A Bird’s-Eye View on Innovation

Managing risk and allowing innovation to flourish are two sides of the same coin. Today’s board directors must understand the value of both and create an environment that rewards them appropriately.

Sir Howard Davies, Chairman of the Royal Bank of Scotland, explains that while directors clearly should not be relied on for new product ideas, they have a key role in setting the right tone. “The board should be able to create an environment in which innovation is valued, supported and where people feel self-confident enough to take appropriate risks,” he says.

It’s a point shared by Andrew Minton, Managing Director at Criticaleye. He reasons: “It’s becoming increasingly clear that if a business wants to develop an innovative culture, the board has to create an environment within which people can experiment.

“As a result of increased transparency, non-executive directors must be cognisant of their role in setting the right culture and attitudes. If NEDs don’t appear to value innovation and fresh thinking, the rest of the business will follow suit.”

For Rita Clifton, Non-executive Director at ASOS and Nationwide, this goes beyond simply saying the right things. The modern boardroom must have vibrant, curious individuals who symbolise the behavioural standards and values that they expect from the wider organisation.

She says: “When I started sitting on boards 15 years ago, I would hear many chairmen, chief executives and directors talking about how the business needed to be more innovative; that it needed to move faster. I would look around the table and think: ‘Guys, you’re the problem, you don’t look as though you want to be innovative’.

“In my view, the board directors need to symbolise the best of your organisation. The standards and expectations they set are so important; people pick up cues from what the board appears preoccupied with. Regardless of what you say about culture, if your staff know that your main driver is profit you’re going to encourage fearful and short-term behaviour.”

Complaining about compliance

The challenge for boards is to find the time for strategic thinking when the immediate focus needs to be on regulatory compliance, corporate governance and effective risk management.

Sir Howard, who has sat on FTSE 100 boards for over 25 years, has seen a shift in the board’s approach to governance. He believes that time, which would otherwise be spent looking forward and assessing growth opportunities, is being eaten-up by “the pressure to demonstrate a robust control framework”.

What can you do to redress the balance? Sir Howard answers: “You can make better use of the risk committee, which should take a lot of the heavy-lifting off the main board. However, be careful that you don’t create two classes of director, one who is focused on risk and the other who can ignore it”.

“The key thing is that the board isn’t dragged too far into the detail and can afford to pull itself into more strategic thinking. You could also ensure that there are board and off site meetings in which risk and control are banned topics and you focused on innovation.”

For Guy Elliott, Deputy Chairman at SABMiller and Non-executive Director at Royal Dutch Shell, boards need to embed their obligations into strategic discussions.

“Often compliance and risk are segmented as a special discussion on the board. Board members may think they tick that off every six months, and if the audit committee has said that the processes are fine, they feel they’ve done their job,” he says.

“You have to go further than that. What you should be doing with risk, a lot of the time, is integrating it with strategy and futurology. For example, one might think about what’s going to happen to consumer habits; what rate of growth you’ll see in emerging markets compared to a developed one. Integral to that is exploring how you are going to chase an upside risk or mitigate a downside one.”

All-pervasive technology

The nature of innovation in the digital age means that directors require a much deeper understanding of technology. Natarajan Chandrasekaran, CEO and Managing Director of Tata Consultancy Services, says: “All of us, in every industry, are going through a transformation; the biggest [challenge] is that before technology was supporting business, now it’s leading it.

“It’s no longer the case that once the business model is decided, you deliver the technology to support it. Now, it’s absolutely essential that you appreciate the power of technology so that you’re able to define the future of the business.”

This sentiment is echoed by Stine Bosse, Member of the Supervisory Board of Allianz and Chairman of BankNordik. “I would argue that you can’t talk about anything in the future without considering technology. Last year, it took up about 30 per cent of board time. That included educating the board – we have to go into the machine room and understand the technology, then we can think about its impact strategically,” she comments.

“At Allianz, we have just had a full day looking at where disruption is likely to come from – a full day for the board is a lot of time. We were thinking about driverless cars and the implications for insurance.”

Even with this level of education, Stine believes that the composition of the board room will change. “The average age will fall because boards will need to have age diversity. Intuitive knowledge of technology [needs to] enter the board room. Of course, [everyone] has to be able to satisfy the regulators’ requirements, but let’s not be too frightened about that; you can educate yourself to that end.”

Ultimately, it’s a case of developing a board that has the confidence to invest in change and encourage the business to move forward. Guy says: “We have to have more discussion about technology and disruption in the boardroom. That doesn’t necessarily mean that a CIO needs to sit on the board, but they need to be there, talking the language of the board. It is important that what they say actually means something to everyone around the table. It’s difficult to make that linguistic transformation, but it can be done.”

Of course, the other side is that to ignore market disruption is a dereliction of duty. Rita notes: “Risk management can be seen as putting a brake on proceedings and trying to stop things from happening. With the speed at which most markets change these days, a key risk is not to innovate. If we’re not careful, the board will be seen as trying to stop things from happening.”

These comments were made during a panel discussion at Tata Consultancy Services’ European Summit in Berlin.

By Joshua Tearney, Account Manager, Advisory Practice

Do you have a story about innovation? Please share your perspectives by emailing: dawn@criticaleye.com

Don’t miss next week’s Community Update on how to change your leadership style.

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How to Assess Culture

Kevin Hills, Head of EY’s Integrity and Compliance Team, explains that when it comes to risk and reputation, culture has a lot to answer for. 

Given the context of peoples’ actions, Kevin believes we can understand the reasoning behind even the biggest frauds in history. “When you connect with them on a human level, culture is often the thread that helps explain why they did it,” he says. 

This is just one reason why leaders and regulators are increasingly interested in corporate culture and how it drives the actions and behaviour of their staff. Yet many struggle when assessing culture. After all, how do you measure something so impalpable?  

