Post-Crisis Finance: Curse of the Short Term

For Alex Malley, CEO of the 122,000-strong professional accounting body CPA Australia, it’s not too early to think about financial management after the global recession. “For the first time, a generation of people 30 and under have seen that the current world doesn’t always work,” he says. “There’s a generation of people who can see that the world we thought was perfect is no longer perfect. So what is it we can do?”

 
What indeed? Malley spoke to CFO Innovation’s Cesar Bacani about what he thinks CFOs, CEOs and other C-level executives should be doing post-crisis, the higher cost of doing business in a low-carbon, higher tax business environment, and other issues.  
 
You have expressed worries that once the crisis is over, businesses will simply go back to what they were previously doing and thus set up the conditions for the next crisis. What do you think should be done to avert this?
I believe that the CFO should now increasingly refocus on medium-term ambitions, not just short-term ambitions, when the business starts to grow. At the moment shareholders have had an expectation of short-term results. These very same shareholders are offended by the fact that companies have been managing things poorly, but they have demanded short-term results. Shareholders are not, as individual groups, totally innocent. They’re also party to what’s been going on. They said, ‘We want short-term results so we can sell our shares and make money,’ and that creates expectations and demands on the business to supply that need – and all of a sudden, everyone gets upset when money gets lost.
 
The biggest problem for the global economy is to change mind-sets from short term to medium term. That would make an enormous difference globally. But that requires individual courage from individual CEOs in individual companies. It’s my view that we haven’t seen a lot of those behaviours from CEOs.
 
We haven’t seen them come out during the crisis and say, ‘Look, the world’s on fire, our companies have done some really good things, and it’s done some things in retrospect we could have done better. So I’m coming to you in the AGM, on the website, to the wider community and the press to say that we are going to take a medium term view. The reason we’re going to do this is because we want to set up a series of strategies that we know will work, but we’re going to take time to make them happen. If you are a short-term investor, perhaps we are not the one for you.’
 
Now that takes big courage, and it [needs] boards to support the CEO [who delivers this message].
 
What about the CFO?
The CFO is generally the person who has traded the organisation back to a reasonable level. So if things are being tough, it’s the CFO, in conjunction with the CEO, who has actually brought the organisation back on track. The credibility that comes with their skills need to be leveraged to start sending messages to the shareholders about the good things that have been done in the last 12 months.
 
‘We’ve reorganised the business. We’ve got a more flexible work force. We’ve got less inventory holdings. We’re more efficiently run. But you know what?  We’re starting to set medium-term goals.’ So there’s a whole communication plan that’s required to take advantage of good work done.
 
Are Asia’s CFOs doing this?
To be honest, my sense is that most people in the senior accounting role are so busy. They listen to what I’m saying, and say, ‘Well, that sounds great but we don’t have time to do the communication.’ I’m saying we’re going to have to find a way to do it.
 
There are examples of CFOs who are great communicators. They’re all competent people, but they need to increasingly focus on communication. If you’re a shareholder and you don’t trust the markets, you don’t trust the processes around some regulation, you’ve got to trust something or someone. So the CEO or CFO has got to walk out and start talking to people.
 
I think the mistake we make is to think that IT systems and emails do the trick. If you can say it [face to face], don’t email it. The human condition is still built to communicate and touch each other. Our biological system is not built for IT. If I lose confidence in the market, where do I go? I need someone to believe in. 

  

POST-CRISIS WORLD
How competitive will this company be that focuses on the medium and long term rather than the short term? In a world of the Internet and instant communications and instant changes in business models and new technologies . . .
For the first time, a generation of people 30 and under have seen that the current world doesn’t always work. The fundamental principles of life -- no pain, no gain, all of those things – have been circumvented in recent times. All of us, as parents in this generation, we’re all guilty of giving our children something because we never had it. We’re not helping them. So at least now, there’s a generation of people who can see that the world we thought was perfect is no longer perfect. So what is it we can do?
 
People tend to forget what they had gone through. Just look at the 1997 Asian financial crisis.
If you have a product that has a level of confidence, integrity, communication and engagement, you will always have a good level of investors in good, bad and ugly times. Maybe when things are dangerous you won’t have as many, but let me tell you, on the way up they’ll all come back.
 
There are expectations about changes in the post-recession world. One thread is the environment, climate change, low-carbon growth and things like that. The other is more intervention from governments, more regulations. The third would be the fact that government finances are in shambles and therefore taxation and other revenue measures will be more stringent. These three factors, and there may more, would seem to fundamentally change the way you would do business.
Climate change is a really interesting issue because there’s a whole lot of various opinions on climate change. As a businessman, I can either wait and wait and wait for what this is going to be or I can actually make a very simple solution. In the end the fundamental principle of climate change is to manage resource more efficiently. So what I’m going to do, I’m going to put sustainability at the front and centre of my business with the board and the management.
 
I’m going to make no apologies for that in market, and I’m going to tell people that whatever resources we have are going to be managed now more efficiently. We’re going to prepare a report, we’re going to vindicate ourselves. You [politicians] can have all the debate you like. By the time you have a tax on carbon, we [in business] will be managing on the basis that we’re ready for it. So when the tax comes, I’m producing 10% less [carbon] and I’m up 10% in my tax [liabilities].  
 
This population is not that clever, because my grandfather told me when I’m doing my teeth, turn the tap off. He told me that 25 years ago. He didn’t go to university, he wasn’t a businessman. Now we’re talking about the same principles. So let’s not pretend we’re a clever generation. Let’s just respect resources more.
 
