world conference report on manufacturing processes

7/29/2019 world conference report on manufacturing processes

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Building world-class businesses for thelong term: challenges and opportunities

Short-term thinking by both companies and their investors is widely seen as a key ault

behind the global fnancial crisis. It seems, rom the current discourse, that businessesneed only shit to a longer-term outlook and act in a socially responsible manner or alltheir and the worlds problems to be solved. But is it so easy? What does a long-termapproach look like in practice, and what challenges ace companies that want to lengthentheir horizons and create sustainable enterprises?


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Key messages

1. Recent events, such as the global fnancial crisis and the growing challenge o environmental sustainability, havebrought new urgency to the age-old debate o how business fts into society. Modern communications andglobalisation are also creating greater complexity simply ormulating the right questions is difcult; fnding

solutions the new normal may be near impossible.

2. One key theme permeates much o the discussion: a condemnation o short-termism and the promotion olong-term thinking. This is, in part, responsible or the retreat rom shareholder value as the dominant business

philosophy and increasing interest in alternative corporate models, such as those common in India and China.

Abandoning short-termism or the longer horizon, it seems, would cure all ills and transorm companies into orces

or good. But this view should not be adopted uncritically. The reality or most businesses is more complicated

and requires a more nuanced approach.

3. Executives ace two daunting challenges as they embrace the value o long-term thinking and strive to createsustainable businesses. First, the genuine need or short-term stewardship can distract managers rom their long-

term vision. Second, defning the long term and embedding it into todays operations are more complicated tasks

than they may seem at frst glance. The key is to think creatively about the challenge o juggling short and long-

term goals.

4. A long-term vision is more likely to align with the public interest, but with two caveats. The frst is that thelong-term mission must be based on sound moral and ethical principles. The second is that it must be executed

pragmatically, assuring that short-term actions support the long-term goals.

The recent nancial crisis and issues such as climate change,

food security and poverty mean that business as usual is no

longer an option. Leading companies are asking themselves

what part they can play in ensuring equitable and sustainablegrowth for generations to come.

A critical requirement for this is to shift the organisational focus

to the long term. This report makes a helpful contribution to

understanding how this can be done.

Paul Polman, Chie Executive Ofcer, Unilever


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5. Creating long-term value does not mean that short-term needs can be ignored. However, managers need torecognise short-term pressures that do not contribute to the long-term vision. These include poorly defned

perormance targets and the pressure to ollow the herd.

6. The relevant time horizon can be difcult to pin down and is inuenced by actors such as industry characteristics.Much o the conusion can be cleared when companies distinguish between a long-term perspective and a long-

term planning horizon. The perspective provides a guiding star that leads the company 20, 50, even 100 years intothe uture while the planning horizon must be more practical. It must provide enough scope to think radically, but

not so much that it is abstract.

7. Managers need to create a meeting point where long and short-term needs connect. I immediate goals clashwith long-term aspirations, the incongruence is a symptom o an unhealthy company. Traditional strategic

planning creates a useul hierarchy o ideas to support an organisations thinking rom high-level purpose to fve-

to-ten year strategic goals through to short-term operational actions. However, the past oers little guidance to

the baseline assumptions on which companies now need to ormulate their uture.

8. Global challenges including climate change, population growth and loss o biodiversity, mean that companiesmust incorporate a much broader range o issues into their planning than ever beore. Governments andregulators have a key role to play in creating the carrots and sticks which will ensure that business incorporates

such impacts into their planning. But companies that are able to work with uture uncertainty and to translate

this into short-term action can have a major competitive advantage. Many companies do not have the power o

the large multinationals to shit markets. But by working openly with customers, suppliers, regulators and even

competitors, they can exercise surprising inuence on the course o industries.

9. Management accounting tools such as the balanced scorecard and the CIMA Strategic ScorecardTM can helphighlight the areas that companies must address to maintain sustainable business models and to manage the link

between the short and long term. Management accountants have a key role to play in providing and analysing

data around the key drivers o long-term business perormance and in designing perormance managementsystems that encourage the desired behaviours.

10. Companies should ocus on the ollowing aspects o their business models to ensure that their short-term actionssupport a long-term uture: attracting and retaining customers, a motivated and skilled workorce, durability o

the supply chain, innovation and cost leadership. At the heart o these considerations is the core business model

which asks the basic question: How do we make money?

11. The CIMA Workshop section in Appendix 2 provides some initial questions to help translate the high-levelmessages o the report into action. This will be supplemented by additional material on www.cimaglobal.com/

Thought-leadership


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About CIMA

The Chartered Institute o Management Accountants, ounded in 1919, is the worlds leading

and largest proessional body o management accountants, with 183,000 members and studentsoperating in 168 countries, working at the heart o business. CIMA members and students work

in industry, commerce and not-or-proft organisations. CIMA works closely with employers and

sponsors leading-edge research, constantly updating its qualifcation, proessional experience

requirements and continuing proessional development to ensure it remains employers choice when

recruiting fnancially trained business leaders.

CIMA is committed to upholding the highest ethical and proessional standards o members and

students, and to maintaining public confdence in management accountancy. CIMAs goal is to

contribute to the overall health o the global corporate sector and believes that organisations should

be ocused on their long-term sustainability.

According to independent research conducted by the University o Bath School o Management,

CIMAs syllabus and examination structure are the most relevant to the needs o business o all the

accountancy bodies assessed. See the CIMA dierence report or urther inormation at

www.cimaglobal.com/cimadifference

For more inormation about CIMA, please visit www.cimaglobal.com

Follow us on Twitter at www.twitter.com/CIMA_News

About the authorsGillian Lees is head o corporate governance within the knowledge unit in CIMAs profle and

communications department.

Roger Malone is a reelance writer and editor specialising in business and economics. He has lived

and travelled extensively in Asia, as well as Europe and North America.

The authors would like to thank Thomas Lingard at Unilever and Alice Chapple at Forum or the

Future or their invaluable insights and assistance as well as Stathis Gould, Senior Technical Manager

at IFAC, and CIMA colleagues or their helpul suggestions and comments.


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Building world-class businesses for the long term: challenges and opportunities | 1

IntroductionEvents over the past ew years have brought new urgency to the age-old debate o how business fts into society.

Companies are being chastised rom all directions or ocusing on their own sel interest and that o their shareholders

and told they must act in the public interest. Multiple stakeholders oer conicting ideas o how best to organise and

govern activities that generate wealth. The agency problem, arising when ownership and control o a company are

separated, has come under increased scrutiny. Observers are questioning whether market competition provides sufcient

discipline to drive and constrain businesses simultaneously. And, o course, the markets structural ailures and how to fx

them are recurrent themes or conerences, television talk shows, blogs and newspapers.

On its own, the global fnancial crisis would have been enough

to provoke serious soul-searching about the role business

should play in society. But even beore toxic assets and

Lehman Brothers downall, corporate scandals at the start o

this century notably Enron and WorldCom signalled severe

aults in the prevailing corporate governance and philosophy.

But while the debate might not be new, additional acets

have created increased complexity. Modern communications,

as one example, have accelerated exponentially the spread

o news and rumours and contributed to todays volatile and

rapid share trading. Globalisation is also changing the rules o

the game. The dominant western model or public companies

has been challenged by the emergence o world-class

companies rom developing markets that have dierent views

on governance and structure, as well as the ascendance o powerul new investors such as sovereign wealth unds. And

the reocus on global sustainability has shattered long-held assumptions on corporate value.

Just ormulating the appropriate questions in such a complex environment is difcult; fnding solutions the new

normal, as some call it may be near impossible.

In the midst o all this chaos, one theme permeates much o the discussion: a condemnation o short-termism andthe promotion o long-term thinking. In a nutshell, short-termism is a fxation by company managers and investors on

immediate gains with little i any consideration or longer term benefts or harm. The attitude has been blamed or some

o the worst excesses o the global fnancial crisis and an excess o public bads, as green economists see environmental

damage and other negative externalities to society that arent represented in the fnancial statements.