Having spent more than 20 years in forensic accounting, Kevin has conducted a number of investigations at major UK and global organisations. More recently, he launched the Corporate Integrity Division at EY to help leaders understand culture and its impact. 

Kevin has had to work against the belief that there is no benchmark for a good culture. “The standard exists, although it is different for every organisation. The leadership create it,” he explains. 

Read more from Kevin Hills here 

Cleaning Up the Supply Chain

Many large businesses are battling to regain control of their supply chains. The lack of transparency due to off-shoring, myriad partnerships and poor data management means that a chief executive and their board can appear clueless when a scandal breaks.

And break they do, as shown by the horsemeat scandal that swept across Europe, the collapse of the Rana Plaza factory in Bangladesh and Nestlé’s discovery of forced labour in its supply chain.

Andrew Minton, Managing Director at Criticaleye, says: “If the CEO and the board are unaware of the risks, how are they expected to mitigate them? Often organisations don’t realise the inherent reputational danger that lies within their immediate and extended supply chain around the world. If executives don’t develop a strategy to deal with that, it can quickly become too late.”

The focus during the recent Criticaleye Global Conference Call: Reputation Management and Your Supply Chain was on how senior executives can show greater diligence in mitigating against such failures.

Here are four key points to emerge from the discussion:
1) Centralise Data

The single largest barrier to creating a visible, transparent supply chain comes down to having good information that is updated regularly.

Richard Shoylekov, Group General Counsel at the FTSE 100 distributor of plumbing and heating products Wolseley, comments: “Business partner due diligence − knowing who your partners are − is important. It sounds easy but it’s about having the right system in place to ensure you’re not doubling up or missing something, and categorising them properly.

“IT systems and data on existing operations should talk to one another and allow you to extract data in a reliable way – we’ve had a challenge with that.”

The crux of the problem lies with fragmentation. Bruce Morrison, Vice President for Production Procurement at GlaxoSmithKline, says: “We have a presence in 150 countries, the best part of 50,000 tier one suppliers and 72 manufacturing sites operating on multiple ERP systems. The biggest hurdle to overcome is getting control of this complexity and understanding what you’re doing today.

“I’ve been asking how many suppliers we have. Only now are we getting to the right answer; it’s taken us a year to get there.”
2) Prioritise the Risks

The sheer volume of suppliers, particularly those in tier 2 and 3, makes due diligence extremely complex for an international business.

Bruce notes that GSK has introduced Category Councils to ensure the organisation is choosing appropriate suppliers: “These are business-led as opposed to procurement-led and are an opportunity to debate why we are selecting a particular supplier or how we manage risk within a category,” he explains.

A programme called Third Party Oversight (TPO) was also launched a couple of years ago. It’s company-wide and focuses on 13 different risks – including anti-bribery and anti-corruption, labour rights, health and safety, information risk and conflict minerals – across all external engagements with suppliers, distributors and companies in which GSK holds an equity stake.

“In my area – the manufacturing organisation – we have 72 sites and about 20,000 tier one suppliers. Our goal through TPO is to assess all of those suppliers across the 13 risks by the end of 2017; to date we’ve assessed about 1,000 suppliers.”

Luke Wilde, CEO at consultancy twentyfifty, says that companies need to prioritise which supply chains require an in-depth assessment, although he acknowledges that it’s no easy task. “It’s important to explain how you’re doing that prioritisation in your reporting,” he explains. “Most sensible external critics will recognise when a company needs to make decisions about where it invests limited resources; it’s about having a good rationale to do that.”
3) Focus on Collaboration, Education and Enforcement 

Proper interaction with suppliers needs to take place. Amelia Knott, Director of Consulting at twentyfifty, says: “The focus on this area has increased. For many years there was a safety net, [companies] would simply put something in the contracts and that would be adequate. Now there is a recognition they need to go further.”

Last year, GSK introduced additional training to develop employees so they can, if necessary, ask suppliers the right questions. “It’s no longer just left to a CSR representative or an auditor,” explains Bruce.

While not underestimating the scale of policing companies across a global supply chain, it’s evident there must be greater responsibility for enforcing standards. Bruce continues: “Previously, there was a tendency to think that inserting the right clause in a contract would be sufficient; that has definitely changed. Legislation, such as the Modern Slavery Act, is encouraging us to further understand what we are doing and our approach in this area.

“The first point is making sure you’re sufficiently empowered to drive change. We’re fortunate that we have a Global Ethics and Compliance Team that sits within our executive committee, reporting into our CEO.”

Given that the reputation of a business is inextricably linked to suppliers, there needs to be a clear and unambiguous set of expectations, argues Will Smith, Vice President for Property & Market Development at retailer Asda.

“The way we do business has to be consistent,” he explains. “There’s one set of rules, one code of ethics and they apply internally and externally. There are no exceptions and there is no grey area. We communicate clearly through regular supplier briefings and training days… All suppliers sign up to our standard terms of engagement with the appropriate ongoing checks and balances – or there is no business.”
4) Communicate With Stakeholders

Regulators, NGOs and other stakeholders want to see companies strike the right balance between margins and an ethical, sustainable approach to managing risk.

Amelia notes that companies should be prepared to answer questions about their supply chains and work with external parties for the greater good: “The board might want to ask who your teams are talking to and what relationships they have with NGOs and institutions like the International Labour Organization (ILO), which has insight into the conditions within various supply chains.

“NGOs are willing to support companies that are genuinely trying to make a difference. They’re not expecting companies to solve the problem of modern slavery, for example, which is huge and would require multi-stakeholder action. It’s more about showing proper commitment to understanding where risks are in supply chains and making an informed decision about where to focus effort.”

As ever, a company’s appetite for investment in systems and processes, combined with its ability to communicate with external parties, depends very much on the leadership within an organisation. David Horlock, Managing Director for Asia Pacific at standards body BSI Group, comments: “The CEO has to specify the direction of the company in terms of values and how to drive that with procurement, [suppliers], training and governance.