The regulation issue is something that is obviously very important. Capitalism at the moment is in the process of failure. It has failed before, but not on a global stage. And so governments see, if you like, an opportunity to assert their authority. It’s a natural phenomenon. When they assert their authority, in the middle of it they say: ‘Well, how’s this going to work?’
 

At the moment you’ve got business saying: ‘Listen, too much of your intervention isn’t going to work.’ But business has no credibility because the reason that the governments are having to do this is because capitalism failed. So you got two parties to a transaction, both of which are not quite sure where it should all fit.

 
From a company point of view, I need to know that my annual report has all the material information that needs to be in there. But I’m not going to hire 50 extra people to manage all the regulations to the point that my organisation loses direction. It’s an issue of balance that the CEO and the CFO need to deal with. If I can pay my bills and I have a good cash flow, and my shareholders get some dividends, there’s no regulation in the world that’s going to stop me.
 
Should business try to influence those regulations?
There’s an imbalance in the negotiation; governments have far more authority than the professions do. Governments can’t possibly know as much about the profession as the profession knows. Yes, there should be conversations with appropriate stakeholders in the profession. And no final decision should be made without at least some support from the profession to say, ‘Yes, this would work and these are the reasons why that would work.’
 
I’m concerned with what’s possible and reasonable for the long term. If we come out of this whole process with far too much regulation, then we’re going to spend another decade trying to de-couple it. Look at Sarbanes Oxley. It was the rather quick response to a problem. To this day, Sarbanes Oxley sets some inhibitions on some companies that still have to resolve the problem. 

  

There’s got to be a mix of education, fundamental principles from school age about good behaviour. It’s about generational change, too.  Governments are just looking at the problem now because it’s politically expedient. But actually there should be a whole roll-out of conversations around education. But we’re preaching to people who come from different systems, who have different values. The job will be made easier if the process begins at a young age.
 
IMPACT ON BUSINESS
In practical terms, what can the CEO and CFO do going forward knowing what the post-crisis world is probably going to be like?
If I was making one assumption about business in the future, it’s that there’s going to be an increase in the cost of running a business. It will grow partly from excess regulation, excess taxation, partly because of carbon, partly because government is going to get their money back. There’ll be a whole lot of additional costs.
 
My intuitive position is that to run a business from today onwards is probably a 15% higher cost proposition than it was prior to the crash. I call it ‘society cost’.
 
So the challenge for a business to be competitive and take a leading position is to cut that 15% extra cost to, say, 10%. How do you that?
Yes, you can try to negotiate [society costs] down a little bit. You do that by a whole range of things. You do traditional things like outsourcing. You do that by strategic alliances. I have to keep reinventing myself. American Express was once a transport company; it’s now a credit-card company. I need to be agile. I can’t allow tradition to override decision-making.  
 
Technology is a part of this as well?
Technology is a huge part of this. The problem with technology is we make decisions about it, but we don’t know anything about it. That’s a cost. [Companies] pay experts to talk to them, but 80% of what the experts say doesn’t register.
 
Is there still a lot of things to do with just the mundane process of cash management and working capital, accounts payable…
A hundred percent they’re still important. The business people I respect most in the world are the people who know where the cash is in their business. The fundamentals of how quickly they get the money in, how slowly they manage their payments, how much is current, how much is non-current – those will still be very important.
 
So the society cost you’re talking about can be mitigated by making processes more efficient.
What I’m suggesting to you is that this is a global taxation. You still have to pay tax for doing business, but there’s going to be what I call a global tax.  Nowadays there are so many regulations, there are so many issues around being involved in this society that you just have to weigh the cost. My concern is that the global tax of doing business will start to become heavier than the rewards of doing in the business.
 
What does that lead to? Less business, more and larger conglomerates. Australia is founded on small businesses. The Hong Kong ethic is founded on enterprise. But if you add this increasing burden of global tax -- I call it 'global tax' and I mean it as a cost of society – as that keeps growing, the incentive of the individual drops. Who gets attracted to that? A bigger bureaucracy. So instead of selling my hamburgers as an individual or SME, I’ll sell [the company] to the big enterprise buying seven other SMEs.  
 
There’s this untouchable little core that’s growing. The lower you are under the radar, the smaller your business, the less likely you are to have that social tax. The trouble is, when you then want to create a bigger business, you will end up hitting the big jets up higher and the best that can happen is they’ll buy you. They’ll just absorb you. What happens is you’re going to get this concentration of power and that’s not healthy.
 
CPA AUSTRALIA
Given all these, how is CPA Australia changing the way it trains accountants?
We’re doing a lot of things on major fronts. We have a whole series of education programmes on sustainability, matters of climate change, of resource management, all the areas that we’ve been talking about today. We have a whole series of CPD [continuing professional development] programmes.
 
Within the CPA programme we are about to introduce three things: strategy, leadership and international business. We recognise that doing business [only] locally is going to be rare, not common. So we need to include in our education programmes information about strategy and leadership and international business. Your accountant today needs to be an analyst, a creator, an innovator, a negotiator, all of those things. The role is widening. And the resource responsibilities are is widening.
 
It’s fair to say that you’re actually helping with the behavioural changes that we’ve been talking about?
Yeah, that’s right. But we’re helping after people have finished school. What we would find very useful is for the G20 to talk about cultural education across the board. They’ve managed the global crisis, surely they can manage some contribution at the educational level on the importance of integrity, the importance of transparency, honesty – the concepts that we take for granted but others don’t.
 
CPA Australia today, like all good organisations, should be is different from yesterday because the world keeps changing. There [is always feedback on change] coming from our membership, from over 122,000 individuals who provide us with insight to determine our strategy. We still are just as strong in technical matters, but what we’re finding is an increasing demand in strategy, leadership and international business, so that has been the driver of change. 

 

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