Short-term thinking, or example, is blamed in part or the recent takeover o British iconic chocolate manuacturer

Cadbury by Krat, the US ood giant. In early 2010, ater a our-month battle, Krat completed a US$19.4 billion hostile

takeover o Cadbury. During the takeover battle, the share o stock in Cadbury owned by short-term investors including

hedge unds went rom 5% to 31%, suggesting that the only open question was the fnal bid price. The deal was heavily

criticised in the UK as the latest example o a venerable company that had allen victim to impersonal short-term market

orces.

Sir Roger Carr, Chairman o Cadbury during the merger battle, lamented, At the end o the day, there were simply not

enough shareholders prepared to take a long-term view o Cadbury and prepared to orego short-term gain or longer-

term prosperity. Individuals controlling shares which they had owned or only a ew days or weeks determined the

destiny o a company that had been built over almost 200 years.

Against this background, companies and shareholders are being exhorted to think long-term. Abandoning short-termism

or the longer horizon, it seems, would cure all ills and transorm companies everywhere into orces or good.

But shiting gears and acting suddenly in the long-term interest is not as straightorward as might be suggested and

raises many questions. What are the challenges o implementing a long-term ocus and how does it look in practice?

What is needed to link directly long-term aspirations to a companys day-to-day operations and success? And would a

long-term view really mean that a companys relatively narrow interests would converge with the wider public interest?Many companies are exploring these questions, and some such as Unilever, IBM, Tata, and Ford have shown some

immediate progress.


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2 | Building world-class businesses for the long term: challenges and opportunities

This report identifes some o the actors complicating the debate on the role o the company in society. We ocus

particularly on the changing models o ownership and diering time horizons and on how these have interacted in some

cases to produce undesirable consequences.

We then consider the argument or a long-term approach, identiying some o the difculties o defning and delineating

the long-term. O particular importance is how to manage the interplay between short and long-term thinking. We

look at the role o government and regulation in fne-tuning long-term incentives so that they all within a reasonable

timescale o most companies. And we consider whether long-term approaches by individual companies best serve thepublic interest.

Next we examine the practical considerations o pushing orward a long-term view. Disoriented by the current

maelstrom, it is easy or managers to lose sight o the perennial principles o good organisational practice. These proven

principles give companies the best chance o success in any situation. Even as managers seek to clariy the over-arching

purpose and structure o business, these practical measures or navigating through the conusion manages the present

without compromising the uture.

We conclude that a world-class, sustainable business must ocus on a basic set o priorities a clear strategy, cost

leadership, a durable supply chain, a motivated sta, satisfed customers and innovation. When successul, this approach

can create enduring corporate value and organisations that prosper not just or months and years, but or decades. We

suggest ways o bringing this approach to lie by creating a ramework or organisations to use and adapt to meet theirspecifc needs. At the end o the report, we oer the CIMA Workshop, a section which will help translate the high-level

messages into practical tools and questions that can move any organisation orward.

This report builds on a number o other recent CIMA reports looking at dierent aspects o long-term corporate

sustainability, such as comparisons between eastern and western approaches to governance. Details can be ound at the

end o the report.

Current issuesUntil recently, the debate about appropriate ownership models and the role o business in society has been generally

confned to college lecture halls, board rooms and perhaps, the business columns o selected media. Indeed, periodic

corporate scandals have momentarily raised the profle o the discussion, but more oten than not these ailures have

been attributed to greed rather than some underlying crack in the system. The wide-ranging suering brought by the

fnancial crisis changed that and exposed the fssures that have been undermining the Anglo-Saxon or western model.

A changing climate or listed companies

The so-called Anglo-Saxon model o corporate ownership, prevalent in the UK and US, has been under increasing pressure

in recent years. The model eatures dispersed ownership o shares and dominance by institutional investors such as

pension unds. For decades, it has been considered the most eective ownership structure or public companies, even

though it exacerbates the agency problem (a sharp separation between ownership and management). The key advantage

o the model is access to global capital.

At one time, the model served the market and businesses well. For example, in the 1980s in the United Kingdom,shareholders like pension unds and insurance companies were the dominant owners o many major public corporations

and largely represented the interests o all shareholders. In general, they took a long-term view o their investments.

In this environment, there was a common interest among shareholders, corporate managers and board members.

Shareholder activism ocused on ensuring a strong board o directors was in place that could exercise judgment

independent o the management.

But over the past ew decades, the smooth operations o Anglo-Saxon model have been attacked on various ronts.

Shareholders, in the Adam Smith model, take an active interest in the joint stock company, said Paul Abberley, CEO o

Aviva Investors London. You could argue [that interest] was there in the nineteenth century, but i it was, it was lost in

the last 30 years.

An explosion o new players hedge unds, sovereign investment unds, private equity unds and others has brokendown the premise o commonality. Ira Millstein, an expert on corporate governance at Yale University, said in 2008 that

this change has created or corporations and their boards a zoo o owners with dierent stripes, teeth, sensors, claws,


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vision, strength, will, and attitudes. The agency problem is no longer confned to owners and managers, but stretches

along the entire investment chain, rom the original providers o capital to the ultimate users, creating a complex web o

principal and agent relationships.

Gazing at this menagerie, in which values are diused and oten conicting, managers fnd it difcult, i not impossible, to

identiy and understand the shareholder interests they are meant to serve. This is uncharted territory and has awakened

images o ownerless corporations, where the diversity o shareholders means there is no dominant or powerul voice

among the owners to hold the board to account.

Investment techniques and instruments have also prolierated rapidly in recent years. High-requency trading, short

selling, share lending, hedging and other opaque options have helped decouple investors title ownership and their true

economic interest. O-market trading, or example, is a recent phenomenon, giving players the chance to buy and sell

shares even when exchanges are closed. What looks on paper to be a large owner o a company may only be a renter

with a signifcantly dierent agenda than that o the true share owner. Hedge unds have taken the brunt o the criticism

or this shit, and CEOs such as Paul Polman at Unilever, have made it clear that it is not their job to keep the hedge

unds happy, saying They are not people who are there in the long-term interests o the company.

Rise and all o shareholder value

The underlying shits in ownership and investment structures have promoted the wests embrace o shareholder value in particular the fxation on short-term results that it encourages. Shareholder value has underpinned management

thinking in developed markets or almost three decades.

A sharp ocus on shareholder value and the consequent emphasis on short-term results have, at best, outlived their

useulness. And the problem is not confned to corporate head ofces. The mantra o maximising shareholder value has

created a destructive cycle, with shareholders quick to sell and reinvest elsewhere, outside analysts ocused on stock

prices as the key metric o corporate health, and top executives (urged orward by imbalanced incentive packages)

anxious to guide share prices higher.

Shareholder value has a noble lineage. Its antecedents can be traced at least as ar back as 1776, when Adam Smith

wrote in The Wealth of Nations, It is not rom the benevolence o the butcher, the brewer, or the baker, that we can

expect our dinner, but rom their regard to their own interest. More recently, proft maximisation as the guiding staror companies was given intellectual credibility in a 1970 New York Times article, in which Milton Friedman wrote

amously that the one and only one social responsibility o business is to increase profts. Anything less, the conservative

economist argued, was pure and unadulterated socialism.

In essence, the notion o shareholder value suggests that the

ultimate success o a company should be judged by how well

it enriches its shareholders, either through dividend payments

or share price increases. With the stock market as the judge

and jury, strategic horizons shrank to a myopic fxation on

short-term results. Shareholders were quick to sell when

companies missed their own proft targets. Results were

weighed heavily against expectations. And, executives, otennurturing bonus packages linked to meeting yearly targets,

adjusted their strategies accordingly.

