Too Much Information

Annual reports are fast becoming the dustbin for every imaginable corporate risk. This presents a number of headaches for audit committee chairs as they seek to produce accounts that are true and fair, while still meeting expectations on compliance, bribery, culture and business model disruption.

Given the scope of what needs to be covered, keeping a sense of direction and purpose can be tough. Scott Knight, Head of Audit and Assurance at BDO, comments: “The audit committee must not simply respond to management and the auditors, or just edit the debate in some way. They need to control the agenda, even if some of it is merely putting a marker in the sand and saying: ‘Right, this issue is important but we will come back to it in a year’s time.’”

John Allkins, who is Chairman of the audit and risk committee at Punch Taverns, and Non-executive Director at Renold, Fairpoint and the Sweden-based Nobina, says: “The audit committee chair needs to be able to run a process that enables everybody to have their say, even if they are not the ‘financial experts’…. Provided each person can contribute, the committee will arrive at the best answers.

“That committee as a whole should talk to management, advisors, internal and external audit – and actuaries, if pensions are a big issue for a business.”

On the table

The pressure is mounting on audit committees to show a greater degree of scrutiny, notably in light of substantial EU audit reforms. Tom Beedham, Director of Programme Management at Criticaleye, comments: “When a public interest entity runs aground, accusations will inevitably be levelled at the non-executives about how they allowed a crisis to occur.

“Such criticism is justified if NEDs categorically fail to ask pertinent questions to both the CEO and finance director, not to mention each other.”

It means holding a wide range of conversations. John says: “I like to communicate beyond the normal committee members, including the CEO and CFO. I will talk to the head of internal audit, the financial controller, and the company secretary, who will be involved with issues like whistleblowing and bribery. That way, you tend to get a total view of the business.”

The axis between finance director, auditor and audit committee chair is vital. Theresa Wallis, Non-executive Chairman at medical devices company LiDCO, says: “In a small company, the auditors will speak with and see the finance director and finance department on a fairly regular basis. Given this, it is important for the chairman of the audit committee to also make time to establish a relationship with the audit partner.”

Andrew Walker, Chairman of the audit committee at Plastics Capital, says that it requires “people who are numerate and fully understand the class of business they operate in – things become unzipped when there is a lack of understanding of the real financial risks”.

If you are questioning these matters, such as capitalisation of development costs, you should expect pushback. “You need to be quite sure of your ground in order to be resolute; these are the crunch times when the audit committee earns its crust,” adds Andrew.

Seeing the wood for the trees

Aside from regulatory change and an expanding risk register, the biggest shift for audit committees relates to data and analytics. Scott from BDO says: “We have probably seen more innovation in audit in the past three years than over the last 20. It is changing the way audits are done, such as removing sampling so you can look at entire populations.”

At present, some committees lack expertise about how to use this information while also maintaining a healthy degree of scepticism. Scott warns: “There is a risk that audit committees can take false assurance. While an auditor might be able to scan ten thousand invoices a minute, this technology won’t be able to tell whether it’s a fake invoice or the real thing.

“Equally, the audit firms have very sophisticated tools looking for outlier type journals but if the general IT controls are weak, say around password security, then it is impossible to tell who is really posting those journals.”

It is essential for committees to be comprised of individuals who understand the different pressure points within an organisation. Theresa states that “you need people who are independently minded and are prepared to think carefully about the judgements that need to be made, who proactively ask good questions and don’t just accept the recommended approach”.

According to Tom at Criticaleye: “It is the responsibility of the chairman of the audit committee to ensure everyone understands their responsibilities and feels able to raise issues they believe are important.

“Without the right degree of openness, an audit committee can quickly become blinkered to the financial, operational and strategic risks within a business.”

In the current environment, no company can afford to have its board of directors behave like nodding dogs.

These views were shared during Criticaleye’s Global Conference Call, How To Create an Effective Audit Committee.

Don’t miss next week’s Community Update, which provides an outlook on the retail sector.

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Strengthening the Executive Team

The HR Director mustn’t shy away from assessing the capabilities of the top team. They should hold candid conversations with the CEO about skills, succession and whether senior executives are genuinely aligned, or if they are just a loose collection of individuals with competing agendas.

At Criticaleye’s recent Human Resources Director Retreat, the focus was on how to strengthen the capability and cohesiveness of the leadership team. After all, unless senior executives are working together, how else are they going to create an organisation that’s customer-focused, agile and driven by a clear sense of purpose?

Here are some highlights from Day One of the Retreat:

Don’t Get Comfortable

The steady build-up of silos, bureaucracy and legacy-thinking will inevitably result in a business slowing down and becoming estranged from the customer.

Andy Griffiths, Advisor and former President for UK & Ireland at Samsung Electronics, was unequivocal about the need for businesses to quickly adapt to changing markets.