“The CEO needs to state that, while price is important, there is a minimum criteria and [be clear on] what that entails.’”
By Dawn Murden, Editor, Advisory
What are your thoughts on supply chain risk? If you have an opinion that you’d like to share, please email Dawn at: dawn@criticaleye.com

 

Find out more about Criticaleye’s next Global Conference Call: Cyber Security – What Boards Need to Know with Justin Lowe, Cyber Security Expert at PA Consulting and Sigga Sigurdardottir, Head of Customer & Innovation at Banco Santander. 

 

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Understanding Risk Culture

Attitude is everything when it comes to managing risk effectively. “If a company doesn’t have a positive culture you can have as many rules as you like, but in that moment of truth when people are under pressure, they will tend to do the wrong things,” says John Shelley, Chief Risk Officer at RBS Asia Pacific.

Creating the right mindset in a global business is a difficult undertaking. The emissions testing scandal in the automotive industry and the discovery of slave labour in the supply chain of food companies reinforce why serious attention has to be paid to risk.

Rules and regulations, combined with integrity around remuneration and bonuses, will provide a framework for making good decisions, but senior executive and non-executive directors need to understand that governance won’t be enough.

“Risk needs to be a responsibility of everyone in the organisation and the board needs to test that there is a strategy and direction in place, monitoring and reporting against key measures and indicators, and a culture of awareness and ownership,” says Lucy Dimes, Non-executive Director at European textile service business Berendsen and former COO of Equiniti.

Charlie Wagstaff, Managing Director at Criticaleye, says: “To manage risk across a global organisation there must be an operational framework that is consistent with the organisation’s values. This needs to be wide-ranging and sensitive to all situations encountered.

“Transparency and openness are also key, so that any outcome is readily apparent. There should be no opportunity to hide or conceal anything.”

Criticaleye looks at the questions boards should ask in order to assess their company’s risk culture:

What do customers think about our company? 

Customers can give you an entirely different perspective from those within the business. Jim Meredith, Chairman at hazardous waste management company Augean, says they can “tell you whether management… understand and deal with them appropriately”.

Realistically, not all non-executives will have the time to interact with customers, so Jim promotes the idea of having a “mini customer conference” during which NEDs and others can hear their candid feedback.

Do we have a whistleblowing system? Is it effective? 

Employees must be able to raise concerns without fear of losing their job or damaging their career.

Andrew Heath, CEO of Alent a global supplier of surface treatment plating chemicals and electronics assembly materials and Independent Non-executive Director at Imagination Technologies Group, comments: “We look at the whistleblower statistics at every board meeting at Alent. I report on it because the only way you can get the right culture is by people telling you the truth, otherwise you live in a bit of a bubble.”

It’s a case of the board asking simple, direct questions. “Is there a whistleblowing line?” asks Lucy. “Is it anonymous? Does it allow employees to flag concerns and risks against a clearly communicated set of values and tolerances? Is speaking up valued or discouraged?”

Andrew agrees: “You’ve got to have various channels, such as employee helplines and whistleblower facilities whereby people can independently flag things without going through the chain of command.

“People have a duty to flag concerns, especially when it comes to reputational risks such as things to do with ethics, bribery, corruption and bullying.”

Where have we had near misses? 

Consider those close shaves and what they say about your organisation.

John from RBS comments: “We have a system of notifying senior management about things that nearly went wrong. Think about the airlines reporting near misses and then put that into the context of your company… Getting information about them is more valuable than going on a witch hunt to see who almost messed up.

“We want to know if our process, or something we did or didn’t do, almost resulted in an error. When these things happen we need them to be reported so we can learn from them.”

For David Gooding, Group IT Director at waste management company Biffa, health and safety is critical. “The waste industry, after agriculture, is the most dangerous industry to work in. So, this has been a primary focus for us,” he explains.

This kind of reporting has been an important part of Biffa’s process for a while but is something they have recently pushed further. “In the last four years we’ve had a double digit decrease in our incident frequency – we’ve done that by really pushing the reporting of potential hazards and near misses,” he adds.

What tone does the board set?

Respect for risk management has to start in the boardroom. Andrew Allner, Chairman at the Go-Ahead Group, says: “That is where the tone and culture are set. If the board takes risk seriously then the organisation will naturally follow that lead.”

Samantha Barber, Non-executive Director at Spanish utility company Iberdrola, agrees: “A strong risk culture also requires trust, transparency and challenge within the boardroom between executive and non-executive directors.

“Effectively managing risk is far more about culture and leadership, than it is about filling in a matrix.”

According to Deepika Bal, Managing Director and Head of Risk Architecture for Asia Pacific at Citibank: “The foundational elements of a strong risk culture include, among others, a common purpose and mission, clear goal-setting, fair and transparent rewards mechanisms, ethics policies and whistleblower protection.

“Most importantly, there has to be a culture of learning and self-improvement. Most large companies do have many of these elements in place. However, boards should focus on the efficacy of these measures in embedding a strong risk culture. Beyond these policies and controls, boards are in a unique position to set the tone at the top.”

 

By Dawn Murden, Editor, Advisory

Do you agree with the questions posed above? Would you ask something different? If you have an opinion you’d like to share, please email Dawn at: dawn@criticaleye.com

Find out more about how to embed a positive risk culture across an organisation at our Hong Kong-based Discussion Group, with John Shelley, Chief Risk Officer at RBS Asia Pacific. 

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Leading Breakthrough Innovation

Comm update_19 NovemberNo executive team wants to experience its own ‘Kodak moment’, whereby a tried and trusted business model is rendered obsolete. That’s why incremental innovation, where a company invests in improving products and services, won’t be enough to protect its long-term market position. The real alchemy lies in creating a culture which provides a continual stream of fresh ideas that have the potential to transform an entire industry.