The idea gained currency ollowing a 1981 speech by Jack

Welch, then the new CEO o GE and later dubbed the ather

o the shareholder value movement by The Financial

Times. The speech described Welchs mission to increase

profts, primarily by cutting costs and discarding underperorming businesses. As a result, Welch said, GE would be the

locomotive pulling the GNP, not the caboose ollowing it.

But almost three decades later, just as amously, Welch abandoned this child. On the ace o it, shareholder value is the

dumbest idea in the world, he said in 2009. Shareholder value is a result, not a strategy your main constituencies areyour employees, your customers, and your products.


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Ha-Joon Chang, a South Korean economist at the University o Cambridge, wrote in 23 Things They Dont Tell You About

Capitalism, The weakness o [General Motors] managements short-term oriented strategy has been apparent at least

rom the late 1980s, but the strategy continued until its bankruptcy in 2009, because it made both the managers and

shareholders happy even while debilitating the company.

Polman at Unilever is among a growing cadre o top executives turning away rom shareholder value. Among his early

acts was to stop oering earnings guidance to investors, I do not work or the shareholder, to be honest; I work or the

consumer, the customer, he said. Im not driven and I dont drive this business model by driving shareholder value. I drivethis business model by ocusing on the consumer and customer in a responsible way, and I know that shareholder value

can come.

The retreat rom shareholder value was hastened by the global fnancial crisis. Many critics blame an excessive ocus on

share price, especially in the fnancial services sector, or the kinds o risky strategies that created a debilitating amount o

toxic assets, brought down Lehman Brothers and others, and sent most o the world into recession.

The cumulative result has been a major loss o trust in businesses and their leaders in the west. As Anthony Hilton,

an Evening Standardcolumnist, has pointed out in his comments about the 2011 World Economic Forum in Davos,

Customers, employees, the environment, the other stakeholders have been sidelined and exploited or the short-term

beneft o shareholders and a management rewarded or short-term share price perormance rather than long-term

business sustainability.

Receding dominance o the western model

While the Anglo-Saxon model o ownership and governance, with its low concentration o share ownership, has

long been held as best practice or companies entering the global market, other models have always resided in the

background. These competing models or instance, those ound in Germany and Japan have oten been characterised

by more concentrated patterns o ownership and, at times, signifcant participation by organised labour. But in general,

these models werent seen as easily exported and the successes were oten attributed to unique domestic environments

such as the Social Contract in Germany. The ailed merger o Daimler and Chrysler between 1998 and 2007, or example,

was in part the result o tension between the competing models.

The greatest challenge to the Anglo-Saxon corporate model has come rom the emergence o corporate giants romemerging markets, particularly India and China. The rise o Lenovo rom China and Inosys in India, or example, has

electrifed the debate on ownership and governance models and turned the discussion rom an academic exercise to

one with immediate, practical implications. Coupled with the stress brought by the global crisis, the success o the Asian

model has called into serious question the very validity o the western model.

Governments or wealthy individuals or amilies are still the dominant shareholders in many Asian companies, particularly

in China. And while state or amily-owned or controlled enterprises ace their own obstacles to success, they are

generally spared the burden o ollowing market uctuations closely unlike UK or US companies with their widely-held

shares. In addition, cultural traditions and the importance o personal relationships give many Asia executives a view o

their constituencies that go beyond shareholders to include their employees, community, suppliers, and country.

Proessor Julian Franks rom the London Business School has suggested that the orm o capitalism ound in Asianand other emerging markets is more efcient and eective than the western one. With a greater concentration o

ownership, Franks argues, Asian companies incur lower agency costs, and their owners monitor management more

closely. As standards in Asian governance and regulations improve, reducing the scope or potential abuses by dominant

shareholders, the disparity could become even greater over time, he believes.

The stakeholder perspective

As the shine o shareholder value has dulled, a new emphasis centred on the perspective o multiple stakeholders has

emerged. Intellectually, this is an exciting time, wrote Stean Stern, a Financial Times columnist. Academics and business

thinkers are being orced to return to frst principles, question base assumptions, and consider whether trusted models

have led them astray.

Reporting on the events at the World Economic Forum in Davos, Switzerland, in 2011, Hilton at the Evening Standard

noted, The ethical and moral question or Davos is to explore how managers can genuinely reconcile the competing and

potentially conicting demands o multiple stakeholders in a way which creates a sustainable business the current


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benchmark or success, shareholder value, has been ound to promote all sorts o division which the public and politicians

no longer fnd acceptable, rom opportunistic oreign takeovers o British businesses to the collapse o corporate pension

schemes to the questionable profts used to justiy bankers bonuses.

Such attitudes ft well with the teachings o Peter Drucker, the widely respected management writer. Business

enterprises ... are organs o society, he wrote in The Essential Drucker. They do not exist or their own sake, but to ulfl

a specifc social purpose and to satisy a specifc need o society, a community, or individuals. They are not ends in

themselves, but means. He acknowledged that proft and proftability are essential or any business, but warned, Theconcept o proft maximisation is, in act, meaningless.

Managers moving beyond the stale precepts o shareholder value must take on

such attitudes. Mentally, this requires understanding a wider range o stakeholders:

shareholders, undoubtedly, but also employees, customers, business partners,

communities in which the company operates, and even, in terms o pollution, climate

change, biodiversity and other externalities o business, the planet itsel.

Decisions cannot be made based solely on the benefts oered to one group o

stakeholders. The duties o directors o UK companies, or example, relate to the long-

term success o the company or the ultimate beneft o shareholders. This recognises

that companies will not succeed in the long-term i the directors do not take accounto other stakeholders. There will likely be times, or example, when some slice o

proftability should be sacrifced in the short-term to maintain sta motivation, to help

a reliable supplier, or to protect a neighbourhood beyond the legal mandates or public

relations impact.

However, as John Maynard Keynes wrote almost a century ago, In the long run we

are all dead. Managers and investors pressing or a shit to long-term thinking ace a

challenge in defning how long exactly the long-term is.

What is the right time horizon or

business?No one starts a business to ail, and ortunately ew purposely run a business to ruin. Founders, managers, board

members and most other stakeholders usually want their companies to prosper indefnitely, and many o todays

corporate giants take pride in their longevity. The recent ocus on short-term strategies and shareholder value has blurred

the view o the distant horizon, but has not diminished the general desire to reach it.

But executives ace two daunting challenges as they rediscover the value o long-term thinking and strive to create

sustainable companies. First, the genuine need or short-term stewardship can distract managers, even those with the

best intentions, rom their long-term vision. Second, defning the long term and embedding it into todays operations are

more complicated that they may seem at frst glance.

Thought starter: is the public interest satisfed?

Do the actions o companies with long-term strategies inevitably converge on the public interest? Unortunately,

there is no guarantee.

Even the largest companies do not reach into every part o the world, and its oten the poorest populations that

are the last to eel the benefts o global economic growth. In addition, even companies with the best intentions

may simply ail to deliver.

But long-term vision, with two caveats, is more likely to align with the public interest than the model that helped

trigger the global crisis. The frst caveat, obviously, is that the long-term mission must be based on sound moral

and ethical principles. The second is that it must be executed pragmatically, assuring short-term actions supportthe long-term goals.


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Managing short-term needs

Creating long-term value does not negate the need to tend to the immediate needs o a company. When driving a car, its

not enough to know your destination. You must also be aware o the cars around you, the course o the road, your uel

level and other pressing matters. In the same way, companies must manoeuvre through todays market to make it to the

long-term horizon. However, managers must also do a better job at recognising the short-term pressures that needlessly

interere with their longer-term goals.

The most visible source o short-term pressure is the desire to please the stock market. Regular earnings guidance and

eorts to meet these public targets has destroyed value in many companies. Reporting rom a survey o more than 400

executives in 2004, three US economists ound an astonishing 78% admit that they would sacrifce a small, moderate

or large amount o value to achieve a smoother earnings path. Based on a separate survey a ew years later, McKinsey

& Company noted, Providing quarterly guidance has real costs, chie among them the time senior management must

spend preparing the reports and an excessive ocus on short-term results.