He explained: “We tried to bring Samsung together as one big organisation, but how do you do that when you’ve got nine big silos? We decided to talk about the externalisation of the business as it’s a common mistake for companies to be too inward-looking.

“This entailed talking to the end users and distribution partners to get their perspective. The danger, when it comes to assessing performance, is to just keep looking at the numbers again and again.”

People must have the space to understand the context they’re working in, Andy noted. “The atmosphere, in some ways, has to be one of organised chaos so people don’t get comfortable – complacency is a killer. Each year, you need to tear up the previous business plan and start again,” he added.

Matthew Blagg, CEO of Criticaleye, agreed: “It’s increasingly important for leaders to not be insular. If they’re going to successfully navigate a fast-moving and complex business environment, they must have external reference points in order to draw on a diverse ecosystem of skills, expertise and experience.

“It’s this that will shape the talent agenda of the future and it is why, as a leader, you need to accept that you don’t have all the answers.”

Devise a New Purpose

The notion of organisational purpose is increasingly on the radar of employees, customers and other stakeholders.

Stephen Pain, Vice President of Sustainable Business and Communications at Unilever, commented that it stems, in part, from a loss of trust in big business. Now, there is greater pressure on organisations to be more inclusive and to act with transparency.

“People are much more aware of sustainability as an issue and this is also amplified through social media,” he commented.

It’s up to the senior leadership team to respond to these expectations and not just focus on business as usual. Steven Cooper, CEO, of Personal Banking at Barclays, noted that “creating a sense of purpose galvanises people and enables them to overcome a shock to the organisation”.

At Equiniti, there has been a concerted effort to create a new story for the business as it’s grown. Nicky Pattimore, HR Director at the payments provider, described two attempts at establishing such a narrative: “We devised a new purpose for the organisation to bring the different elements together. HR focused on internal engagement, and marketing concentrated on communicating to external stakeholders; it was quite a powerful message in terms of being a more solutions-based business.”

However, Nicky explained that the leadership at the time didn’t give the support that was required. “In 2014 the business underwent refinancing,” she continued. “After that, the leadership team were reviewed and this resulted in about 70 per cent of the top 40 leadership roles being changed. That was a catalyst for transformation.

“The new team that came in was aligned and we created a clear purpose that was supported by the business’ strategy.”

Don’t Just Pay Lip Service to Succession

Current frameworks for top-level succession planning tend to be inadequate at best, especially when it comes to the chief executive role.

Simon Laffin, Chairman of airline parent company Flybe Group, said: “Succession planning for the CEO is difficult. For one, corporate governance puts pressure on boards to look externally, at least to benchmark. I have seen as many issues through external candidates being appointed as I have internal ones promoted.”

According to Matthew, boards often assume that the answer to CEO succession lies externally, rather than internally: “There tends to be a view that the external person is bright and shiny and will solve all of the problems within an organisation.”

It remains a difficult area for HRDs and boards. In many instances, an organisation’s appetite for succession planning at the top level depends on the CEO’s attitude and openness to discussions about tenure.

“Most organisations pay lip service to succession,” Matthew warned. “From the point of view of the board, they need to be strong in dealing with succession – sooner or later it will be an issue they have to confront.”

Put the Business First

If a HRD is to behave as a true business partner to the CEO and other senior executives, they need to speak the language of the board.

Simon urged HRDs “to put the business first” when talking with executive and non-executive directors. “If you’re describing people development, that means describing it in the context of the business need,” he explained.

He added that it was important for HRDs to bear in mind that boards, out of necessity, tended to be task-oriented. “There is a lot of time pressure at a board meeting and it’s not often a place for much emotional intelligence,” he said. “I would suggest a HRD tries to talk to directors in advance, particularly the remco chair who is often, in effect, the non-executive HRD.

“Also speak to people afterwards and get feedback, not so much on how they thought you did in a board presentation but how they think you should move forwards.”

At the same time, HRDs shouldn’t be overly deferential. “One of the problems is that CEOs don’t always recognise the importance of the HRD,” said Matthew. “Allied to that, I’m not sure HRDs always understand the power they have, or that they’re unwilling to wield it. After all, it’s easy to forget that they have the ability to fire the CEO.”

Next week, we’ll be covering Day Two of the Retreat, which explored how HRDs and senior executives are preparing for the workforce of the future.

Read more on trust and alignment in the top team here.

Or, read about creating passion and purpose here.

Leading a Digital Culture

Comm update_14 JanuaryAs new technology continues to turn traditional business models upside down, the onus is on executive teams to embrace change while encouraging employees to think and act differently. It means challenging conventional approaches, testing ideas and creating a ‘digital culture’ within an organisation which is attuned to and reflective of changing customer expectations. It’s inevitable that the companies that fail to adapt will struggle to compete effectively.