“Breakthrough innovation is about changing the paradigm.” says Colin Hatfield, Founder of communications specialist Visible Leaders. “It’s about leaders coming up with new models, looking to new markets, breaking through with new consumers and actually doing things in a very disruptive and different way.”

Once corporates reach a certain size, the focus on margins and process can extinguish that entrepreneurial spark which is crucial for genuine invention. So, how can large businesses recapture their innovation mojo?

Bal Samra, BBC Commercial Director and Managing Director of BBC Television, has led innovative projects like BBC Online, Radio 5 Live, the iPlayer, and BBC Store, an online commercial service for audiences to buy and keep BBC programmes which is due to launch next year. “It’s important to be open about change, what it means for the organisation, how to think about it and how people can get involved,” he says.

“For example, rather than convincing everyone that moving forward with BBC Store isn’t going to be too disruptive, you almost do the reverse – you openly communicate as a leader that it probably will disrupt the conventional model and what we really need to think about is how we manage that. Too often as leaders we don’t have an open dialogue with our teams and our organisation about what disruptive change actually means… Equally, we don’t do enough to talk about what the opportunities are for people in terms of developing new skills and new experiences.”

Steve Muylle, Professor and Partner at Vlerick Business School and a Criticaleye Thought Leader, provides the example of BNP Paribas, which launched its mobile retail bank venture, Hello Bank, in 2013: “[Its launch] was communicated from the group level at BNP Paribas by the Chief Operating Officer, then rolled out at country level by each of the regional CEOs.

“The messaging was important because the leadership said they believe in the potential of both models… [While] they believe the disruptive business, mobile, is the source of future growth… they are still innovating in the core model, even though it is more incremental innovation… [Leaders need to consider how] solutions in one model reinforce the other, without undermining it or developing a conflicting situation.”

Deciding where to house your innovation team often presents a dilemma. Mark Parsons, Chief Customer Officer for the UK and Ireland at DHL Supply Chain, says: “Skunkworks, where you bring all the innovation together in a silo… are appropriate in certain circumstances in which you need to get around something that will impact the overall business substantively.

“How you get that to market is important but you need to work through what the majority of the implications are for the business before you actually launch it… You need that protection and also the ability to focus your attention on trying to develop the end product.”

There’s a risk that, with a siloed approach, you lose sight of what customers actually want. Neil Stephens, Managing Director for the UK and Ireland at food company Nestlé Professional, comments: “I get slightly perturbed when I hear [leaders] talk about innovation in isolation because it’s not an end in its own right; it’s a means to an end. For me, the end is always in creating disruptive services or solutions that customers are delighted by…

“The narrative I always put around the need for breakthrough innovation is that the customer is constantly changing and they are always eager to find new ways to enrich their lives… [That’s why] we are trying to bring our customers into the innovation loop as early as possible so that, by the time we go to market, we already have customers who are attuned to the opportunities and who have been part of the process from the beginning.”

For Bal, creating teams that work across business divisions helps to encourage an innovative mindset: “Creating smaller teams that work in collaboration is the way forward and co-location is a big part of that. Innovation is actually delivered through that serendipity, where you have people bouncing off each other’s ideas; those connections are really what you are trying to promote.”

Nothing ventured

Leaders will often talk about innovative companies building a culture where people are allowed to fail. Ideas will be piloted, tested and experimentation actively encouraged, although of course results will be expected at certain intervals. Aimie Chapple, Chief Innovation Officer in the UK and Ireland for Accenture, says: “It is important to be transparent and to expect both great successes… and great failures, where we have more to learn or to try something new.”

“[It’s about making it acceptable for employees] to risk doing something amazing. The barrier for getting it wrong… [can’t be] so high that it stifles the very people who may be able to see the best new ideas around them.”

Koray Gul, Vice President for General Merchandise, Hardlines, George, and GM Sourcing and Quality at supermarket chain Asda, comments: “The first rule of innovation is allowing teams to make mistakes. This is always hard in what is a very competitive business environment, but if people play safe there is absolutely no room for fresh thinking.

“Innovation takes courage and as leaders we need to support it. Trial and error is an essential part of the innovation process and, rather than calling the trials ‘failures’, we should call them ‘learning opportunities’ and share [what comes] out of them.”

Having brilliant people will certainly be important, but a heavy responsibility falls on the senior executive team to communicate why disruptive innovation is necessary. Mark says: “Leadership makes all the difference because when a leader says, ‘I really want to get behind this idea’ and ‘this is important to me’, it focuses attention.

“They’ve got to be selective because they can’t burn up too much of their political capital, so it’s about choosing which ideas to back… then visibly promoting them.”

I hope to see you soon

Matthew

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What’s on the Mind of a CFO?

Comm update_20 August1

Collaboration is essential if chief financial officers are going to perform to the highest level. They have to be highly analytical, commercial in approach, capable of shaping strategy and possess a keen eye for detail and process at the operational level. It’s why technical expertise and good interpersonal skills are so important as the CFO will be pulled into a variety projects right across an organisation.

“The demand on the CFO is to be a bit of a silver bullet guy,” says René Matthies, Chief Financial Officer for energy company E.ON UK. “They need to be strong on different capabilities, particularly stakeholder management. It’s a balance, on the one hand supporting customers and the business and, at the same time, managing the delivery of the strategy and financial targets while safeguarding compliance and managing risk.”

It relies on possessing a diverse set of skills. “The role of the CFO is a lot broader so it’s no longer about accounting and [bookkeeping],” says Shatish Dasani, Group Finance Director at electrical systems manufacturer TT Electronics. “It’s about getting to know the business, being a commercial player and getting involved in strategy.”