But other corporate elements that encourage short-term thinking are more subtle. Perormance targets or business units

and individuals that highlight easily measured and relatively volatile metrics can also support behaviours counter to a

companys long-term vision. For example, management bonuses may be tied too closely to achieving quarterly or annual

sales targets at the expense o sustained customer relationships.

The herd mentality also contributes to placing more urgency on short-term pressures than necessary. Mimicking the

actions o competing companies whether by dabbling in exotic fnancial instruments, continuing with energy-intense

technologies or ollowing some other industry trend is oten an easier decision than breaking away. It oers a modicum

o strategic cover and lessens the risk o lagging behind (while also hindering a companys ability to pull ahead).

Talking about Citigroups leveraged lending practices, then-CEO Charles Chuck Prince said inamously in 2007, When the

music stops, in terms o liquidity, things will be complicated. But as long as the music is playing, youve got to get up and

dance. Were still dancing. The comment dogged the fnancial executive or years, and in 2010 he explained, My belie

then and my belie now is that one frm in this business cannot unilaterally withdraw rom the business and maintain its

ability to conduct business in the uture.

A handul o companies are fnding ways to side step some o the distractions o the short-term and break rom the pack.

Unilever, Ford, Berkshire Hathaway, and AT&T, among others, have stopped publishing quarterly guidance, or example.

The key is to identiy ways to operate a company proftably in the short-term without losing sight o long-term goals.

Sometimes, apparent tension between short and long-term goals is the result o not thinking creatively enough about

the challenge, said Thomas Lingard, Global External Aairs Director or Unilever. You have to do both. Its not about

saying the short-term doesnt matter.

Investor sentiment is also beginning to shit. We sense a real groundswell change in the way shareholders want

companies to behave, said Abberley at Aviva Investors London, and I dont view that as being entirely altruistic either.

The industry should not be waiting to be called to account.


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Case study: shiting perormance targets to the long term

Selling new cars is a volume game, right? The more shiny saloons that leave the showroom, the better or the

dealership.

A close look by CIMA at Van den Udenhout (VdU), a dealership with outlets throughout the Netherlands, showed

such common sense can destroy value when reinorced by inappropriate perormance targets. Like most cardealerships, VdU was organised around proft centres: sales, service, fnance and insurance, service, and leasing.

Proft centre managers were given ambitious monthly targets, generally linked to transactions, such as the number

o cars sold, and, not surprisingly, managers ocused on transactions.

Customer relationships, however, are ar more important to new car dealerships than individual transactions.

Selling cars is not particularly proftable, and incidental customers those who buy a car and are never seen

again generated hardly any proft. Financial services, maintenance, and body work have a much greater

impact on the bottom line, yet the perormance leaned heavily on sales volume and paid little heed to building

long-lasting customer relations and expanding the network o loyal customers.

To change the attitudes and behaviours o sales sta and managers, VdU had to redefne how it measured

perormance, in essence shiting rom a short-term ocus to a long-term one. It had to go rom an emphasis onproft centres and transactions to one on proftability throughout the customer lie cycle. The change required

that company gather new streams o data and inaugurate a dierent set o key perormance indicators.

No hard metrics are available, but VdU was confdent that the success o the new approach would become

evident to the whole organisation by the end o 2010, thus urther reinorcing desired behavioural changes.

(More details o this case can be ound in Using management accounting to lengthen the time frame of managers,

E. Pieter Jansen, University o Groningen, Research Executive Summary series Volume 6, Issue 11, CIMA, 2010.)

Defning the long-term

The relevant time horizon or companies shiting away rom a fxation on the short-term is difcult to pin down.

Shareholders oer little help. Because o new technology and investment strategies, on average they hold an investment

or about eight months.

The long-term at the moment is anything longer than seven or eight months, said Alice Chapple, director or sustainable

fnancial markets at Forum or the Future, a UK think-tank ocused on sustainable development. We need to do anything

that lengthens the time horizon a bit urther.

Company statements and business literature oer a ull range o potential horizons, rom one year or small enterprises

to 100 years (Unigen Pharmaceuticals, a US/South Korean genetics frm, said in 2006 they had developed a 100-year

business plan). Industries that depend on long-lasting, capital-intensive assets, such as energy and steel, oten look 30 or

40 years ahead when making investment decisions, and or those that need signifcant time or product development,such as branded pharmaceuticals, the planning horizon is generally about 15 years ahead. But when ast-paced changes

in tastes and technology are actors, such as consumer electronics or ashion, anything beyond a two-year horizon could

be meaningless.

Without doubt, the characteristics o an industry and individual companies have an eect on how managers see the

uture. Size, potential environment impact, the pace o change, and investment timelines, among others, are all relevant.


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Yet much conusion can be cleared when companies actively distinguish between a long-term perspective and a long-

term planning horizon. The perspective provides a vision o how the company imagines the world, ideally, 20, 50, even

100 years into the uture. It provides a guiding star that directs the company, oers a sense o purpose, and provides an

argument or or against todays decisions. The planning horizon must be more practical. It should oer targets that are

ar enough into the uture that creativity isnt stied because o time limitations, yet near enough to the present that

changes need to begin immediately or the targets to be reached.

Its very easy to write a vision statement or something very ar ahead. You get a type o utopian outlook, without anypressure to explain how you will get there, said Lingard at Unilever. I you are serious about changing the way you do

things, the way you work in the short-term, then ten years provides enough scope to think radically, but not so much

that its abstract.

Beyond the ten-year horizon, uncertainty plays an even bigger and more unwieldy role. The possible utures expand

exponentially to near infnite permutations. Such long-range vision becomes the realm o uturology, where best guesses

about changes in the environment, market, industry, economy, technology and countless other actors can all wide o

the mark. At best, managers can only imagine the possibilities, work toward the ideal, and brace themselves or the black

swans or the unknown unknowns.

Where short- and long-term needs meet

When managers try to steward their organisations toward a long-term vision, the crux o the challenge is in creating

a meeting point where long- and short-term needs connect. I immediate goals clash with long-term aspirations, the

incongruence is a clear symptom o an unhealthy company. I achieving quarterly volume sales targets is a company

priority, or example, this can be quickly achieved by oering deals to buyers, but the long-term damage o devaluing a

product or service can be tremendous.

A return to basics is the frst step toward managing this intersection. Traditional strategic planning creates a useul

hierarchy o ideas to support an organisations thinking. The cascading philosophy begins with high-level statements

o mission, vision or purpose that articulate a broad direction, overarching values, and aspirations (the long-term

perspective). Next, long-term strategic planning takes this philosophy and translates into general goals, usually over fve

to ten years (the long-term planning horizon). Short-term operational planning refnes these goals urther, integrating

them into very specifc, detailed action with concrete targets or the next year or so.

But when the tail wags the dog, when short-term decisions

are made with little regard to long-term goals, the hierarchy

breaks down. US investor Warren Buet cautioned, It takes

20 years to build a reputation and fve minutes to ruin it. I

you think about that, youll do things dierently.

The past, unortunately, oers little guidance. O course,

many great companies have shown a remarkable ability

to adapt to change, whether in technology, tastes, or the

competitive landscape, and the best have put considerable

resources towards understanding the threats andopportunities the uture may present. But there were always

certain baseline assumptions such as natural resources

being reasonably abundant and, literally, the environment

remaining stable.


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These assumptions are no longer valid. Resources rom oil to water cannot be taken or granted and global challenges

including climate change, pollution, population growth, and the loss o biodiversity have a direct impact on every

business model, whether a small microbrewery securing clean water to a multinational crisp producer contemplating a

world with scarcer potatoes. As a result, companies must incorporate a much broader range o issues into their planning,

creating increased complexity and uncertainty. Henry Ford in 1911 did not need to worry about a world without petrol;

his great-grandson William Ford Jr. in 2011 must.

