The Opportunity to Transform Finance

Almost two years after the collapse of Lehman Brothers and the violent financial storm that ensued, it appears we are in calmer waters. Some people are even daring to mention the green shoots of recovery.
 
These might turn out to be fragile, and it would be dangerous to assume that there are no further crises to come. But we do have valuable breathing space in which to review the story so far.
 
It’s no surprise that the policy debate is moving into full swing and that various new ideas are being suggested — for example, introducing separate risk committees for banking institutions. In one sense, we have returned to a situation like the one we found ourselves in following the collapses of Enron and WorldCom, which saw the introduction of the Sarbanes-Oxley Act 2002 (SOX) in the U.S., and a host of new corporate governance codes around the globe.
 
Although there is evidence to show that many organisations have found SOX useful, and that the adoption of best-practice governance frameworks has helped non-financial companies to weather the storm, we should be mindful that codes and legislation will get us only so far.
 
What really matters is getting behind the codes of corporate governance to ensure that the right behaviour and processes are truly ingrained in the organisational DNA. Remember that even Enron ticked all the right boxes as far as governance was concerned.
 
During one of the breakfast seminars organised by CIMA and attended by senior management accountants to discuss board effectiveness, they were in no doubt about this requirement. Participants who were executive or non-executive directors in the FTSE 350 recognised the importance of embedding the right culture throughout their companies.
 
As you might expect from a group of financial managers, they took a highly practical approach when it came to questions such as, "How does a company resolve the information gap between non-executives and executives?" What underpins this is the power of management accounting to provide the information that continually drives the business.
 
Financial accounting certainly has its place and a company’s financial results will mirror how its performance has been managed. But although stakeholders want to know what has happened, they also need an idea of what the future holds.
 
Rather than just studying how an organisation has performed in the past, chartered management accountants are geared towards analysing performance, assessing business possibilities, grasping opportunities and shaping the future. Management accounting, with its predictive potential, has much to offer here.
 
Enlightened companies are already well on the way to transforming their finance functions to be more efficient and to better support decision making. This has included developing finance professionals and deploying them as finance business partners across the business. This gives organisations a competitive advantage. Any organisation not taking the opportunity to transform its finance function in this way could be putting its competitive position at risk.
 
There is already evidence of a correlation between companies where finance functions have been transformed to improve the focus on performance management and superior returns for shareholders. This is achieved through improved performance and more reliable forecasting, giving investors greater confidence. Management accountants are not limited to the finance function and are best placed to work in such value-adding roles, while still retaining their traditional skill-set of processing transactions, producing accounts and preparing management information.
 
There is an exciting opportunity for management accountants to re-invent themselves as a new form of finance business partner, particularly in the Middle East. The region’s relative resilience to the overall effect of the global economic downturn puts it in an advantageous position to transform the finance function.
 
The nature of Middle Eastern markets as a global hub for multinational companies provides the flexibility and expertise to facilitate such a transformation. They can improve decision making by providing better information and helping to manage performance and risk, so that financial targets and strategic objectives are achieved.
 
Companies need to determine what role they want finance to play, and a finance strategy to ensure that they are developing the finance capabilities necessary to deliver the service that is required. In particular, clarity is required regarding the role of finance business partners in the business. Only then can the skill sets required be defined and training programmes developed.
 
Improving decision making, from the Asia-Pacific perspective
The Asian region comprises many different cultures, languages and belief systems, both between and within various nations. The 'one size fits all' decision-making mentality will not work globally.
 
In most parts of Asia, decision-making models can be categorised into three types of influences: 
  1. The large Japanese business groups, the Keiretsus;
  2. The large Korean business groups, the Chaebols, which are heavily dependent on government finance;
  3. The relatively non-complex, simply structured Chinese family business, which has a high degree of flexibility but can be quite niche.

There is a need to rework our assessments and assumptions about Asian management and organisations, based on the realisation that Asian stakeholders come from a unique cultural base. This defines what they are looking for in life, and how the fulfillment of their aspirations and needs are different from other cultures.

 

The Asian model of decision making is fairly steeped in cultural uniqueness — particularly the Asian collectivist culture and the values attached to them, where group ties and hierarchical relationships are viewed as paramount, in contrast to the supposedly more individualistic Western culture, which emphasises self-fulfillment and individual achievement.
 
The question of who makes decisions, how quickly the decision is made, the types of decisions and how the decision is implemented — these all involve cultural differences.  
 

There are four major distinctive differences in decision-making processes in Asia: 

  1. At the problem-recognition level, compliant managers tend to accept situations as fated to be God’s will. Problem-solving managers are likely to believe in their own efforts.
  2. Asians include their intuitive senses more often, when using ideas from the past and future in their data gathering. In terms of information gathering, 'sensers' (Westerners) mainly use their five senses to gather information and facts about a situation, and are more deductive in arriving at decisions.
  3. Typically, Asian cultures steeped in past-oriented thinking will often search for a historical precedent when constructing alternatives, or in formulating ‘new alternatives’. Westerners tend to create more ‘new alternatives’, or will re-engineer (re-hash) ‘old ideas’ as updates to make them more contemporary, in line with changing times and environments.
  4. Since Asians are more accepting of problems, once having identified an issue, it would take them longer to choose to recognise it as a problem.  

 

The need for ‘finance transformation’ has been recognised for over a decade. This is a journey towards a situation where the efficiency of finance operations has been maximised, management information is insightful and actionable, and finance is seen less as a necessary overhead and more as an important management discipline that enables value creation. This destination may always be hazy and beyond the horizon, but the direction seems clear, and some organisations have taken an early lead.
 
Yet, many organisations’ accounting and finance functions still see this as a distant future. They will have reduced their costs. They may even have people termed ‘business partners’ or ‘finance managers’. But if the emphasis is still on accounting processes and financial reporting, these finance functions have not been transformed. They may have become more efficient, but can still be seen by some as more of an overhead than an enabler.
 
CIMA welcomes views on the series of articles based on this report (exclusively published fortnightly on CFO Innovation), and any insights gained from your experience in this area. Comments should be sent to:
 
The CIMA Innovation and Development Department
CIMA
26 Chapter Street
London SW1P 4NP
United Kingdom
 
About the Author
Mr. Charles B. Tilley is the Chief Executive of CIMA. He is a regular commentator on a range of corporate governance issues, international standards, narrative reporting and strategic management issues concerning the profession and the Institute.
 
Sponsored article   

 

Suggested Articles

Some of you might have already been aware of the news that Questex—with the aim to focus on event business—will shut down permanently all media brands in Asia…

Some advice for transitioning into an advisory role

Global risks are intensifying but the collective will to tackle them appears to be lacking. Check out this report for areas of concern