For large, well-established organisations, deep-rooted changes are required. Julian Payne, Line of Business Director for Solutions at De La Rue, a supplier of identity and product authentication services to governments and multinationals, says: “If you’re a first-generation digital start-up business or technology company, you don’t have to think about digital culture, you just have it. You have an agile development team… and you are open to change.

“Whereas if you’re working in a bigger business or a business with a significant non-digital legacy… you’ve got to think about the DNA of the culture that you want to create… It means thinking about what’s happening in the wider context around everything from hosting, to the cloud and big data analytics.”

Laura Haynes, Chairman of brand consultancy Appetite, explains that digital needs to be part of the core business: “People think about digital as being something outside their regular business issues, but it is time to think differently and recognise that the first way to reap the benefits of a digital culture is to break down silos and integrate digital thinking and processes throughout the business.

“Sure, there will be parts of digital that may need new technical expertise, but there is the opportunity to explore the potential to improve processes and communications, but this means embracing digital.”

It’s about connecting the established practices with the new, and reaching a balance which allows digital to enhance or adapt the traditional offering. Bal Samra, BBC Commercial Director and Managing Director of BBC Television, who is leading major digital projects such as BBC3 Online, the iPlayer and BBC Store, comments: “Our values at the BBC are always going to be the same… but we are in a different world – it feels like everything is speeding up… You need to create a culture in your organisation to evolve from the old to the new.”

Executives on point 

Senior executives in an organisation need to take the lead on digital. Bal says: “The CEO has to set the pace of the vision… So that means constantly talking about the world around us and how it’s changing, and moving that from being scary to being an opportunity.”

Leaders need to be open-minded. Laura says: “The challenges are understandable because if you take a lot of senior leadership, they’re having to relearn a way of thinking that doesn’t come naturally… it’s not just about learning techniques; it’s about learning to think differently about processes, about truly interactive and real-time communications, about the utilisation of information and how to analyse what’s in front of us, as well as new media.”

Julian says you have to “remove fear and de-risk digital” through experimentation and education: “Get them to play at home more. Ask them to use some of the modern apps that, frankly, kids are using.

“You need an interpreter role, it might be your CTO or it might be head of R&D. Someone who can take relatively complex concepts of digital and introduce them to a board… [Crucially] you have to be really clear about where the customer value lies, the cost to achieve it and the steps to take.”

Younger employees are increasingly being turned in order to share their digital expertise, acting as reverse mentors for an older generation. Paul Brennan, Chairman of cloud infrastructure software provider OnApp, comments: “You need to utilise younger people who are going to be the consumers of your products and services in ten years’ time, to understand how they want to communicate with you.”

Allied to this, employees should be allowed to experiment and test ideas. “You fail fast and learn,” says Bal. “What you want is an innovation kind of culture which says if you fail… and if something doesn’t work, you move on. You’ve got to create a culture that allows people to challenge the conventions.”

For this ‘digital culture’ to be meaningful, it has to be joined-up with how the information generated by technology is being used to bring about collaboration, experimentation and to inform decision-making. “New technologies enable us to act in a very different way,” says Emma Cooper, Managing Director of UK Health and Public Sector, and Organisational Change Lead for the UK and Ireland, at Accenture.

“They allow us to tap into workers anytime, anywhere… Digital is changing organisations, silos and hierarchies.”

Helen Murray, Chief Customer Solutions Officer at Webhelp UK, a company that provides outsource customer services, says: “Huge insights can be gained from analysing conversations, utilising voice and text analytics, to truly understand customers’ emotions, frustrations and behaviours, and combining that with more traditional, structured data analytics… You need to ensure all customer engagements consistently reflect and represent the brand.”

In order to fully endorse digital, leaders have to understand the tangible business benefits. Paul comments: “A lack of awareness of the value proposition means you could miss opportunities, so education is important for senior executives to fully embrace digital. You need to understand the benefit to your organisation.”

At the very least, they have to be honest about where gaps in knowledge and expertise may lie. Mike Greene, Chairman of pharmaceutical and consumer healthcare company WinchPharma Group, says: “Boards need a diverse mix of experience, energy and ambition… If they haven’t got someone who’s digitally savvy and digitally confident then their board is missing something, but unfortunately they often recruit in their own image.”

Helen comments: “Digital is so critical to businesses… It’s essential that digital is in its DNA, not a separate operating unit; not an adjunct… It needs to interface seamlessly with the rest of the organisation.”

Large corporates may struggle to embrace a truly digital culture, but senior executives must rise to the challenge. Ultimately, leaders need to ensure they are open-minded and willing to learn, while utilising new technologies and data in order to empower employees to meet changing customer demand.

I hope to see you soon

Matthew

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