Thought starter: the role o government and regulators

As businesses and industries transition to a new way o thinking, governments and regulators may need to step in

to assure that early movers are not disadvantaged. In addition, market ailures, such as neglecting to account or

public bads, may also need to be corrected through ofcial actions.

Initial moves in this direction include measures taken to impose carbon pricing on organisations that emit

greenhouse gases. But many other externalities that generally arent represented in proft-and-loss statements

must also be addressed. Companies that contribute to the depletion o natural resources, such as fsh stocks or

orests, must be required by authorities to account or these costs through mandated pricing mechanisms or

some other device.

Being able to work with uture uncertainty and translate this into short-term action can be a major competitive

advantage. Along with aligning the two horizons, communication and commitment are critical actors or success.

Lingard at Unilever oered an example. Ice cream cabinets those ice boxes at corner stores eaturing Magnums,

Cornettos, and other treats traditionally used hydrouorocarbons (HFCs) as rerigerants. The problem was that these

rerigerants had a very bad impact on climate change as the gases can be a thousand times worse than carbon dioxide

or global warming. Unilever wanted to shit to cabinets that ran on hydrocarbons, which had less environment impact,

but which were not commercially available. Rerigerator suppliers may have been willing to develop better cabinets, but

the costs could have been prohibitively high. When the company publically committed to changing its two million ice

cream cabinets globally, suppliers were assured the scale needed to fnance development and keep unit costs down.People have to think about the signals that they send to the supplier base, Lingard said. Too many people give up. They

abandon innovation opportunities based on the frst numbers they get rom their suppliers.

Most companies do not have such unilateral power to shit the market. But by working openly with customers, suppliers,

regulators, and within the bounds o anti-trust laws even competitors, they can exercise surprising inuence on the

course o industries.


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Thought starter: the stewardship economy

Tomorrows Company, a UK-based research organisation ocused on sustainable business models that beneft sta,

shareholders, and society equally, has explored the idea o the stewardship economy as an answer to the short-

termism that has permeated recent corporate models.

In their view, the stewardship economy is built on undamental principles:

Value creation must be given primacy.

Organisations everywhere are part o complex chains o production and distribution which span the world,

cutting across national and corporate boundaries and cultures. Within individual nations, there needs to be a

powerul alignment between business, society, and government in building value as part o this wider global

community.

Companies, communities and countries must understand systemic and strategic risk and build resilience

against such risk.

The drivers o value creation are changing and new metrics o business success must ocus more and more on

building economic, social/human, and environmental capital.

Business is an essential engine or value creation. A co-operative platorm is necessary to support multi-stakeholder dialogues and bridges between private and

public policy.

Extracted rom Building the stewardship economy response to A long-term focus for corporate Britain call for

evidence by the UK Department for Business, Innovation and Skills, 2010. Submission by Tony Manwaring, Chie

Executive, Tomorrows Company on behal o the Good Governance Forum and Tomorrows Company.

Practicalities - the basics behind valueHenry Ford in the early 20th Century said i you treat workers well and make quality products the money will all

into your hands. And like Ford, executives striving to create corporate value must have aith that good, basic business

practices, executed well, are rewarded with companies that prosper over the long-term.

We believe a world-class, sustainable business must ocus on a basic set o priorities:

a strategy that eectively connects short-term actions with long-term aspirations

cost leadership

a durable supply chain

satisfed customers

innovation

motivated sta.

These have been derived rom the CIMA Business Success WheelTM which aimed to provide a broad view o the key

drivers o organisational success (see www.cimaglobal.com/Employers/The-value-o-CIMA/The-CIMA-dierence/).


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Thought starter: drivers o sustainable success

The Proessional Accountants in Business Committee (PAIB) o the International Federation o Accountants (IFAC)

has identifed eight drivers o sustainable organisations based on sources such as the CIMA Business Success

WheelTM. These are:

customer and stakeholder ocus eective leadership and strategy

integrated governance, risk and control

innovation and adaptability

fnancial management (see Thought Starter: the importance o good inormation)

people and talent management

strategy execution

eective and transparent communication.

Interestingly, the global managing director o McKinsey, Dominic Barton, has also identifed fve key priorities or

companies in achieving long-term value creation. These are: create new products and markets

drive operational efciency

motivate and retain employees

spur innovation

retain access to inputs.

So while our lists may not be exactly the same, they share some strong common eatures. What would be on your

list?

Sources:

Competent and versatile: how professional accountants in business drive sustainable organizational success, PAIB

consultation paper, September 2010. Final report expected June 2011. See www.ifac.org/PAIB/

Capitalism for the long term, Dominic Barton, Harvard Business Review, March 2011. See www.hbr.org

When successul, this approach can create enduring corporate value and organisations that prosper not just or weeks

and years, but or decades.

Getting these undamentals right is no guarantee o corporate success and longevity. Nothing is. Unoreseen actors such

as sudden shits in consumer taste, new technologies, and countless others can undermine even the best businesses.

Focusing on these actors, however, will create a sound base to build corporate value and could also oer businesses an

early warning on game-changing shits in the market. For example, a company that understands its customers well is less

likely to be surprised by a change in their desires than one that does not; one schooled in innovation is more likely to be

the benefciary o new technologies than the victim.

Managing strategy between the short and the long term

The CIMA Strategic Scorecard was originally developed to help company boards oversee strategy more eectively

and dynamically, but its basic ramework can also highlight the areas that companies must address to maintain a

sustainable business model. In essence, the ramework sets the business model in a broader dynamic context. Once a

company has developed a clear sense o its vision and purpose, it needs to understand how the external environment

and the associated risks and opportunities impact this vision. It should generate and evaluate a range o strategic

options, selecting the most promising ones based on its concept o vision and purpose, then move through to eectiveimplementation.


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The entire process must be dynamic, with managers and executives constantly questioning whether the strategy is

relevant and best ulfls the companys stated vision and purpose. Managing the interace between long and short-term,

the trade os between the vision o the uture and the immediate needs o the company, is a critical challenge during

the transormation. Tools such as the balanced scorecard serve to translate strategy into action and ensure congruence

between short-term actions and long-term goals.

Thought starter: a balanced scorecard or the long termTraditional metrics or fnancial perormance such as return on investment tend to reinorce an excessive ocus

on short-term achievements. In addition, these measurements ail to capture value created by intangible assets,

including employee skills, eective operating processes, and competence in innovation, which require a longer-

term perspective. In the early 1990s, Robert Kaplan and David Norton developed the balanced scorecard as a

solution to this perormance measurement problem. In essence, the tool translates strategy into action.

As a recent CIMA-unded research project highlights, the balanced scorecard has been extremely successul in

aligning actions to long-term strategy and promotes the measurements to defne strategic concepts such as

quality, fnancial excellence, customer satisaction, and organisational learning.

(More inormation can be ound in Creating and popularising a global management accounting idea, ResearchExecutive Summary series, Volume 6, Issue 13, Sandy Qu, David Cooper, and Mahmoud Ezzamel, CIMA, 2010.)

But at the heart o these considerations is the core business model which asks the basic question: How do we make

money? (Exhibit) In answering this undamental question, companies must ocus on fve critical areas:

cost leadership;

durability o the supply chain;

a motivated and skilled workorce;

attracting and retaining customers;

the ability to innovate.

Impact

Results

Business model

how do we make money?Key areas of focus:

- Cost leadership

- Supply chain

- Workforce

- Customers

- Innovation

External

environment

Strategic risks and

opportunities

Strategic

options

Strategic

implementation


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1. Cost leadership

Cost leadership requires non-stop eorts to increase efciency and reduce the cost o resources used by the business.

Lowering costs allows organisations to generate higher margins at prices that are more competitive. Beyond the

immediate corporate advantages, cost leadership also promotes decreased use o the worlds fnite resources while

maintaining production levels.

