finance, are also driving the development of the finance function, the discussion heard.

A second participant from the pharmaceutical profession said: “I think it’s driving the key trends we talk about in finance – it’s driving efficiency as you can centralise and standardise, providing

better information and insight and freeing up the retained functions for finance to be more influential.”

That view was echoed by his counterpart from the pharmaceutical sector: “I think the value proposition is huge and I think that what you have to do is be really clear on all of the levers of value that you’re trying to build. It often also gives you a level of compliance that you cannot possibly have otherwise. I have 30 sites reporting to me from China, all the

‘The next generation of finance partnering is all about value

identification and value delivery’


way through Europe, and into Latin and North America. But the ability to run 30 sites on a compliant basis becomes increasingly difficult as the regulatory and fiscal environment becomes more complicated. The second thing I would say on this is that we will become much more demanding of the improvements and performance management coming out of the shared service groups. They have the ability to leverage innovation and drive improvements in reporting processes much quicker than we do across lots of different modes of operation.”

An attendee from a major oil corporation spoke of his firm’s experience of moving to shared services, and the impact it has had on individuals and the finance function as a whole.

“We’ve been through maybe a four-to-five year journey to move people or jobs to new locations,” he explained. “What we’re really struggling with now is that we’ve sort of branded people as ‘offshore or onshore’ and ‘retained or non-retained’ and it’s put a barrier in the end-to-end finance process. It has made it less efficient. We’ve seen an initial cost saving, but we’re trying to change mindsets so that everybody works on the same team but just happens to be sitting in different places. That’s where we are going to be able to really unlock some of the efficiency and influence that we’re trying to achieve, where people are not inside finance fighting against each other, but are all just focused.”

Equipping staff with the necessary skillsAnother participant with broad finance experience added that not all staff find the transition to business partner as easy as others – and that companies must think carefully about their training strategies. “The primary challenge is how you equip people with the skills and capabilities to become business partners in the first place,” she said. “A lot of the traditional ways of working are hard to teach out of

people, perhaps those doing more transactional work or in some of the reporting activities, for example.

“My biggest challenge is finding ways to effectively equip those people such that if you put them in a room with a bunch of people they can effectively add colour and value, and people will listen to them and not just look at them as finance people – but will take their views on wider areas, whether that be product development, marketing or whatever,” she added.

“Part of the change comes back to the training agenda and some of the qualifications. All the accountants are fantastic technically, but it’s hard training

someone to have that commercial sense and ability to have a conversation around the coffee machine about a business issue.”

An academic attending the event agreed that organisations must think carefully about how they develop their finance staff.

“There is no one-size-fits-all for an organisation,” he told the discussion. “There are different cultures and there are going to be different reactions towards change and to what finance does. Many of you are saying we don’t find business partnering going on. I think a better way of putting it is that there is no one-size-fits-all person, so just because somebody is fresh out of their qualification doesn’t mean that they have an equivalent skill set on top of their technical competence. There are some people who will be good business partners, provided they get the support to do that. There are others who like their spreadsheets, they like the routine and the numbers.”

Thinking about the customerOne participant concluded the discussion by saying that, although finance has come a long way in transforming and becoming a genuine business partner, it could develop further by focusing on its customers and their needs. “I suspect that one of the reasons why we aren’t as influential as we can be is because we don’t think about our customers as much as we should,” he said. “We should be thinking more about our stakeholders and creating the right sort of information and dialogue that is really important. Being a good communicator in finance is a real strength.”

However, another participant countered that some organisations are already doing this – and doing it well: “We actually call our business partners co-pilots because we see them as sitting alongside the pilot – the managing director or the other head of area – very much as the go-to person. And that role very much is about influence and engaging with the business.

“You have a seat around the table because you know the business. In our organisation, you don’t get to influence unless you know the business inside out.” n

‘It can be hard training someone to have the ability to hold a conversation at the coffee machine about a business issue’

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This article is based on the debate from a senior roundtable used to input to a CGMA research programme on the future of management accounting. Supported by Genpact.

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CIMA 2012 CPD Autumn Academy 6-7 September 2012This two-day event is designed to help finance professionals maximise their CPD learning in a convenient and cost-effective

format. It will cover a variety of topics that are relevant to management accountants as well as providing an opportunity to network. www.cimaglobal.com/conferences

Finance and funding in an NHS Trust12 September 2012This event will look at how an NHS Trust is funded and the setting of finance targets.www.cimaglobal.com/westmidlands


This event will review the Bank of England’s latest economic forecasts from its recently published inflation report. It will also cover the outlook for GDP growth, as well as CPI inflation.

www.cimaglobal.com/EastMidlandsandEastAnglia

Further events

The Bank of England’s view of the British economy for 2012

Introduction to the Bribery Act and review of recent developments in money laundering

Tax update and topical issues – in partnership with AAT

This presentation will review the key aspects of the Proceeds of Crime Act and money-laundering regulations, with an examination of latest developments. It will examine the pitfalls for management accountants.


This event will cover a range of topical tax matters, including capital allowance, budget update and its recent changes. This is a great chance to gain knowledge and to network with potential employers, clients and employees.


11 July 2012, 6.30 pmNational Skills Academy in Financial Services, Norwich

12 July 2012, 6.30 pmWyboston Lakes Conference & Training Centre, Wyboston

25 September 2012, 6.30 pmHallmark Hotel Derby, Derby

EVENTS

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NEXT TIME


T E C h N O L O g ythe

issue

How analytics can enhance business performance Cybercrime and the growing threats to your business

Harnessing effective ERP Where next for iXBRL?

Technology’s role in modern-day corporate reporting Mobile technology for improving customer relations

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66

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CIMA Sri Lanka: KandyRoshini Wirasinghe: manager 229 Peradeniya Road, Kandy, Sri LankaTel: +94 (0) 81 222 7883Email: [email protected]

CIMA UK David Rowsby: regional director 26 Chapter Street,London SW1P 4NP Tel: +44 (0) 20 8849 2251Email: cima.contact @cimaglobal.com

CIMA ZambiaKennedy Msusa: country manager6053 Sibweni Road,Northmead, Lusaka,ZambiaTel: +260 1 290 219Email: [email protected]

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CIMA offices


CIMA contacts:New ZealandTel: +64(0)48017132Email: [email protected]

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KenyaEmail: [email protected]

Excellence in Leadership July 2012

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Transcript of Excellence in Leadership July 2012