The CFO will be called upon for their insights on a variety of issues, from IT, legal and HR, to the more traditional areas of financial modelling, compliance, acquisitions and speaking to analysts and investors. Steve Allen, Managing Director for Finance at TfL (Transport for London), says: “You have to be able to work collaboratively with colleagues, draw out information, challenge constructively and yet still be able to present results in a robust manner.”

David Santoro, Executive Partner for IBM Global Business Services, says: “The role of the CFO has… gone from one that’s been custodial in nature, statutory and regulatory [in its focus], to one that’s now more forward-looking and oriented towards providing strategic input into the business…

“Data and reliable information are probably the most important assets in the armament of the CFO today and that’s definitely something that has changed dramatically over the last ten to 15 years.”

The emphasis on risk management has grown significantly. Bob Emmins, Finance Director of sugar supplier Silver Spoon, comments: “Gone are the days when risk management was just what the financiers asked and the auditor thought about. It has to be embedded into the business, so that people are considering the risks whilst making their decisions.”

Deirdre Mahlan, Chief Financial Officer of alcoholic beverages company Diageo, says: “Globalisation, or the increasing tendency of businesses to act and think globally as opposed to just being present globally, has shifted the balance in terms of thinking about risk and reward.

“Certainly, when your business has less presence or less at stake in multiple cultures, multiple economies, different sets of socio-political environments, you can manage that risk-reward and resource allocation differently.”

As a business becomes more global, the dynamics around risk and resources becomes far more complex. “I think many organisations and individual professionals are still working their way through getting to reasonable levels of comfort in doing that,” adds Deirdre.

Using Intelligence

Technology’s impact on the role of the CFO is only going to increase. “It is driving both the strategic and detailed aspects of the work,” comments Barbara Moorhouse, Non-executive Director of the Lending Standards Board. “More of an organisation’s strategy may be technology led; support systems are becoming more complex and risks are increasingly technology related – and hard for non-specialists to understand.”

The speed at which information can be sliced and diced is proving to be both a blessing and a curse. Jim Wilkinson, Chief Financial Officer at African investment concern Lonrho, says: “Technology is changing the role because everything is becoming more immediate and the amount of information is increasing significantly.

“This means that time management skills and being able to identify the valuable information is extremely important. It is also making the role far more 24/7 than ever [before].”

It’s one of the reasons why finance functions are rapidly evolving, so they can provide productive insights by integrating operational and financial data to inform the decision-making process. “The operating model is changing from being transactionally focused – so producing reports, closing the books [and reconciling accounts] – to one that’s much more focused on… insight creation and driving real value back into the business,” says David.

In fact, many organisations are keen to outsource the day-to-day aspects of management accounting in order to bring in people that can enhance performance. “It’s a massive challenge facing finance [teams] globally and one that is causing a fundamental shift in how they look at… investing in the future of finance,” he adds.

What hasn’t changed is the need to talk regularly with the CEO and, in effect, act as co-pilot. Paul McKoen, Chief Financial Officer of bed and mattress manufacturer Silentnight Group, comments: “A CEO needs the support and complete loyalty of a good CFO, but they also need somebody who is prepared to stand up and criticise and tell them when they’re wrong. It can’t be an uncritical relationship.”

Jim makes a similar point. “The CEO and CFO should work extremely closely together as partners. However, they should also be challenging each other and not be afraid to speak their minds and have differing opinions. Respect for each other’s style and achievements should still overcome any fundamental disagreements,” he says.

The CFO has the widest ranging role on the board, with the emphasis firmly on forming alliances to make sure strategy and execution are aligned. As Deirdre puts it: “The biggest change in the role of the CFO, over the last decade or so, is a shift from almost a policing or reporting function, as the primary role, to one of business partnership.”

I hope to see you soon.

Matthew

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The True Value of Risk

Comm update_2 July1A healthy approach to risk is one where a board has a robust framework in place which allows it to focus on the most important threats. Success will mean an organisation is not only resilient and well-drilled in how to avert or respond to a crisis, but strategically directors will be able to make informed decisions that can outsmart the competition.

Alison Carnwath, Chairman of commercial property and investment company Land Securities Group, says: “In 2010, we took a gamble to start our big development programme in London. There were commentators at the time who said we were taking a very risky view on life… but we calculated financially, and in the context of the property cycle, that we were doing the right things… and we’re seeing the payoffs now.”

What risk cannot be is purely a box-ticking exercise. Barbara Moorhouse, Non-executive Director of the Lending Standards Board, comments: “As directors we have very well developed models for good governance, internal controls, and risk management. Professional services firms in the UK – accounting and legal – would rightly see themselves as setting high standards by international comparisons. While this may help the balance of the UK’s ‘invisible trade’, it may increase the focus on governance issues disproportionately.”

Board directors must have the time to think strategically. Allan Cook, Chairman of engineering consultancy Atkins, says: “The balance between risk and strategy, and taking full advantage of opportunities that exist, is down to the quality of the leadership in the company. It’s in the balance that you have between the executive and non-executive directors.”

A system should be in place whereby directors aren’t overloaded with information. “Boards need to focus on the big risks and make sure that they are properly considered, debated and addressed,” says Andrew Allner, Non-executive Chairman of public transport concern Go-Ahead Group. “You can end up with an incredibly long list which is not particularly helpful, and there’s a lot of stuff that, really, shouldn’t take up the time of directors.”

Peter Shore, Chairman of telecoms concern Arqiva, comments: “We have developed a risk matrix… [whereby] only the top ten risk items come up through the business to the main board… If they aren’t realistic or actionable, or it isn’t a material performance risk, they don’t actually make it onto our risk register.”

For chief risk officers (CROs), internal auditors and chief finance officers, this is posing some interesting questions about how to manage data, the general flow of information and what should be communicated to risk committees. Sue Kean, CRO at financial conglomerate Old Mutual, explains that while wide-ranging monitoring reports and trend analysis are conducted and examined, only identified trends or exceptions are passed up to the board.