Case study: cost leadership

There are many examples o organisations which ocused on cost leadership as a source o competitive advantage,

or example low-cost airlines and retailers such as Walmart which has consistently sought to obtain the best

possible prices rom its suppliers. Strategic purchasing, outsourcing and plain cost-cutting are all well-used means

o achieving improvements in the bottom line.

InteraceFLOR represents an interesting example o an organisation

that is reinventing ways o doing business that minimises the impact

on the environment while enhancing shareholder value. InteraceFLOR

is a worldwide leader in the manuacture o modular ooring and has

a mission to eliminate any negative impact the company has on theenvironment by 2020. This involves a three-pronged approach including

cultural change, but it is the other two elements which are o most

interest here. Not only is InteraceFLOR seeking to reduce its ootprint

through reduced energy, waste and water usage, or example, but it is

going urther by redesigning products and processes in such a way that

provide extra momentum to this eort. Some products such as the

Flatworks range use 50% less yarn while end o lie technologies mean

that todays products orm raw materials and resources or tomorrows

products. Not surprising thereore that the company has achieved some

impressive results since 1996. For example:

total energy consumption per unit o output down by 43%

non-renewable energy usage down by 60% per unit o output

reduction in waste rom manuacturing to landfll down by 77%

global water usage reduced by 80% in modular carpet acilities

percentage o recycled or bio-based raw materials used to manuacture products up rom 1% to 36%

cumulative avoided costs rom waste elimination activities o US$433 million.

As Lindsey Parnell, President and CEO, InteraceFLOR Europe, Middle East, Arica and India, has pointed out, Our

continued progress proves that sustainability is not only good or the environment but also or the bottom line,

said Parnell. Putting sustainability at the heart o our business has paid dividends; costs are down, our people are

galvanised around a common purpose and our products are better than ever as sustainability provides an infnite

source o innovation.

Extensive inormation on InteraceFLORs eorts in this area can be ound on www.interfaceor.eu


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2. Durable supply chain

For a business to succeed in the long-term, it needs to secure the supply o resources used to produce its goods or

services. A durable supply chain is an inescapable component o a successul business model. An example o how ensuring

a supply chain and responsible business strategy coincide would be oering suppliers o basic resources air wages. Supply

chain durability needs to be balanced against the goal to achieve cost leadership. For example, excessive pressure on

suppliers to oer low prices could impact on their ability to pay air wages, so having a longer-term adverse eect on

supply chain durability.

Case study: durable supply chain

Li & Fung, a global trading group based in Hong Kong, has created signifcant competitive advantages through

innovation and skilled supply management. The 100 year-old group has overcome internal silos to coordinate

a complex network o suppliers that span more than 40 countries, creating an organisation with almost 35,000

employees and annual revenues o US$16 billion, primarily rom its sourcing operations.

Group Chairman Victor Fung said in 2008, Competition is no longer between companies but between supply

chains. To ulfl an order or shirts, or example, the yarn might be sourced rom South Korea, the dyeing and

weaving rom Taiwan, and the fnal production completed at several mills in Thailand. At each stage we willconsider the best place to produce the component we need. The end-product, thereore, becomes a truly

globalised one, he said.

Technology has enabled such complex supply changes, but the chain is strengthened by a holistic view o the

entire process and transparency or all partners. For example, a manuacturer that might want to hold down costs

by avoiding overtime must take into account the impact on delivery times and other suppliers. Suppliers are

inormed o shipment dates and other key aspects o an order, allowing them to optimise their role in ulflment,

discover potential cross-selling opportunities, and even oer alternatives.

It is this kind o intimate knowledge o suppliers, and our ability to co-ordinate and inuence them that put us in

a position where we can stitch together a network o suppliers to satisy orders rom anywhere in the world, Fung

said.

The group has developed seven principles o supply chain management:

Be customer-centric and market-driven.

Focus on ones core competency and outsource non-core activities.

Develop a close, risk- and proft-sharing relationship with partners.

Design, implement, evaluate and continuously improve the work ow, physical ow, inormation ow, and

cash ow in the supply chain.

Adopt inormation technology to optimise the operation o the supply chain.

Shorten production lead time and delivery cycles.

Lower costs in sourcing, warehousing and transportation.

(Additional inormation on Li & Fungs eorts can be ound in Competing in the at world: the Li & Fung

Experience, Victor K. Fung, 30 July 2008, Sun Yun-Hsuan Management Forum. http://www.lifunggroup.com/

eng/knowledge/presentations/05.pdf)

Also take a look at 8 ways to reduce supply chain risk, Richard Young, Financial Management, March 2011,

www.fm-magazine.com


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3. A motivated and skilled workorce

A successul business needs a committed, ethical and motivated workorce. Promoting an ethos o doing the right thing,

even when no one is looking will help both the business and the wider community. Ethical behaviour reduces the threat

o raud within an organisation and enhances the reputation o an organisation among its wider stakeholder group.

Case study: a motivated and skilled workorceTesco is one o the top retailers in the world with over 5,000 stores and 472,000 people in 14 countries, including

the UK, Ireland, Poland, China, Malaysia and the US. It has long been characterised by its strategic approach to

building and maintaining a skilled and committed workorce. Tescos Every Little Helps strategy is reinorced

by its two core values o No-one tries harder or customers and We treat people how we like to be treated.

Tescos approach is that i it looks ater its people and treats them with trust and respect, sta will do their best

or customers. This will in due course have positive impacts on sales and proft. It is not surprising thereore that

so many Tesco people stay with the company or 25 years or more. It is particularly noteworthy that Tescos chie

executives have been recruited rom inside the company strong evidence o Tescos commitment to growing its

talent base.

Weve trained ourselves to be obsessive about training, says Tesco, which prides itsel on the signifcant numberso sta on development programmes 7,000 at any one time and 80% o management roles are flled by existing

team members.

The Tesco Academy has been established to support the training and development o employees in leadership,

management and technical skills. A hub is being developed in South Korea to ensure that people development in

Asia keeps pace with the rapidly growing business while the UK-based European Academy provides a hub or the

managers and directors rom across the world. Tesco brings 100 o its most senior leaders together on an annual

basis to share strategy, develop leadership skills and build their network.

A key distinctive eature o Tescos approach is that it devotes considerable eort to ensuring that all sta can see

how their actions aect the bigger picture. Its primary tool or doing this is the Tesco Steering Wheel perhaps

better known to the outside world as the balanced scorecard. Key perormance indicators relate to fve keyaspects o the business customer, community, operations, people and fnance and help to ensure that Tesco

manages the business in a balanced way with due regard to the needs o all stakeholders. In this way, Tesco tracks

people inormation just as closely as fnancial results. Its particular areas o ocus relating to people are:

to provide an opportunity to get on

to provide interesting jobs

competent management (a manager who helps me)

to treat people with respect.

In this way, Tescos approach to people management is closely integrated with its overall strategy and values and

in turn, represents a powerul source o long-term competitive advantage.

Sources: www.tescoplc.com and www.tesco-careers.com

CIMA has been looking at developing models to help companies measure the separate costs o losing and

replacing employees. See http://www.cimaglobal.com/en-gb/Thought-leadership/Newsletters/Insight-e-

magazine/Insight-2011/Insight-January-2011/Losing-a-manager-costs-65000-say-new-models/


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4. Attracting and retaining customers

No business can survive without customers who require its product or service. To succeed, businesses must oten

anticipate their customers needs, even beore they are aware o them themselves. Increasingly, customers are looking

or socially responsible companies to supply their goods and services and seek to understand the origins o the materials

that go into their goods or are used to deliver services. Among many examples, a growing proportion o consumers want

assurances that no child labour was used in the manuacture o clothing.

Case study: customer ocus

SABMiller, the worlds second largest beer maker, produces more than 213 million hectolitres o lager a year. Its

goal? Making more beer, but using less water.

Dierent surveys have shown that as many as three-quarters o consumers in some markets consider

sustainability when selecting their purchases and believe that their actions can inuence major corporations. And

yet, while many look toward businesses to help fnd solutions or increased sustainability and other environmental

challenges, only about a fth think corporate leaders are stepping up to the task.

SABMIller has responded to such consumer sentiment by looking or ways to better manage constrained watersupplies and generally protect the environment. The beverage giant wants to reduce its water consumption per

litre o beer by 25 percent between 2008 and 2015. In 2010, it had lowered its average consumption to 4.3 litres

o water per litre o beer, a 4% reduction over the previous year.

As long as markets are ree and competitive, our business will succeed i we manage our relationships well, use

resources efciently and meet the needs o our consumers and the communities in which we operate, the group

said in its 2010 Sustainable Development Report.

Brewing accounts or a major proportion o the companys water consumption, and among one ocus o the

companys sustainability drive to evaluate its consumption patterns and create processes that are more efcient,

or example recycling water to secondary uses such as cooling and cleaning. SABMiller has also teamed with the

World Wide Fund or Nature (ormerly the World Wildlie Fund) to create a Water Futures program to protect

watersheds.

With annual revenues o US$26 billion and operations on six continents, SABMillers initiatives have the potential

to trigger signifcant improvements or the company and the communities in which it operates.

(More inormation on the groups eorts can be ound in Sustainable Development Report 2010, SABMiller,

June 2010. www.sabmiller.com/les/reports/2010_SD_report.pdf)


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5. Ability to innovate

The ability to innovate underpins the other our key areas o ocus. Innovation allows companies to fnd new ways to

satisy customer needs, keeps sta motivated and excited about the uture, assures suppliers o a companys prospects,

and leads to cost-saving advances in production processes and service delivery. Once a relatively slow process, the scale

and speed o technological change requires rapid innovation and demands dedicated attention in organisations. In terms

o environmental sustainability, the scale and nature o the challenges require innovative and creative approaches to

business, oten demanding new approaches to amiliar problems.

Case study: innovation

In 2009, Tata Motors, Indias largest car manuacturer, marketed a car with the worlds smallest price tag:

US$2,200. To go rom radical idea to production model, the company had to rethink new car design rom scratch,

looking or innovative ways to cut costs at every corner. The abled one-lakh car a name taken rom the Indian

term or 100,000 rupees aced a rocky debut, but that shouldnt distract rom the innovative drive that brought

the Tata Nano to showroom oors across India.

O course, we want to grow and produce a healthy bottom line, necessary or sustained growth, but in doing

so, we want to be seen as an innovative company breaking new ground and going into uncharted territoriessuccessully, Ravi Kant, managing director o Tata Motors, said in 2007. Finally, we want to achieve this the Tata

way transparently, ethically, and meeting our corporate social responsibility. We want to make India proud.

With total annual sales o US$20 billion, Tata Motors has the market power to encourage more than 100 suppliers

to explore innovative ways to squeeze costs rom the Nanos components and the deep pockets needed to launch

a radical product line. Everything was questioned, and the fnal design eatured a long list o cost-cutting eatures:

a rear-mounted aluminium engine, one windscreen wiper blade instead o two, three lug nuts holding the wheels

in place instead o our, and many others.

Such innovation requires a commitment to a long-term vision that goes beyond immediate business needs.

The Nano hit the market more than fve years ater Ratan Tata, the groups chairman began his quest to build

a peoples car within reach o a broad swath o Indians. It is propelled by the opportunity, but there is also asocial or dreamy side to it, Tata said in a 2005 interview on the project. Today in India, you oten see our people

on a scooter: a man driving, his little kid in ront, and his wie on the back holding a baby between them. Its

a dangerous orm o transportation, and it leads to accidents and hospitalisations and deaths. I we can make

something available on our wheels all-weather and sae then I think we will have done something or that

mass o young Indians.

(More inormation on Ratan Tatas approach to innovation can be ound at Whats next for Tata Group: An

interview with its chairman, The McKinsey Quarterly, November 2005. www.mckinseyquarterly.com )


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Thought starter: the importance o good inormation or decision making

Management accountants play an important role in providing and analysing data collected around key drivers o

long-term business perormance. In the case o the Dutch dealership, or example, fnancial proessionals were

behind the fnding that long-term perormance and sustainability could be best served by a shit in ocus rom

transactions and proft centres to lietime customer proftability.

Armed with such inormation and analysis, management accountants can redefne eective perormance and

design new indicators and systems to ensure the desired behaviours are being encouraged. Providing regular

perormance reports is an integral part o this endeavour and supports eective decision making throughout the

organisation.

In addition, good external reporting to stakeholders orms an essential component o company-investor dialogue.

Clear communication allows stakeholders to judge the organisations perormance, position and prospects in

relation to achieving long-term success. These external reports should contain the highlights o inormation that

is regularly reported internally.

ConclusionThe unremitting emphasis on shareholder value had its heyday in the robust markets

o the 1980s and 1990s when, or the most part, it seemed share prices could only go

up. Periodic crashes were regarded as inevitable and did not invalidate the core business

philosophy. The turn o the century changed that reality. First, the rise o Asian corporate

giants, which were successul without taking up western models entirely, brought into

question business practices and attitudes prevalent in the US and UK although less so

in Continental Europe. New types o investors hedge unds, sovereign wealth unds and

others have created complex ownership structures. Then, o course, the global crisis

o 2008 brought the debate about shareholder value and short-term strategies into thepublic discourse, bringing near universal condemnation o the theory. Added to this is the

increasing urgency to meet the challenge o planetary sustainability.

Consequently, debates about the role and purpose o the company in society, short-

termism and appropriate company structures are not likely to end soon.

Simply to exhort companies to take a long-term view is too simplistic and ignores the

challenges presented by the shit in perspective. In addition, some external actors,

particularly those relating to environmental considerations, all beyond the conventional

mandate o corporate planning. At least during the transition, appropriate government

and regulatory intervention may be needed to guide the process.

Lengthening a companys time horizon requires more than adding a ew years to its target deadlines or vision statement.Managers must also align long-term goals and short-term actions. Day-to-day decisions must contribute to the overall

health o a company and move it toward its long-term vision. Such harmony between todays activities and tomorrows

success creates a signifcant competitive advantage. Tools like the CIMA Strategic ScorecardTM can help companies

dynamically manage this biocal perspective. By ocusing on critical areas o the business model the supply chain,

customers, sta, cost leadership and innovation companies can ensure that their short-term actions support a long-

term uture.


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Appendix 1CIMAs involvement in key initiatives relating to sustainable business success

Tomorrows Company

Tomorrows Company is the agenda setting think and do tank which looks at the role o business in society and

considers how enduring business success can be achieved. It challenges business leaders around the world to work with

others to tackle the toughest issues. The group also promotes systemic solutions, working across boundaries between

business, investors, governments, and society.

Tomorrows Company believes that business can and must be a orce or good. This requires that shareholders strengthen

their stewardship o their holdings in partnership with the boards o companies. It argues that the Age o Sustainability

has begun and that corporate success and value creation will come more and more rom recognising the triple context

o the links between the economic, social and environmental sub-systems.

CIMA is a corporate member o Tomorrows Company and is involved in a range o programmes tied directly to exploring

long-term sustainable corporate success:

Good Governance Forum bringing together practitioners and investors to develop good governance practice.Particular areas o ocus include stewardship, the boards role in strategy, and boardroom behaviour. A report

Tomorrows Corporate Governance the case for the board mandate shows how company boards can create a living

statement about what the company stands or and how it wishes to be known to all its stakeholders.

Tomorrows Value lecture series a joint initiative between CIMA and Tomorrows Company which invites some

o the most senior fgures rom the global business community to explore the concept o value. The series looks

specifcally at how value is created, how it can be measured, and what drives it orward.