Across an organisation, there has to be an embedded sense of accountability and openness. Judith Nicol, Director at executive and non-executive recruitment specialist Warren Partners, comments: “You have to make sure there are internal processes to measure and monitor known areas of risk. But perhaps the more difficult thing for boards is to ensure they have a culture and a system in place to allow issues of concern to be surfaced that may not even be on their radar.”

Getting this right is easier said than done, especially for global entities. Peter says, “If you’re across a whole range of countries I think [the question of risk management]… is increased, because the probability of something going wrong in those countries is increased…

“Rather than tight central controls, you’ve got to find a way to distribute some of the decision-making authority and risk assessment. That then has to take account of different cultural and business practices and markets, regulatory risk and the whole swathe of things that you have to deal with. It’s just bigger and more complex.”

At board level, a mix of individuals will be needed, including experienced non-executive directors who are bold enough to provide a different perspective, while not acting like blockers. Allan says: “Having a balanced board means that you’re able to take a longer-term view, in terms of what you should be looking at with regard to risk, and actually what [you] should be looking at in terms of strategic options.”

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Can Banks Win Back Trust?

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The banking industry faces a huge task ahead if it is to restore trust and credibility. While it’s understandable that much anger and suspicion is directed towards ‘bankers’ for their role in the financial crisis, it has always been too simplistic to blame this group entirely for what happened. It’s time to move on, not least because a strong banking system is in everyone’s interests if the economic recovery is to gain momentum.

Getting there is another matter. The measures taken by regulators, such as the introduction of the Dodd-Frank Act in the US and Basel III in Europe, are necessary to reduce some of the remarkable risks that were being taken with unwitting customers’ money. There does need to be a limit, however, so that the political necessity to be seen to act in order to satiate public opprobrium, combined with a very rational need to reduce alarming behaviours, does not result in throwing the proverbial baby out with the bathwater.

Brian Stevenson, Non-executive Director of Agricultural Bank of China and former Chairman of Global Transaction Services for The Royal Bank of Scotland, says: “If you look at the new regulation that’s being put in place in Europe and the US, together with the FSA in the UK and the new authorities being given to the Bank of England under the new structure of regulation, when you add all of that together, you could legitimately argue that in combination it is going too far. If you’re a large international bank operating in a lot of countries around the world, you’re currently facing a multiplicity of new regulations and new regulators, and they’re not the same.”

The lack of standardisation around the world is a problem, creating a serious competitive disadvantage for some international banks, whereas at least the country-focused banks know they’re competing on a level playing field. “For domestic banks in the UK, it is very difficult to argue that the regulations have gone too far,” adds Brian, citing the issues around payment protection, liquidity and capital planning, to name but three.

Within this, there is also the question of the false sense of security that can occur in the clamour for safeguards and buffers. Steve Pateman, Head of UK Banking at Santander, says: “I may be wrong, but I don’t see that capital and liquidity management in isolation will effectively prevent another banking collapse. It has to be seen in combination with risk management. Anglo Irish would have gone bust with 30 per cent Tier 1 capital, so let’s not kid ourselves that if you’ve got Tier 1 capital of 10 per cent, you won’t go bust.”

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Tone at the top

Risk management has to be right – it’s no use, for example, having a well diversified mortgage book if there’s a massive concentration of exposure in highly leveraged corporate entities, as HBOS discovered to its cost. Omar Ali, Partner and UK Banking & Capital Markets Leader at Ernst & Young, says: “In terms of the issues we’ve had since 2007, fundamentally it comes down to a few critical questions; what is the organisation’s attitude to risk?; its culture?; how does it operate? Because, let’s be clear, all banks had rules and policies and regulation was in place already – regulation by itself is not the answer.”

Mary Jo Jacobi, Criticaleye Associate, former MD of Lehman Bros and advisor to the board of HSBC Holdings, says: “The banks need to clean up their own act and demonstrate that they are capable of occupying a position of public trust and of managing their own affairs responsibly. That doesn’t necessarily mean chasing huge profits through highly risky ventures. Of course, one of the reasons we got into the current situation was because the banks were coming up with more and more complex instruments to make money out of basically repackaging the same things. I’m a capitalist and I believe in the profit motive, but I also believe that businesses have a responsibility to understand what they are doing and address the potential consequences of what they are doing.”

Rebuilding faith in the competence of banks will not be easy. According to research from E&Y, some 40 per cent of banking customers globally have lost trust in the industry over the past year; customers are also becoming less loyal and increasing the number of banks they use, with a third of them now dealing with three or more banks.

At least banks now realise they actually need customers and success depends on winning back their trust. Paul Staples, Head of Corporate Finance at BNP Paribas, says: “Regaining public confidence in the provision of banking services will require progressive, visible changes in how we deliver value to our clients. The pursuit of shareholder returns must be blended intelligently with a tangible commitment to social responsibility.

“The project has begun and the next stage is genuine engagement with stakeholders to ensure that key initiatives are better designed through proper consultation. Clarity of communication is essential to regain credibility and to rebuild progressively an enduring trust.”

Over time, banks have been the most ruthlessly profit-focused of businesses. It’s now time for them to reconnect with customers and get back to basics, which means looking at how to provide the best possible service with transparency, such as being clearer about pricing and charges. Whether that is going to occur can be debated long and hard, as the aforementioned cultures within many organisations is entrenched, but given the public’s cynicism towards the industry, those banks that do respond will be at a distinct advantage.

“When you boil it down, banks only really do five things,” says Brian. “They provide a vehicle for customers to make investments; finance for customers; move money from A to B; risk management services; and information and advice on all of those services.

“So, in each category, they have to be careful enough to make sure that what they’re actually providing for their customers is ultimately what they want and there isn’t any form of grand deception or sleight of hand involved in the process.”