Tomorrows Corporate Reporting this study by CIMA in partnership with Tomorrows Company and

PricewaterhouseCoopers explores the corporate reporting system and assesses the barriers to change, as well as the

enablers. This work oers an insight into the main actors to be considered in order to move towards a more eective

corporate reporting system.

www.cimaglobal.com/Thought-leadership/Tomorrows-Value-lecture-series , www.cimaglobal.com/tcrcfe,www.tomorrowscompany.com

Report Leadership Group

Together with PricewaterhouseCoopers and the communications consultancy, Radley Yeldar, CIMA is a ounding

member o the Report Leadership Group which ocuses on how corporate narrative reports can be made more eective.

Underpinning the groups work and publications is the precept that the narrative report should demonstrate the long-

term sustainability o a business.

www.reportleadership.com

The Princes Accounting or Sustainability (A4S) Project and International Integrated ReportingCommittee (IIRC)

Management inormation is the key oundation or developing better corporate reporting. Conventional reports and

accounts can ocus excessively on a companys short-term fnancial perormance, passing over broader actors such as

the sustainability o the business model or the companys social and environmental impact. In particular, the way natural

capital is depleted through, or instance, ossil uel consumption or greenhouse gas emissions typically gets ignored.

When such inormation is disclosed, it is rarely connected to the strategic direction and fnancial perormance o the

company. In addition, they do not clariy the risks and opportunities o such resource depletion or ease year-on-year

comparisons.


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The Accounting or Sustainability (A4S) initiative, in which CIMA plays an active role, seeks to redress the imbalance by

creating a ar-reaching reporting model. Chartered Management Accountants are well placed to collate and present this

vital data, much o which can be extrapolated rom routine management inormation. Supported by their ethical code,

these fnancial proessionals are mandated to present the data objectively.

In August 2010, the A4S and the Global Reporting Initiative launched the International Integrated Reporting Committee

(IIRC). The initiative has global reach and is a collaboration o established accountancy institutions, standard setters,

and leaders in corporate governance, business ethics, and sustainability. There is no global standard or measuring andreporting environmental, social and governance perormance, and the initiative is working to fll this void.

The committee was created in response to the need or a concise, clear, comprehensive, and comparable reporting

ramework, structured around an organisations strategic objectives, as well as its governance and business model, and

integrating fnancial and non-fnancial inormation.

The objectives or an integrated reporting ramework are to:

Support the inormation needs o long-term investors, by showing the broader and longer-term consequences o

decision making.

Reect the interconnections between environmental, social, governance, and fnancial actors in decisions that aect

long-term perormance and conditions, making clear the link between sustainability and economic value. Provide the necessary ramework or environmental and social actors to be taken into account systematically in

reporting and decision making.

Rebalance perormance metrics away rom an undue emphasis on short-term fnancials.

Bring reporting closer to the inormation used by management to run the business on a day-to-day basis.

www.accountingforsustainability.org and www.theiirc.org

International Federation o Accountants, Proessional Accountants in Business Committee

In 2002, the Proessional Accountants in Business Committee (PAIB) o the International Federation o Accountants

(IFAC) launched a research project to understand what breakdowns led to business ailures such as Enron, WorldCom andMarconi and identiy the critical success actors or sustainable businesses. The major fnding o the committee was that

while good corporate governance is important, companies also should not overlook long-term strategic perormance as

a way to achieve sustainable success. Good corporate governance might prevent ailure, but it cannot achieve success

alone.

Ater identiying lapses by company boards in overseeing strategy and risk, CIMA developed the CIMA Strategic

Scorecard as part o the solution. Underscoring the urgency, the recent global fnancial crisis exposed board ailures

in strategy and risk governance. As a result, the committee launched a urther project to explore how companies can

address these weaknesses as well as to integrate sustainability considerations and to present examples o good practice.

The project will be taken orward in 2011.

www.cimaglobal.com/enterprisegovernance, www.ifac.org/PAIB


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The CIMA Forum

The CIMA Forum is a group o major organisations represented by senior fnance personnel, typically divisional fnancial

controllers or leaders o fnance transormation projects. They all share a proessional interest in the uture o the role o

the fnance unction.

The orum meets twice a year, usually in London, or a ull days workshop hosted by CIMA. Members attend to share

experiences, to learn rom each other and to network.CIMAs objectives are to share learning with members, students and stakeholders and to inorm its syllabus development

and continuing proessional development programmes.

Each member organisation is rom a dierent sector and has a right o veto over any competitor joining. Academics or

consultants are invited as guest speakers.

The orums agenda is set by the members. It considers fnance transormation widely. The people aspects o business

intelligence and fnance business partnering have most recently been considered. CIMA has published a portolio o

reports inormed by the orums discussions: www.cimaglobal.com/decisionmaking

Organisations who have participated in recent meetings o the orum include Alliance Boots, Barclays, UK Department

or Work and Pensions, Diageo, Ford Motor Company, UK HM Revenue & Customs, Kimberly-Clark Corporation, The NECGroup, Rolls-Royce and Unilever.

Leading organisations rom other sectors would be most welcome as members. I your organisation would be interested

in joining the orum please contact CIMA at [email protected]


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Appendix 2CIMA Workshop

Hopeully, this report will have given you plenty o ood or thought. But how can you translate some o the ideas into

action?

Some o the issues raised in the report are not possible or individual organisations to solve completely on their own, orexample, the challenges presented by the large increase in equity churn in recent years.

Organisations can:

Clariy what long-term means or them and articulate long-term goals;

Ensure that their short-term actions are aligned with long-term objectives on a dynamic basis;

Create a sustainable business model by ocussing on fve critical areas: cost leadership, durable supply chains,

motivated and skilled workorces, customer retention and innovation.

What are the key learnings rom the case studies?

InteraceFLOR cost leadership

Li & Fung supply chain

Tesco workorce

SABMiller customer ocus

Tata Motors innovation

Which ideas could you use? Are there other organisations that you could look at?

Here are some questions that you might want to consider:

How do you defne long-term in your organisation? Do you think it is long-term enough?

What are the individual, organisational, market and environmental actors that drive a short-term and long-term

perspective? Which perspective do you think is dominant?

To do this, you could adapt force eld analysis to map out the various factors that impact on your organisations time

orientation. For example, you might identify investor pressure as a force for the short-term while the nature of your

products might mean that it takes a number of years to develop new products. The thickness of the arrow represents your

assessment of the strength of the factor. By identifying all the competing factors and their relative strengths, you should

be able to gauge at a glance what your organisations overall time perspective is (rather than what you guess it is!) This

will then give you a basis for targeted action. An outline example is shown below.

Investor pressure

Incentives

Cash flow pressures

Forces for short term Forces for long term

Environmental pressures

Product development timescale

Tone from the top


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Does your organisation have a clear cascade o objectives rom the high-level, long-term to short-term operational

goals?

How do you manage the link between the short and long term?

The report suggests that the CIMA Strategic ScorecardTM framework can be useful in helping to integrate changes in the

external environment as well as the associated risks and opportunities into the organisations overall vision. You can nd

out more atwww.cimaglobal.com/Thought-leadership/

Are your KPIs driving the behaviours that contribute to long-term value creation? Are targets being set that ostershort-term behaviours?

The case study of the Dutch car dealership, VdU is a good example of how targets were set in such a way that encouraged

staff to go for sales rather than customer relationships, which were actually the main driver of long-term protability.

You might want to consider if your organisation has a really good handle on what drives protability. Are there any

obvious information gaps that you could address?

If you are looking for a framework that links longer-term strategy to short-term operational goals and KPIs, the balanced

scorecard is a useful starting point.

Does your organisation do scenario planning? What sort o scenarios could you consider?

To what extent is your organisation embedding sustainability considerations into its planning?

A downloadable checklist is being developed and will be published on www.cimaglobal.com/Thought-leadership

CIMA has a range o resources available to help you explore some o the issues raised in this report in more detail. See

http://www.cimaglobal.com/

world conference report on manufacturing processes

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