Helping first-time buyers, supporting businesses, making services quick and accessible across a variety of channels, that’s what people want to see and, if done in the right way, banks should not be pilloried for making profits. “The most important task we as an industry have ahead of us is to show that banking done well is a good thing, but it’s not a battle we’ve done a particularly good job with so far,” says Steve.

Omar suggests that it should be an enormous wake-up call for banks to appreciate the role they have to play in society: “This could create an industry that is better for everyone. Better for shareholders, taxpayers, regulators, customers, the overall economy and the country we live in. I think we have a unique opportunity to improve banking for all stakeholders and I just hope there is the collective will to do so.”

A New Generation of NEDs

If the requirements to be an effective NED have changed, it’s because the role demands the ability to add genuine value to a business, and that the expectations around performance have increased markedly. The net outcome of this means enhanced levels of commitment in order to do the job well, along with greater risks, not least in terms of reputation.

Contrary to what many may think, there is much to be welcomed here. Lynn Drummond, Non-executive Director of technology business Consort Medical, says: “There is almost a generational shift happening, and with that a more positive reaction to the greater responsibility. There is lots of expectation around NEDs now and of course that means preparation, networking and solving business issues, rather than just accepting things that come in the board pack.”

Ian Durant, Criticaleye Associate and Chairman of property developers Capital & Counties, says: “[There is] more public and political scrutiny of public company governance, more active shareholder attention, a harsher regulatory environment and a greater understanding of the risks involved [since] the financial services collapse… Time commitments for Remuneration and Audit Committees have increased substantially, and for a NED to contribute successfully overall, more time is required to be spent with the business.”

It’s a popular sentiment among Plc NEDs. David Shearer, Senior Independent Director of media concern STV Group, says: “A consequence of the economic, regulatory and business environment is that the amount of time and work outside the boardroom has increased substantially across all sectors, though particularly in financial services regulated entities. The degree of scrutiny to which board members are being subjected both by regulators and the City at large has increased as has the need for directors to keep themselves up-to-date.”


Choose wisely

The level of media, political and shareholder scrutiny means that prospective roles, especially in higher profile sectors, need to be judged more carefully. If something is perceived to go wrong, the dangers and liabilities may not be commensurate with the rewards.

Aleen Gulvanessian, Partner at law firm Eversheds, comments: “The risks, particularly reputational, have increased greatly. You are not going to get the most experienced and best qualified people to take on the most challenging NED and chairmanship roles in the financial services sector. For a number of them, especially if they have had 30 years of brilliant executive service, why would they put that reputation on the line for not a lot of money?”

While a chairman may receive what’s deemed to be a reasonable remuneration package, a growing chorus of voices are suggesting that the time and commitment needed to perform the role is not reflected in the amount earned. Robert Drummond, Chairman of clean energy business Acta, is passionate on this subject: “It’s about the overall skill and experience of the individual and with that the ability to stand up and be counted during testing times.

“Given what’s required to make a good quality NED, I do believe they have to be paid more. There must be a situation… where they are capable of earning the sort of salaries that attract the best people.”

The current mood and antipathy towards executive pay suggests that NEDs are going to remain on the same pay grade for a while yet. Besides, as David says, “full financial independence” is important as ultimately a NED has to be prepared “to resign as the final way of making a point”.

What is absolutely certain is that there is no shortage of motivated and experienced individuals looking to develop a portfolio career. John Allan, Chairman of Dixons Retail, tells Criticaleye: “Boards are more conscious of having a strong team of non-executive directors and the contribution that they can and need to make… I still meet a lot of people who want to become NEDs. I don’t think the liabilities issue is frightening most people off.”

This is where another change is occurring – the range and variety of people currently looking to take on NED positions. It’s well reported that boards are under pressure to address the gender balance, but as businesses look towards new markets to achieve growth a broader mix of skills and know-how have to be found.

“In structuring a board there is a need for a broad variety of skill-sets which can change over time, so as part of the board evaluation done annually the chairman should always ask the question: is the board fit for purpose?” says David.

The blend has to be right. John comments: “There is more focus on finding women, and on non-executives from outside the UK, and from outside a conventional business background. There is a lot of talent out there and maybe people are spreading the net a bit wider because they want to create greater diversity, in the broadest sense, not just in terms of gender within boards.”

Stop and listen

As for the qualities required to be a good NED, by and large they remain the same. Nicola Mumford, Non-executive Director of Harbour Ligation Funding, says: “The challenge for the new type of NED, who is reading all of the papers and getting well and truly stuck in, is to maintain independence and a bit of distance, as the more information that you have the more you’re likely to delve into the detail. It takes quite a lot of skill to take it all on board and step back afterwards, and that wasn’t such an issue when the information wasn’t at hand.”

John says: “The really good non-executives learn how to challenge without being aggressive or confrontational. There can’t be a stand-off in every board meeting between the non-executives and management; the ability to make a point, ask a question and raise a challenge without actually provoking a confrontation is actually a very important interpersonal skill which the best non-execs have in spades.”

The fundamental quality to being a good NED is flexibility. Roger McDowell, Chairman of engineering company Avingtrans, comments: “The role of the NED is changing only at the pace that business at large is evolving. So if you pick any of the trends that are happening in business, for example the increased internationalisation, then clearly this is something that NEDs have to keep pace with.”

In terms of actual governance duties and legal responsibilities, as defined in the Companies Act, there have only been modest changes recently. The day job for these highly experienced individuals is simply about knowing when to roll their sleeves up and get involved, and when to keep their counsel.

But to say that it’s business as usual would be a mistake. The range of qualities and level of involvement in understanding an organisation have grown since the financial crisis, which makes the role of the NED both more interesting and fulfilling for individuals and more important for healthy decision-making on the board.

These days, no business can afford to be the victim of ‘group think’ in this day and age.

Leading Through Uncertain Times

The two biggest pressures for CEOs today revolve around international expansion and recruiting the right talent. Invariably, the two are linked, as it’s a case of finding and engaging people who have the breadth of skills and knowledge to help unlock the potential of new markets.

Ian Edmondson, Chairman and Managing Director of Dunlop Aircraft Tyres, sees opportunities across Asia, Russia, Brazil and Africa. “The concern is how to find, motivate and retain good staff as one of the challenges is to successfully recruit foreign nationals for key leadership roles and to restructure the way the company operates as it transforms from a regional to a global business.”

It means taking calculated risks. Mark Hunter, CEO of claims and risk management business Airclaims, says: “Growth overseas is our priority right now; China is supposedly building 90 new airports in the next 10 years, but there is always a number of political factors and relationship differences [you have to accept], such as an initial lack of local knowledge and the need to maintain a justified presence through employing local people. So if you are going to make a sizeable investment and an immediate impact, it is crucial you get that timing right.”

Brain drain

Massive growth brings with it new challenges. Bryan Marcus, South America Director at financial services provider VW Credit Canada, explains: “Upgrading IT solutions and securing the best talent are prerequisites for any successful change or transformation programme. But Brazil’s growth has led to significant shortages of IT professionals, increasing business change and product development costs. It’s enough to put some projects on hold and it has diminished our flexibility – our key differentiator compared to the very large banks in Brazil.”

As a result, good communication is vitally important: “Project milestones can be delayed and one of my major challenges is managing the expectations of key stakeholders, shareholders and headquarters, who demand high performance in the BRICs, especially given the economic challenges in Western markets.”

Indeed, domestically, the picture is equally complex. Adrian Gunn, CEO of recruitment agency, Matchtech, explains: “We’re seeing a two-tier economy for the UK. We have growth opportunities as the product demand from overseas is creating demand for staff that we are fulfilling.

“However, there are two million people unemployed here, but what is available in the UK and what is required actually points to a bizarre skills shortage and looking at ways to overcome that is time-consuming.”

According to Adrian, there are huge issues around training that have to be addressed. “What worries me is that the organisations that are growing rapidly from global demand will put their investment elsewhere. As a leader I can target and pursue opportunities, but a lot of it is out of my control.”

The race is on for businesses to up-skill and adapt swiftly. For example, Andy Hague, UK CEO of HR outsourcing provider, Croner, has had to churn “maybe 25 per cent of the workforce” in order to bring in sales people who can thrive through selling online, as opposed to just via the traditional channels of phone and print.

David Wither, CEO of the AIM-listed hi-tech manufacturer Sarantel, says that “the idea of having a knowledge-based economy is absolutely vacuous and unbelievably arrogant”. He explains: “Our suppliers being overseas stretches the supply chain, and once those manufacturing bases have gone overseas, they’re gone.

“You need to bring manufacturing back [to the UK because] the way that technology develops is by learning through making things. There is an unbelievably arrogant Western feeling that we can let other people do ‘dirty manufacturing stuff’ and we’ll be able to come up with the best ideas, even though they are the ones with the latest manufacturing technology.”

The money pit

While ‘bootstrapping’ may be nothing new for companies, the ongoing austerity is certainly testing the resourcefulness of CEOs, not least those in the public sector. Jane Furniss, CEO of the Independent Police Complaints Commission, says: “The outlook for the public sector is a continuingly tough need to make savings, reduce expenditure and make redundancies, including closing offices and supporting staff to work from home or elsewhere. It presents a huge change to our way of working.

“How do you demonstrate that you value your staff as a leader and that you want to respond to external customer feedback about your service? When there’s no more waste to be found, where do you go next? It’s going to get harder to become more efficient just through cuts.”

The environment for listed companies may not be quite as savage as for organisations in the public sector, but there’s no question that financial backing and support remains hard to come by. Stephen Mohan, MD of Operational Services for financial trading platform provider, Cofunds, identifies the main challenges for a CEO at present as “the dire economy, major costs of change to cope with a tsunami of new and sometimes conflicting regulation, and the demand for increased capital”.

In terms of the latter, David suggests that “juggling resource constraints is without a doubt my biggest challenge as a leader – the biggest hurdle as a small technology company is access to capital”. He laments: “One of my deep frustrations is the lack of technology savvy investors. The UK has some of the best scientists and engineers on the planet but there are no Apples or Microsofts here because the US investment community is willing to make much bigger bets.”

Loud and clear

The ability to handle pressure is one thing, but the CEOs who really stand out have to go beyond that, especially when looking to implement a new strategy. Mark says: “Communication is on the agenda right now as employee engagement is absolutely critical. We went through a sale last year, which will distract any business; people have gone from being on a bit of a high to being uncertain about the future and it is critical they understand where we are going.”

It’s a skill that demands greater investment of leaders’ time. Adrian comments: “Communication with staff is taking a lot of my schedule now – internal comms is as important, if not more important, than external comms as unless people have faith in where the business is going, they will leave.

“You have to adapt your styles though: I have to give my recruitment consultants a more simplistic and clear message than the one for lobbying up to industry bodies or speaking to investors, which is much more reliant on statistics. If I communicated in the same way I would lose both audiences.”

These issues are all connected, of course. Andy Dunkley, CEO of Red Diamond Holdings, owner of the Lee Cooper clothing brand, notes: “The trouble I have is communication over our 90 countries, distilling and explaining the essence of my vision and ensuring that people everywhere can understand it. These issues aren’t new but everything comes at you much quicker today; global branding goes online and around the world instantly and if you aren’t very careful, it quickly turns into firefighting.”

Although most leaders are equipped to deal with the various demands of customers, stakeholders and staff alike, support is becoming ever more necessary. Top talent is vital, not least in the form of a strong non-executive team providing essential oversight and clarity amid the din of an online and always-on business.

Boards must work together to provide precious space for leaders to pull back, assess and ultimately decide how to formulate the best strategy when operating on an international stage.

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk