www.fm-magazine.

com • May 2013

Unilever CFO Jean-Marc Huët: ‘the call for integrated reporting is rising’
Mind Candy CFO Divinia Knowles on entering new markets

how to protect your reputation in the face of a scandal

Rogue traders
What does the recent spate of individual fraud cases tell us about companies’ attitudes to risk – and how do you protect your organisation against rogue traders?

Financial Management | May 2013

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Illustration: Masao Yamazaki/Dutch Uncle

‘Members can provide first-hand examples of how CIMA changes lives’

A word from the president

CIMA LinkedIn group: http://tinyurl. com/ahxyoda

ne of the most important facets of CIMA’s growth strategy is the development of partnerships. Recently, both I and CIMA’s managing director, Andrew Harding, made very successful visits to Southeast Asia. The work we carried out highlighted three important strands of the institute’s strategy in attracting a growing number of members and students into the CIMA community.
The first strand is CIMA’s partnership with its members. CIMA is committed to supporting chartered global management accountants by promoting their unique skills in helping to develop organisations that are both successful and sustainable. But, by their very nature, our members are experts in the field of management accounting and are the best people to spread the word about the benefits of studying for the CIMA qualification. We know that some members are already doing this, but there are many more who are in a good position to provide first-hand examples of how CIMA changes lives for the better. At the CIMA president’s dinner held in Malaysia and Singapore, I reminded members that they are powerful role models who can change other people’s lives for the better, as well as their own. This is true at both an individual and national level. I think I hit the right note. A number of members spoke to me later about how proud they are of being part of the global CIMA community and how they would make a concerted effort to be more vocal about this pride in the future. Meanwhile, Andrew Harding has been working on another strand of CIMA’s growth strategy: moving into new markets. One of the most exciting developments to come out of the Southeast Asia region recently is CIMA’s arrival in Myanmar. During his recent visit to this opening economy, Andrew secured agreements with the British Council and local colleges to promote and teach CIMA programmes. It is an ideal time for Myanmar to benefit from the prudent hand of management accounting. Andrew reports that there is great enthusiasm for our qualification there and a particular passion for promoting the qualification among members, some of whom studied for CIMA back in the 1960s. A third strand of CIMA’s growth strategy is developing relationships with first-class academic bodies. At the end of last year we had a total of 17 research projects funded by CIMA at universities around the world. This approach

ensures that the quality of our syllabus is maintained wherever it is taught. It also allows us to forge research agreements that will further the science of management accounting. While in the region, Andrew signed a new agreement with the Centre for Governance, Institutions and Organisations (CGIO) at the National University of Singapore. The new agreement commits CIMA to partner the CGIO in its research and publish annual reports on state-owned enterprises in Asia over the next three years. This work will provide an important road map for countries in Southeast Asia and mainland China, where state-owned organisations play an important role in developing regional economies. As my presidential tenure draws to a close, I feel a great deal of pride in the work that CIMA’s members, students and staff are doing around the world. Before I left the Sri Lankan leg of my Southeast Asian tour, I joined the finals of the CIMA Spellmaster competition. It was a joy to see so many young faces eager to learn and improve their potential. I am delighted that CIMA is helping to develop the skills of a future generation, among whom I’m sure there will be a healthy number of management accountants.

Gulzari Babber, FCMA, CGMA CIMA president

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at a glance
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Financial Management | May 2013

Financial Management | May 2013

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Inform

A word from the president Gulzari Babber – p3 Inform p9–15 Digest of the latest developments in management accountancy and beyond: Hot potato Ethical dilemmas resolved. Gen Y High-performance environments. Must read The Pirate Organization: Lessons from the Fringes of Capitalism

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Editor’s note
Financial Management has a fresh feel to it. We’ve added some extra elements, including a regular big-name interview, and revamped the design in order to bring you as much stimulating and valuable information as possible in a visually exciting format. Our cover story looks at rogue traders. We examine the weakness of organisations and the psychology of rogue traders, even asking Nick Leeson – who brought down Barings bank – if it could happen again. In a world of ever-increasing risk we consider the approach to innovation at Unilever in an interview with the consumer giant’s CFO Jean-Marc Huët. Still on innovation, Divinia Knowles, COO and CFO of Mind Candy – the games giant that has brought Moshi Monsters to 200 countries – reveals how the CIMA qualification equipped her with the tools to create new business processes in one of the world’s most exciting companies. New features also include Led by finance, an insightful guide to how the finance function delivers change in major organisations. The insider view launches with India this month and Watercooler opens with a sideways look at that perennial bugbear – the failure of IT projects to hit deadlines. We hope you enjoy the new-look FM.

I work on... Guiding sales teams to improve performance in South Africa – p6 Thinking and opinion Diversification risk, plus Chris Giles of the Financial Times on devaluing currency – p15 Led by finance Swee Leng Ng on driving gross margins at Kraft Foods China – p17 The insider view India – p18 The data Biggest rogue traders – p21

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Study notes Why E3 candidates should practise IT-based questions, and the key to splitting a total variance – p45 Tech notes Due diligence and bias, and the role of the treasury in risk and governance – p55 CIMA events The calendar of CIMA events, including a summary of past events – p61 What you learn on... The key performance indicators and Balanced Scorecard Mastercourses – p62 The Institute Integrated reporting and a View from Professional Standards– p63

Features

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Back

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Rogue traders The biggest losses and what can be done to stop them – p22 Jean-Marc Hüet Unilever’s CFO on finance’s role in innovation – p28 Avoid an identity crisis How companies are managing reputational risk in a digital world – p34 Divinia Knowles The COO and CFO of Mind Candy talks Moshi Monsters – p38 8 ways to... Improve corporate governance – p42
CIMA is the Chartered Institute of Management Accountants 26 Chapter Street, London SW1P 4NP 020 7663 5441 www.cimaglobal.com President Gulzari Babber, FCMA, CGMA Deputy president Malcolm Furber, FCMA, CGMA Vice president Keith Luck, FCMA, CGMA Chief executive Charles Tilley, FCMA, CGMA Head of media and communications Katie Scott-Kurti Financial Management is published for CIMA by Seven, 3-7 Herbal Hill, London EC1R 5EJ Group editor Jon Watkins Editor Lawrie Holmes Group art director Simon Campbell Junior designer Josh Farley Creative director Michael Booth Editorial director Peter Dean Chief sub editor Steve McCubbin Senior sub editor Graeme Allen

Lawrie Holmes
Please send your comments and ideas to editor@fm-magazine.com or join the FM feedback group on CIMAsphere at www.cimasphere.com/groups
Account director Lisa Mills Group publishing director Rachael Stilwell Global sales director Hilton Young Advertising manager Philippa Mathers Email: Philippa. Mathers@seven.co.uk Tel: 020 7775 5717 Managing director Jessica Gibson Chief executive Sean King Chairman Tim Trotter © Seven
The contents of this publication are subject to worldwide copyright protection and reproduction in whole or in part, whether mechanical or electronic, is expressly forbidden without the prior written consent of CIMA/Seven. All rights reserved. Origination by Altaimage London. Printed in the UK by Wyndeham Press Group. Subscriptions: subscribe@fm-magazine.com Tel: 01580 883841 £45 (UK), £54 (Europe), £72 (rest of world). Back issues: £7.50 (UK) £10 (rest of world) including postage, subject to availability. All payments should be in sterling drawn on a UK bank.

CIMA CEO column Charles Tilley – p65 Watercooler – p66
Head of pictures Martha Gittens Acting picture editor Louise Fenerci Picture researcher Alex Ridley Production manager Michael Doukanaris

www.cimaglobal.com

South Africa Start date 2010 End date Ongoing Location Durban. In this role I started to look more closely at the approach of the sales force to achieve better returns at a lower cost. or help with contract negotiations.. My role has changed to become increasingly more customer-facing as a result of my ability to translate detailed financial information into effective sales material and demonstrate and articulate the benefits of doing business with HP in a way that makes sense to other senior finance leaders. salespeople began asking me if I could attend customer meetings for a number of reasons. I work on.000 compile high-quality information from clients. It gave sales teams the chance to construct their own P&Ls and showed them how and where they needed to improve their efforts. The impact of this has been a dramatic fall in bad debts and a drastic increase in returns on large deals in hardware infrastructure and professional services. which coincided with a move back to South Africa in 2010. which set out to not only empower the sales team.. South Africa (pictured) CIMA qualified: 2006 2012 revenue $11bn Goodwill and intangible asset impairment associated with acquisition of Autonomy 2012 loss $8. CGMA Company: HP Role: Enterprise business finance manager Industry: IT and professional services Location: Durban. I then began a business practice finance role.6 Financial Management | May 2013 Financial Management | May 2013 7 [HP by numbers] $126. but to give them the means to close more and better deals. ACMA.4bn Name: Ian Smulders. but also encourage it to Alamy . As a result. I then home-studied for my qualification while based in the UK and settled into a series of roles in finance – my last pure finance role was looking at the balance sheet and forecasting for the EMEA region. For example. I could talk to the finance director of the client if they were present. This understanding also means I can clearly explain the reason behind decisions to finance and non-finance people alike. It was at a time when HP was going through a huge amount of change. My CIMA qualification has helped me all the way in this process. It has given me the confidence to make key decisions and better understand the broad range of financial implications that each decision brings. Part of the work involved making sure sales professionals understood that this information would be used not only to improve overall intelligence on the market. which gave me a real interest in how the finance function works.8bn Global workforce 350. Guiding sales teams to improve performance Having worked in sales for a number of years I moved into a role between finance and sales at computer hardware provider Compaq (acquired by HewlettPackard (HP) in 2002). A small core management team put together the structure for the plan.

has shrunk by more than 60 per cent since the financial crisis began. The crisis triggered a wave of downgrades across advanced economies. The shrinkage has resulted in a dramatic redrawing of the world credit ratings map. with Greece seeing the steepest drop. which is encouraging investment flows into emerging markets and forcing investors and financial regulators to rethink definitions of “safe” assets. the bedrock of the financial system. the UK and France from the “nine-As” club has led to a contraction in the stock of government bonds deemed the safest. The biggest downgrades were in crisishit southern Europe. the FT’s analysis highlights the series of upgrades across much of the rest of the world – especially in Latin America. according to analysis by the Financial Times.INFORM Bonds analysis reveals full impact of financial crisis he global pool of government bonds with AAA status from the three main rating agencies. while the expulsion of the US. While US and European government downgrades have dominated headlines.com/cd2w3be 9 news/opinion/comment/insight/analysis T Getty Images . from almost $11trn at the start of 2007 to just $4trn now. Topping the list in the scale of credit upgrades since January 2007 are Uruguay. Read our recent feature on ratings agencies at: http://tinyurl. Bolivia and Brazil.

head of ethics. Gallery Stock. but it also presents risks. compared with 32 per cent of IT managers. for his boardroom views. a global company must adapt to a world of fragmented and shifting ethical contexts. invoices. Tendering for audit appointments once every seven years has been voted through by the European Parliament’s Economic and Monetary Affairs Committee (Econ). Second. the following content is now available online Eight ways to get out of a career rut People sometimes feel as if they’re going nowhere at work.com poll of the month Yes. http://tinyurl. offers tips to escape the rut.com/c5zz38n Charles Tilley interviews Jean-Marc Huët CIMA chief executive Charles Tilley writes a regular column for CGMA.5). Germany. This would ensure you are upholding integrity (section 110). on cgma. There is growing evidence that firms with codes of conduct perform better overall than those without one. A staggering 79 per cent of respondents to the latest FM online poll agree. The IBR data revealed that globally. you may have to consider disengaging (220. Tanya Barman. However..com/cmtfljp UK investors. incoming global leader of tax at Grant Thornton International. chairman of BAE Systems. velocity and availability of big data can create growth and efficiencies for organisations. while fulfilling its underlying responsibilities wherever it operates. First. http://tinyurl. http://tinyurl. visit www. Strong corporate governance is needed to capitalise on the opportunities and minimise the chances of unintended consequences arising from big data use. However.10 inform Financial Management | May 2013 Financial Management | May 2013 11 HOT potato Women taking more senior roles growing number of women have been moving into senior roles over the past three years. 24 per cent of senior management roles are now filled by women. If they are not taking any action. and Olver rejected the view that there is a conflict between good business behaviour and strong financial returns. according to Dick Olver. This compares to 28 per cent in the BRIC economies (Brazil. No responsibility or liability whatsoever is accepted for any error. Russia. The move would define a huge shift in company/auditor relationships. visit: http://tinyurl. where economic performances have been faltering. This is usually due to a combination of factors. investment. author of The Careerist: Over 100 Ways to Get Ahead at Work. than in the high-growth economies of Asia. insurance claims and tax records in the cloud. despite EU law placing accountability for lost or compromised data firmly in the hands of the data owner. This is up from 21 per cent in 2012 and 20 per cent in 2011. “It is important to note that cloud storage does not replace the need for a comprehensive archive and backup strategy. A in South East Asia and 40 per cent in the Baltic states.fm-magazine. 32 per cent This month’s dilemma The dilemma I have noticed a large overpayment from a customer on my client’s accounts. the mature economies of the G7 are now playing catch-up. Olver told delegates at a recent CIMA/Tomorrow’s Company event that it is also essential that businesses obtain buy-in from the top if a culture change is to be successful. and Japan). France. G Ethical culture ‘vital’ to success lobal businesses “must adapt to a world of fragmented and shifting ethical contexts” and have “no alternative” but to create an ethical business culture. With financial departments under immense pressure to cut costs and improve efficiencies. “Lose or leak your information in the cloud and your business is ultimately responsible. the G7 economies come bottom of the league table. the survey found. with just 21 per cent of senior roles occupied by women. companies prefer simpler pay disclosures UK investors and company executives favour reporting for director and executive remuneration that is simpler than what UK regulators have proposed.” To download the full report from Grant Thornton.” The survey also revealed that 85 per cent of UK business managers have either moved data into the cloud or plan to do so in the next 12 months.com/cqjkvrg Sound governance needed to get the most out of big data The increase in volume. Unilever CFO Jean-Marc Huët.org.” he said. They need to wake up to gender disparity and add this crucial ingredient to long-term growth and profitability. the only way to achieve this is through shared values that are applied consistently worldwide. it seems this action still has not been taken and more than six weeks have now passed. The average tenure for an auditor of a British FTSE 100 company is 48 years. Canada. In the latest from this series. entitled “One-to-one: Top tips from the boardroom”.. Italy. “A trusted reputation for principled business conduct delivers hard benefits to the bottom line.com/c3rga7c Finance managers should ‘enter cloud with caution’ T he majority of UK finance leaders believe responsibility for the protection of business data placed in cloud data storage rests with the service provider. such as inertia. an ethical business culture is vital – there is no alternative. OUR RESPONSE Ensure that you have advised the client in writing and advise them again that a repayment should be made. professional or career advice.” he said. In my view. which also revealed that more than 35 per cent of finance managers believe it is appropriate to store confidential accounts. In comparison. progress in the number of women being appointed to senior roles is slower in the G7 group of developed economies (US.. But how do you get your career back on track? Rhymer Rigby. omission (whether or not arising out of negligence) or for any loss or damage sustained as a result of reliance on information supplied or comments made. but infrequently (every 10 years or more): 9% No forced rotation: 9% Don’t know: 3% What the poll says. Getty Images We asked. bringing balance to the decision-making process and the smooth running of their companies. disengagement. India and China).” The culture change at BAE Systems recently saw the organisation ranked fourth out of 129 companies in Transparency International’s defence industry anti-corruption index. Charles asks the subject of our feature on page 28. but not to do so indiscriminately. A lack of understanding of the risks associated with cloud storage can lead to ill-considered strategies that could expose businesses to data breaches and the associated financial and long-term reputational impacts. UK. Christian Toon. head of information risk at Iron Mountain Europe. a lack of clarity about goals or a dearth of opportunities. said the results show that Europe’s financial decision-makers could be embracing the cloud without fully grasping the risks and implications. CIMA For the code and other online ethics resources. Speaking about the decade-long culture change he has embedded at the defence giant. and which are continually reinforced and improved over time. but an ongoing voyage where the destination is always just over the horizon. commented: “Women are playing a major role in driving the world’s growth economies.. “To sustain its licence to operate across different markets. security and compliance issues (45 per cent compared to 49 per cent). Francesca Lagerberg. Although I have pointed this out and advised the client to notify and repay the customer. http://tinyurl.com/bualqot . org For CGMAs. frequently (less than every 10 years): 79% Yes. according to a new report by the UK Financial Reporting Council (FRC) financial reporting lab. Should external auditors be automatically rotated? Source: www. according to the Grant Thornton “International Business Report” (IBR).cimaglobal/ethics Disclaimer CIMA does not provide legal. You may also wish to refer to your contractual terms to ensure that the client’s actions (or non-actions) are not a threat to your professional standing (210). the cloud can seem an attractive opportunity.” he said. “All of this boils down to two things. “We would encourage businesses to consider the cloud. and whether or how data might be copied and moved around (23 per cent compared to 25 per cent). Finance managers are also less likely to worry about data protection than IT professionals (49 per cent compared to 55 per cent). building that culture is not a single step that can be taken and then forgotten about. That’s according to research carried out by Iron Mountain.

The scoring is confidential. high performance is about outcomes. Once the start-up founder has explained to the group to what degree they have delivered on their objectives. Anything else will be either too adversarial. This will help you to “course correct” and it’s been said a million times.12 inform High-performance environments Karl Aherne sets out five critical areas of focus when creating high performance Success is all about creating the right environment to drive performance. The environment should be highly challenging but supportive. In turn. Now. Above all. Wayra’s cohort of start-ups each take a turn to present to the group on how they performed against their objectives set two weeks previously. improvement. That usually means a product that is available whenever it is needed. the entrepreneur’s mind is constantly moving onto the next thing so it’s important to stay focused and deliver. then you can communicate it to your team. ambivalent or too soft. gets done” because if you don’t measure results then you can’t tell success from failure. then break it down into smaller milestones based on key challenges. is your product moving the current customer experience in that direction? Is it flowing in the right direction or is it going against the customer flow? If your product is “in flow” with the customer’s ideal final result. the other start-ups score them between zero and ten. By Karl Aherne. Get the pain upfront and early. Five critical areas worth focusing on are: 1 The macro environment It’s essential to identify the best physical location that will provide your start-up with every advantage possible. growth. When you have impact. The trick is to measure your impact. one of Telefónica’s start-up accelerators. 2 Collaborative workspace Your workspace should empower and help you to drive your business forward. not output. we’ve developed an effective way of helping entrepreneurs drive momentum. Figure out what the ideal final result is for your customer. At Wayra Ireland. 3 Peer review It’s sometimes said that the best entrepreneurs have some form of attention deficit disorder. Often. reducing the risk of “friendly” voting. executive director at Telefónica. then you should stop talking and start driving impactful outcomes. your customers and your investors. does the perfect job and has no cost. with near-endless choices and decisions. This is one reason why many high-growth entrepreneurs set milestones. that will drive more impact and more positive outcomes. we start with a long-term vision. it’s better in the long run. At the fortnightly objectives sprint. Every product/technology has a life cycle – often illustrated as an s-curve with five stages: introduction. 4 Testing your innovation levels As an entrepreneur you should test your level of innovation (and get some talented critical friends to do it with you). At its most basic. Creating a high-performance environment is crucial. then check it is in flow with the market. 5 Measuring your outcomes. First. Suck it up. Wayra Ireland Illustration: Mitch Blunt/Dutch Uncle . not your outputs Who cares how many meetings you’ve had? The question is: have the outcomes from those meetings impacted your business? If they haven’t. check whether your product is “going with the flow”. but “what gets measured. What you’re looking for are “critical friends” who will tell you when you stink. If you don’t have a measurable outcome then you’re doing something wrong. optimisation and decline. There are usually three or four objectives that are specific and challenging.

Upon being bailed. with every industrial revolution. including racketeering. avoiding the flaws of the first version. portrayed in The Pirate Organization.must read 13 Rethink on piracy The authors provide a précis of The Pirate Organization. the FBI stepped in to question Dotcom and others in New Zealand. dissenting and innovative organisations at the heart of state-company relations. conspiring to commit copyright infringement and conspiring to commit money laundering. founder of Microsoft @Bill Gates Still work to do. finance minister. corresponding form of organised piracy emerge. modern-day pirate is back. this battle over intellectual property (IP) rights signals a A state of affairs and have introduced the very innovations that are most in line with society. the actions of pirate organisations have highlighted the evolution of capitalist societies ever since the discovery of America. Pirate organisations consistently challenge this Bill Gates. This constitutes a historical motif that is essential to capitalist dynamics and penetrates a whole collection of peripheral. The Kim Dotcom affair highlights the importance of rethinking laws on IP and on the creation and distribution of cultural goods. replacing its predecessor Megaupload. but contradict established firms’ ownership rights. Ngozi Okonjo-Iweala. with each subscriber becoming responsible for their own data. entrepreneur @richardbranson It takes initiative. Twitterati Getty Images What business leaders have tweeted recently on the subject of driving innovation and collaborative working . Among others. In effect. a file-sharing e-firm. Since then. but I’m incredibly optimistic when it comes to Africa. With each great capitalist revolution – orchestrated by states that impose their norms on property and exchange in the name of their sovereignty – we see a new. whether it be at sea. Following an armed raid he was arrested for alleged online piracy. sovereign states have either granted or passively allowed monopolies to bloom in order to control the economic flux generated at the heart of new capitalist territories. arguing collaboration with pirates could drive innovation The Pirate Organization: Lessons from the Fringes of Capitalism Rodolphe Durand (HEC Paris) and Jean-Philippe Vergne £14. others radically innovate and some do both. Christine Lagarde. Kim Dotcom started to mastermind a new version of Megaupload. Some pillage and plunder. But equally. The challenge lies in unearthing and “legalising” the initiators of radical innovations and in simultaneously fighting the thieves. At the beginning of the year internet entrepreneur Kim Dotcom launched Mega. via radio waves or on the internet. if we allow the regulation of territories and the normalisation of exchanges to continue to surface. Perhaps one way of resolving this could be by actually trying to work with the pirates who push the limits of capitalism with their radical innovations that promote new modes of exchange and embody new values. Nigeria @NOIweala How do you transform the economy? You’ve got to provide the basic infrastructure for people to transform their own lives. Richard Branson. A year ago. managing director of the IMF @lagarde Recovery comes from co-responsibility – Ireland and Europe together. bravery & resourcefulness to become an entrepreneur – it takes ‘Gumption’. then even more spaces will be created for pirate organisations to nestle into. There can be no capitalism without sovereignty and without rules.99 Harvard Business Review Press recurring motif in economic history. which peaked as the internet’s 13th most popular site and was responsible for four per cent of all online traffic.

In more practical terms. up an exchange rate under attack. Furthermore. it’s the latest instalment of the international currency wars. be a more palpable remedy: employee ownership in the form of an equity stake for non-executive employees. productivity goes up It’s possible. the short-run incentive to seek currency depreciation is irresistible. executives worry that the proposed rule changes may stifle companies’ ability to grow or. And the prevalence of unpredictable market exchange rates has prevented policies always having the expected effects on exchange rates. which will often flow into foreign assets. so if one country improves its trading performance. The currency wars threaten destabilising volatility in exchange rates and. we also have to answer why the exchange rate skirmishes since 2010 have been so muted if the motives and tools are so clear.14 inform Financial Management | May 2013 Financial Management | May 2013 15 Thinking Toronto Rotman School of Management on The Bright Side of Diversification Risk oncerns over excessive risk-taking in corporate America have become prevalent since the global financial crisis began in 2008. on the shop floors of America. resulting in the same excessive risk-taking behaviour we started with. only to have companies hire lawyers to circumvent the mousetrap. A worst-case scenario might see the federal government create a better regulatory mousetrap to prevent excessive risk-taking.e. in the case of banks. increasing exports or reducing imports is the obvious route to growth. recent research based on survey results from a national sample suggests that employees with an equity stake in their company are more likely to have greater decision rights at various levels throughout the company than their counterparts without an equity stake. employees should both become increasingly cautious and have a bigger impact on decisions. an employee’s collective set of skills that he/she uses to generate future employment returns) are closely connected. where employees own a large equity stake in the company and have a lot of firm-specific skills that are not readily transferable. Quantitative easing – the creation of money to pump into an economy through the purchase of assets – is a particularly powerful weapon as it releases money into the hands of the private sector. and the cheap refinancing operations for European banks – come in the context of domestic action to boost growth. is that nobody wins. through lower interest rates. The danger. That way. all of the Yale School of Management. China’s trade surplus is falling rapidly. however. Countries on Earth cannot export to Martians. the global currency war will remain difficult and noisy – but disaster will be averted. thereby weakening the currency. they also lose that portion of their human capital that wasn’t portable to another job.. Taken together. the results imply that when executives are inclined to suggest rate weakness. unutilised. Specifically. It is likely that countries accept that open currency wars would be a disaster for everyone and have therefore limited their own aggressive instincts. their ability to maintain liquidity. Depressing your own currency is much easier than propping Benefits of equity Research suggests that providing an equity stake to non-executive employees increases productivity. Recent evidence supports this claim and finds that larger equity stakes for non-executive employees lead to less subsequent risk-taking by firms. but peace is not likely any time soon. so the currency consequences can be plausibly denied as a leading motivation. the phrase “currency wars” has no formal definition. Opinion Chris Giles. and Frank Zhang. Financial Times. ultimately. The most open acts of aggression – Switzerland’s cap on the value of the franc in 2011 and Japan’s occasional currency interventions – have come after sustained appreciation when their respective exchange rates appeared too high. Most lesser acts of currency war – quantitative easing in the US and the UK. the Brazilian finance minister. Countries meet at the International Monetary Fund and the Group of 20 and regularly agree not to target exchange rates for competitive purposes. another must be importing more or exporting less. C I Decades of research have suggested that when nonexecutive employees have an equity stake. Although this is likely to be an accurate and depressing portrayal of the importance of the IMF and G20.. economics editor. s it a foreign exchange reserves fight? Is it a quantitative easing quarrel? Yes. think of a firm like Southwest Airlines. Even though long-term economic success is rarely determined by exchange excessively risky strategies. as diversification risk increases. A reasonable concern remains over the diversification risk that arises when employees invest in company stock. says countries are understandably tempted to devalue their currency in a bid to boost exports. however. A full armistice will come only when advanced economies emerge from the mire and lose the motive to act. While the big players realise that they cannot act with impunity on currencies. That is not yet on the horizon. Along with Kalin Kolev. To understand this tight bond. when growth is almost impossible to find in advanced economies. not only do the workers lose their equity stake. everyone would be a loser. he says. It is into this zero-sum game that international diplomacy treads. even this lone drawback appears to have a bright side. These concerns have led to regulatory attempts to rein in excessive risktaking. given current regulatory concerns over excessive risk-taking. that some diversification risk has an upside for the economy. Francesco Bova is a Louis O Kelso Fellow and an assistant professor of accounting at the University of Toronto’s Joseph L Rotman School of Management. He reports on international and UK economics and writes a fortnightly column on the UK economy. the most cost-effective solution to corporate America’s appetite for risk may be waiting patiently. Nevertheless. There may. as equity stakes for employees increase. While various stakeholders continue to debate the merits of new regulation that seeks to curb excessive risk-taking. can have the same effect. taking the heat out of the US/Sino tensions. Jacob Thomas. Higher Chinese wages and inflation have led to a rapidly appreciating real exchange rate for the renminbi. However. Illustration: Karolin Schnoor /Dutch Uncle Illustration: Lyndon Hayes/Dutch Uncle Chris Giles is the economics editor of the Financial Times. You don’t have to manage your exchange rate and foreign exchange reserves like China to make your exports more competitive. But these are merely paper commitments and seem never to impede the action of any member or non-member. given the recent concerns over excessive risk-taking in corporate America. It is a messy prospect. The tools are also easy to define. Simply stated. reduces turnover and leads to both workers and owners being better off. so should the incentive for employees to mitigate risk-taking at work. Faced with households who have borrowed too much and governments imposing austerity to pull their public finances out of the mire. employees with an equity stake in their company are more likely to say. “Not on my watch. . trade wars and protectionism. a key concern with employee ownership is that it leads to an increase in diversification risk for employees. the danger is that many countries will simultaneously and covertly seek a lower value for their domestic currencies to boost their export industries.” than those without a claim. If Southwest goes bankrupt. Diversification risk arises because the returns from an employee’s investment in company stock and an employee’s human capital (i. However. Monetary policy. First coined in 2010 by Guido Mantega. he has recently written the working paper “Non-Executive Employee Ownership and Corporate Risk-Taking”. however.

The project team then launched the implementation plan. otherwise profits would be adversely impacted by 20 per cent. A lot of details needed to be resolved during the second phase. the price of raw materials such as oil. and to identify goals and strategies. CGMA. we were hit by a severe external environment. sugar and cocoa rose by between 15 and 30 per cent. oversaw Project Eagle. A board meeting was called to discuss the issues. sales. identifying the root causes of the issues. with help from marketing. An ongoing process to eliminate wastage and drive productivity was run across the production line at the same time (I put in place a project team to look into this across every line of P&L when I started the role in 2008). A set of milestones to achieve those plans were discussed and a clear action plan and timetable drawn up. A brainstorming meeting was held to gather ideas and resolutions. Throughout the project almost every department manager in Kraft China – be it marketing. manufacturing and R&D to tackle the issue. which focused on driving gross margins. A weekly meeting gauged its impact. Inflation hit a record high. production or supply chain (all responsible for the P&L of the Chinese business) – worked together with the goal of achieving the productivity target. The observation from Kraft Foods executives at the Chicago HQ was that the execution was flawless and was achieved in a fast and cost-effective manner. 2 Rationalisation of stock-keeping units (SKUs are the main product lines in the business) – delisting low-margin and low-volume SKUs to improve the overall portfolio mix. the project team came up with the following action plan: 1 Assessment of pricing. cost savings and improving productivity in the group’s China operation Background: Just after we finalised our 2012 budget. Mapping out the process: We started with an assessment. We realised we had to act with a sense of urgency. which had a significant impact on the company’s performance. while the cost of labour increased 20 per cent. Rationalisation of stock-keeping units was a major aspect of the action plan Action: Within a month. and before we’d even started the financial year. marketing. FCMA. while two analysts from finance were also involved. This is in a business that has seen annual revenue in China increase three times between 2008 and 2012. Adjust the size of selected products without impacting consumer uptake. our P&L was at risk and we faced significant pressure on our gross and profit margins. coffee beans. The strategy was built around a model of collaborative working Business segments involved: In my team. with another three months to completion. . Project Eagle was subsequently formed and was tasked with finding opportunities to close the 20 per cent profit gap. R&D and manufacturing. wheat. was completed within three months. the financial planning and analysis manager led the project. monitoring and tracking progress.Financial Management | May 2013 17 Led by finance Swee Leng Ng. CFO of Kraft Foods China since 2008. R&D. As a result. Its recommendation was to form a cross-functional project team comprising members from finance. Illustration: Stuart Daly /Dutch Uncle A brainstorming session was followed by the setting of milestones to ensure actions were met on time Completion: The initial project.

natural gas. head of finance and company secretary at chemical group Solvay Specialities India. “This is not to construe the prevalence of bribery or corruption. ensuring at the same time to keep it affordable for the masses in order to reach millions of consumers. some people only demonstrate their real worth and skills during a crisis. India liaison office.500km.com [INDIA by numbers] Management style Mark Bevan. Managers also feel responsible and connected with this style. “Where you are in the hierarchy matters.” business tips for india The mechanics of doing business in India have been determined.3 million km and carrying 60 per cent of freight and 87 per cent of passenger traffic. chief financial officer of medical supplies giant International SOS. “The variety of cultural norms.24 billion Gallery Stock 10. by the condition of the country’s infrastructure. The World Bank Agriculture 5. while status in the form of education plays a significant part in business life.” In some respects. Source: Government of India: Ministry of Commerce and Industry Trade balance Infrastructure India has the world’s third largest road network. “There are Indian entities that have been in existence for more than 100 years that have slowly but surely crawled along to keep pace with the present-day situation. says Porwal. CGMA. Sources: CIA. the designation you carry is important. there is a blurring of personal and private life. “The retrospective implementation of taxation laws has not helped and many international organisations and governments are concerned about the policies and regulations of the Indian government in the long term. “More organisations are progressing towards a matrix structure. it is easier to do business through good contacts. “In fact. to some extent. Indian Ministry of Road Transport and Highways. The flip side would be that management has to be very assertive and alert to ensure that safety and quality never get compromised in the process. chief financial officer of medical supplies giant International SOS. the messages are mixed and there is no indication of a clear and long-term policy by the government to woo foreign direct investment inflows. chief representative of CIMA’s India Liaison Office. which in turn brings efficiencies in the system and makes room for continuous development. including insurance and banking. where multinationals are dominant. Lastly. India has 13 major ports. associations and the like. this only happened quite recently. CGMA.56% Industrial Service industry . Yet there are numerous Indian outfits that have either ceased to exist after failing to keeping up with the times.” he says. This gives rise to more transparency and sharing of information. which allows middle-level managers to take part in the decision-making process and keeps them in line with the organisational changes and outlook. “You need to be relationship-based to be successful in business in India as it is important to find the right partners. languages. financial institutions and government organisations. People do appreciate the importance of being cost-efficient.” Kankani says being too transaction-oriented may not be the right way for India. otherwise. and also in areas such as very large banks. Ramanuj Kankani. especially in the oil.2% Industrial 28. Much of Indian business resembles the public sector. assistant vice president of finance at JCB India. At the middle level. there is every chance that some of these points will go missing. CGMA. says personal contact is regarded as the standard way of doing business.” he suggests. there is a natural instinct in Indian workers to say ‘yes’ rather than ‘no’.” Ravindran Balakrishnan.” Much of Indian business culture extends back to the time of British rule. you need to continuously push the team to be as systematic and organised as possible. and at times you may be required to keep track of important items remaining in ‘to do’ lists in the team. explaining why English is the common language.” says Porwal. Even big organisations are changing their management style to ‘transparency type’. says Balakrishnan. “Analysis and interpretation are often left for the receiver to make. business demands. not discursive.3% Population main sectors Service industry 57. There is also a strong respect for hierarchy and bosses are often called ‘sir’. national head of enterprise relations at CIMA India. covering more than 4. India. Because career advancement is considered important. so multiple qualifications can appear on business cards. while respect for deadlines is not as high as it is in the UK and the US. says Ravindran Balakrishnan. even if it means working extra hours.” Contact Arati Porwal.” he says. CIMA Email: india@ cimaglobal. especially when it comes to issues such as the marriage season (which runs from September to January). where technology has made for a flatter structure. In this climate.” he says. Indian Railways is the fourth largest rail network in the world. which eases the way in which business is conducted. Indian workers can “manage”.” However.18 inform Financial Management | May 2013 Financial Management | May 2013 19 The insider view: India In the first of a series of new features.” Ramanuj Kankani. with a track length of 114. head of finance and company secretary at chemical group Solvay Specialities India. says Murali Sundaram. meaning more people are involved in decision-making and running the business. ACMA. she says. as a large part of industry. chief representative. This is tempered in areas such as IT. handling a cargo volume of 850 million tonnes in 2010. says the management information provided in India tends to be “data” rather than “information”.” she says. “Performance management is not strongly practised. says Arati Porwal. FM examines how business is carried out in countries around the world. You also have to be prepared for the agenda to be changed at the last minute. says: “Cost-consciousness is one thing that can be felt in almost all the functions of a business organisation in India. “This is because at a high level people are connected through networking. “The result is that India has a very bureaucratic way of doing business. things are quite slow. From a statutory standpoint. while junior members of staff are not expected to speak freely. Indian business culture is a mixed bag of traditional entities and emerging transnational or multinational companies.94trn India is the world’s largest economy India’s growth rate in 2012 GDP for India in 2012 4th India’s trade deficit for April 2012 to February 2012 was estimated at $182bn. “More often than not. insurance and banking sectors. ACMA. which was higher than the deficit of $170bn during April 2011 to February 2012. religions and beliefs makes it absolutely necessary to customise the product for different segments and different consumers. FCMA.” $1. “Meetings do not always start or finish on time. Management styles are more directional. says when it comes to meeting deadlines. chief representative of CIMA’s India Liaison Office.6% (Source: OECD) CPI inflation in 2012 1. is publicly-owned following a major nationalisation programme in the 1950s. contacts are also important in getting routine work done without difficulty. “As a manager.” Balakrishnan advises developing strong contacts in associations. with local experts acting as business guides From a macro perspective. “Workers like to be recognised for accomplishments – much more so than in other countries – and expect their managers to understand that. India. says Arati Porwal. but is more about the contacts business people make in their professional life. Although large chunks of industry have now been privatised. which is considered very rude. multiple layers are often created to retain people. “As a result. and this is accepted. even if appropriate.6% Agricultural 14. or have disintegrated because of splits in family-run businesses.

Illustration by Leandro Castelao Biggest rogue traders R Source: National Association of Insurance Commissioners (Numbers 1. with some of the biggest crimes committed in North America.4. there appears to be little consistency in relation to the size of the losses. * Formerly Daiwa Bank * .5 and 9 converted to US$ as of 26/3/13). As far as punishment goes.Financial Management | May 2013 21 The data ogue trading is a global phenomenon. The graphic shows (in US$) rogue trades that have been publicly revealed – there may be similar or bigger losses that have either gone undiscovered or kept under wraps. Asia and Australasia. Europe.

lost �4. or at least curtailed? And what about the traders themselves and their bosses – are they untrustworthy or fools? The litany of rogues is familiar. “There is a huge parallel between bank trading rooms and high-performance cycling. draws an intriguing comparison between the outlaw bank trader and disgraced cyclist Lance Armstrong. Nick Leeson.9bn (£4bn) in the three years to 2008.” So is that the core of the rogue trading issue? If so. FM looks at how the terrifying phenomenon of the rogue trader has already led to huge losses at some financial institutions and what can be done to stop them in the future he financial rogue trader has become almost a legendary figure of the modern world. Then there is Jérôme Kerviel. professor in organisational behaviour at London’s Cass Business School. “Both have become elite cultures of extreme performance. can it be eradicated. In 1994. including that of Kweku . Andre Spicer. gambles billions and brings down the bank.” says Spicer. fear or some personal demon. The people in both fields are addicted to this intensity. driven by greed. a derivatives trader in the Singapore offices of Britain’s Barings bank. Like Leeson.22 Financial Management | May 2013 Financial Management | May 2013 23 rogue traders T By Simon Watkins The Austrian state of Salzburg is investigating whether a rogue trader may have lost £3bn of public money. It is a familiar image – one that Hollywood has adopted wholesale. the French trader for Société Générale who. Kerviel was subsequently sentenced to five years’ imprisonment. But it may be an example of a type of behaviour that is more common than we think and one that can be found in many walks of life. Kerviel never denied his activities. but he has always insisted that his bosses knew exactly what he was doing. The claim that “the bosses knew” is a common feature of rogue trading cases. A lone character. that was enough to destroy Barings. racked up losses of £827m. again trading derivatives.

” Harman is doubtful whether rogue trading-types can be spotted among other traders. The role that banks play in fostering rogues is to do with corporate culture. This pattern is also familiar outside the hothouse environment of investment banking. .24 Financial Management | May 2013 Adoboli. In some cases it may even create a profit. “The rogues tend to be very convincing people. traders who exceed their authority are much more common than just these three cases.” Harman says. It is made worse because the rogue may feel they cannot leave the office or take a holiday. “I would say not. arises again and again when looking at rogue trading. a lot of traders are narcissistic risk-takers. Harman at KPMG is dismissive of claims by rogues that their bosses knew about or sanctioned their activities. but he agrees that low-level misdemeanours have been more common in the past. “It is certainly true that traders sometimes take positions outside their authority. Maybe these people really are sitting there thinking. morally corrupt people who happen to find themselves in a bank. ‘They let me do it. In Austria. These cases are well known because the losses were so huge and because it became a subject for the authorities. Adoboli and Kerviel were both notorious for working long hours. Rogue trader Kweku Adoboli.” What about the culpability of the banks? Nick Leeson is clear that the rogue trader is a criminal. long after his colleagues had gone home. But that is changing – more banks are now moving to a culture where if you do anything you are not supposed to. “It is often said that these people are simply of a criminal type. who cheated Swiss bank UBS out of over £1.4bn. He was sentenced to seven years in prison in November 2012 for rogue-trading activities at the London offices of Swiss bank UBS. he was a gregarious sort. But they all show signs of very deliberate covering up. Nigel Harman. “Maybe they convince themselves. a very private person. but it may not always result in big losses. It has more to do with personal issues – the desire to look good among your peers.” Harman says. Adoboli was arrested late at night at the UBS offices in London. However. partner at KPMG. that was not necessarily the case five years ago. the federal state of Salzburg is currently dealing with its own rogue trader case that emerged just before Christmas. Spicer returns to his analogy with cycling and a culture of extreme expectations. “Even so. “Any example of rogue trading highlights the failings of the organisation and suggests there are considerable flaws in the way business is transacted. He cannot discuss the case. but they are not all rogue traders. that is how they have been operating as a rogue trader. There was a study by the University of Southern California that showed that after about five years of working like this people suffer mental or physical breakdowns and one result of this is very poor judgement. which cost the bank £1. That shows they did not really think people knew what they were doing. “The people in trading often work incredibly long hours – 80 to 100 hours a week – and this is how you get ahead. he was far more introverted by all accounts. Such traders may or may not be punished. but then it starts to have a very serious effect on mental health.’ and they manage to absolutely deceive themselves.” The apparent hard grafter. was sentenced to seven years’ imprisonment ‘In the past they may have just got a slap on the wrist as long as they had not lost any money’ “And I do not think money is the first and foremost motive.4bn. but the bank that suffers from a rogue trading loss is still partly to blame. They certainly do not make headlines. But then you look at Kerviel.” he says. Their profile is actually very like that of the other people around them in the bank. People can maintain that for a few years. it’s their fault. you just get fired. This is wrong. he had not taken a holiday in three or four years. otherwise their fraud will be discovered. helped UBS in its internal investigation into Adoboli’s activities. In most banks. Andre Spicer at Cass agrees there is not much that sets the rogue apart. always in the office working long hours and never taking holidays. “And it is certainly true that if they were found out in the past they may have got just a slap on the wrist as long as they had not lost any money. If you look at the Kerviel case. So I don’t think there is a single type.” But this does not let banks off the hook. If you look at Adoboli. But there is a difference between sharing some blame and being knowingly culpable.

Could it be that the same aggressive. He recalls the first time he saw Rogue Trader. but Cass’s Spicer believes there may be some merit in this approach because it may actually help change the culture. it is like the modern-day version of the Roman amphitheatre. Then settlements (the part of bank that ensures payments are made) would call and ask why I needed so much money and I would give another answer. referring to the recent scandal over bank traders at Barclays. including 253 unauthorised derivatives trades. Those that have not are happy to keep their name unconnected to the phenomenon. She is said to have set up a complex system to cover up the loss. but recent events in banking hint that it may be a wider problem.nmplive.” he quips. The incentive is to cover up the error.uk. It is not uncommon and may indicate a change in strategy. some cried. who was hired in 2001 to make investments for the regional government. I was supposed to be the star trader so no one challenged me. Anthony Browne. “It can be quite a complicated relationship between the back and front office. It would have no relevance to the answer I gave the head of trading. not of mistakes but of covering up.” he says. More people got involved until lots of people were doing it.” Leeson says. Generally speaking. and again cancel that before it settles. But I remember the very first occasion I put something in the five eights account. Rathmayer’s case – notable because it shows that public-sector bodies can also be prone to problems – became public in November and is yet to come to trial. I would give him an excuse. “We found that when faced with a moral dilemma. The trader is maintaining a false impression of their position in the market. similar to those in the legal or accounting professions. and it’s all about making money.” Inevitably. He put forward these proposals to Parliament in January. But the British Bankers’ Association. They may be more likely to accept explanations from traders and be subservient to them. Rathmayer had taken no holiday since the loss in 2006. He was released in 1999 and now lives in Ireland. but they have hundreds of items to look at and you cannot have someone looking over the shoulder of the traders on every deal. 44 (0) 01372 361004. The Libor scandal. What Nick Leeson sees parallels in the recent banking scandals with his own case. what we noticed in our studies was some cultures in which very smart people are doing very stupid things and the reason for this is their willingness to turn a blind eye. the best thing for you in the back office is if the head trader thinks you are doing a good job. That breeds a culture. They are making it look like they are hedging positions. His description of the culture at Barings bears a startling resemblance to the language used about some modern investment banks. he believes.” Harman believes the solution is not to look for the individual rogue trade: “What you need to do to spot rogue trading is to take a step back.” On those inadequacies he has strong opinions. as Leeson highlights.” An idea that arises in many cases is that the rogue trader has an intimate knowledge or close relationship with support staff or back offices and that this enables them to pull the wool over the eyes of the people who should be checking their work. Wenn Nick Leeson The man who brought down Barings bank on the culture of the trading floor might seem like large sums to you and me – like $10bn – are not automatically noteworthy. “That crisis has created a window of opportunity to deal with this. But no one ever put it together. “They did not do all that at the same time. “They will cancel it and rebook another trade. under its new chief executive. So back-office staff will tend to want to impress people in the front office. according to Harman. Rathmayer insists that her bosses knew about the losses and her efforts to conceal them. Those who have had a scandal do not wish to draw attention to it. If you have an independent body it puts you in a far stronger position.” Just one reversed trade is not a sign of rogue behaviour. “I wasn’t the first person at Barings to set up an error account. Leeson explains that this is precisely what happened in his case. which would see bankers become members of a professional body with a code of conduct and a disciplinary procedure. But it is not simply that individual trades need to be rooted out.” Leeson. Looking for these patterns – of which regular trade reversals is just one example – is the key to finding rogue trading. “I have been involved in research on this kind of idea. From my perspective it was not worth telling anyone. Then people don’t think they are doing anything wrong. And what about the financial crash itself. The idea has been dismissed as a gimmick by some. “In the past. What you need is someone senior who is approachable and at Barings there was never anyone there like that.” Once they have shown some success the future rogue becomes unapproachable. In most banks. “In big organisations there are always pressures not to challenge people. then you have a problem. But a series of reversed trades all following the same pattern may indicate that a false picture is deliberately being constructed. but they never let the trade settle.” he says. Then I thought a bit and there were a couple of instances where errors had resulted in people losing their jobs. caused by banks massively over-trading in debt and deceiving everyone (including themselves) about the risks they were taking. where he used a secret trading account (number 88888) to hide his activities.26 Financial Management | May 2013 Financial Management | May 2013 27 It concerns Monika Rathmayer. It was like that at Barings – it was always about making money. but the numbers of rogue traders that have appeared since me is worrying. It is slipping away. If you have a culture where people feel uncomfortable doing that challenging. Ewan McGregor stars as Nick Leeson in the film Rogue Trader. But I had a Mercedes. Browne points to his proposals for a banking professionals register as a useful step. working as a consultant and a speaker. whereby rule-breaking quickly spirals out of control. Many senior people in banks are members of some kind of professional body.co. is attempting to grasp the nettle.” . Was it accurate? “It highlights my inadequacies and those of the business I worked for. ended up in a Singapore jail for more than three years. changing market conditions or an honest mistake.” Spicer says. “We see the same sort of thing with Adoboli and with those involved in Libor. The next morning I went to see my boss to tell him. It might even have contradicted it. “It is not that these people do not have high IQs. The culture of high performance or even bullying that exists on many bank trading floors may make it hard for individuals to admit when they have made an error. Somebody was the first to try to manipulate the rate. many banks were not doing this. When they showed me going on the run you saw me drive to the airport in a beaten-up car.” Spicer adds. “If anyone had sat down and thought about it they would have seen the problem. is the unbalanced hierarchical relationship between back office that carries out administration and the more glamorous front office that carries out the trading. Photography: Allstar. I was 25 and I thought I could cope.co. “Rogue traders tend to distinguish themselves by very large numbers of trades that are put into the system. but then reversed before they are settled. “Many of the issues are not just about rogue traders. “Half my friends were there. junior bankers are not. target-driven. but it was usually resolved and closed quite quickly. but what happens is they see things but then wilfully blind themselves to it.uk. It is alleged that in 2006 Rathmayer made huge losses on Icelandic government bonds. but they turned away from dealing with it.” A failure to question lies at the root of almost all rogue trading cases. the Royal Bank of Scotland and elsewhere rigging the London Interbank Offered Rate. those who are members of a professional body are more likely to speak out about it. who has never disputed his guilt. Surely it could not be a secret? Spicer is clear that the explanation for this is the bosses’ stupidity. Total losses are reported to be �3bn. What sometimes gives credence to the view that bosses must have been aware of rogue activities is that the scale of losses is so huge. “If you look at many reports about rogue trading you will see there were many people who saw something was wrong. Harman agrees there could be an element of this in the rogue problem. so the hedge is never really in place. www. Some laughed.” Leeson draws a direct comparison with his own case.” says Leeson. but the hedge is not real.” Does Leeson believe the problem still exists? “There are plenty of companies that do not have any problem. which dramatised the fall of Barings bank Banks are reluctant to discuss rogue trading. “To me. The result – epitomised by Leeson’s case (see box. ‘What might seem like large sums to you and me – like $10bn – are not automatically noteworthy’ Essentially. You see banks systematically attracting certain types of personalities and having this no limits culture. Gallery Stock. Illustration: Leandro Castelao/Dutch Uncle. He does not mean classic “bottom of the class” idiocy. This was described by one trader as being a culture of zero tolerance. “Look at Libor. A bank may have reconciliation teams looking at individual trades. UBS. was a type of rogue trading. The kinds of conditions that have enabled rogue traders have also driven the financial crisis. public awareness of rogue behaviour focuses on the big cases. hyper-competitive culture lies behind this entire mess? Spicer has a warning. “If there is a winner there has to be a loser. To book Nick Leeson for speaking engagements: Email live@nmp.” Another technique to reduce the risk of rogue trading is to address human frailty.” he recalls. the film starring Ewan McGregor that chronicled his downfall. but a refined version which he and colleague Mats Alvesson have dubbed “functional stupidity”. But far more important. “The head of trading would ask me why I had traded so much. but I found out to everyone’s cost that I could not. Now banks are much more switched on and a number of them are buying trendspotting software to look for these rogue patterns.” So the film was quite accurate? “There were lots of details that were not right.” Harman explains that a certain pattern of trading might indicate that a trader is pretending to have hedged risks in the market by taking out a balancing trade. But he did not understand and said I should refer it to the head of trading. look at your central records and see what patterns there are that might be typical of rogue trading. facing page) – is that the trader might find he can get away with the deceit and that small errors kept secret can easily grow into a crisis below the radar. Harman explains: “The reason rogue trading happens is that most investment banks have trillions going through their systems. That is like looking for the proverbial needle in a haystack. they are more general.

and that discipline resides squarely within finance – finance plays a primary role in making sure that we really do max the mix.5 per cent. In the same 12-month period pre-tax profits rose 7 per cent to €6. getting the confidence of marketers and making sure it lands properly.” he says. Huët puts the company’s performance down to a combination of drivers. “It can be because one channel is more profitable than another. product pricing and product mix. The combination of options available includes the setting of sales volume. “Throughout that. driving products through the pipeline. says Huët. it could be because a geography is more profitable than another. Their choice of attire may have seemed remarkably aspirational. but was not surprising when you consider the company’s targets – it has set a goal of doubling revenues to €80bn and halving its environmental impact over ten years. which is about improving existing products – that accounts for the largest chunk of innovation undertaken by the group. along with his CEO. who gained an MBA at INSEAD in France and previously worked for Goldman Sachs and Numico. Huët says the issue is as much a mind-set as anything else. turnover reaching €51. “If an innovation is not margin-accretive I would raise questions as to it really being innovation. There is the innovation of breakthrough projects generated by R&D. as well as incremental innovation. for the consumer giant’s investor conference. the group is on the right trajectory for what is an extraordinary target.” It is in the next stage of the ten-year plan that it has increased the emphasis on the profitability of innovation. To what extent the company behind the Flora. or it could be because one product has a higher premium than another.68bn.” says Huët. Persil and PG Tips brands will successfully deliver on those agendas by the deadline of 2020 will depend on its level of innovation. revealing that the returns from large-scale investment in emerging markets are paying off. “I think it is something we can improve on. As a result. Paul Polman. Jean-Marc Huët has to be responsive to a continually changing environment. up 10. a baby food subsidiary of French consumer giant Danone. Finance has an important role to play to drive the profitability. “The first is incredibly profitable and important as we want to drive the volume of our business. Maxing the mix The process of prioritisation is known internally as “maxing the mix” in order to drive gross margin. applying the discipline through the pipeline to determine what is and what isn’t genuinely marginaccretive.28 Financial Management | May 2013 Financial Management | May 2013 29 A jean-marc huët By Lawrie Holmes e xc lu s i v e s CFO of the world’s third largest consumer goods company. and innovating new products. driven by welldefined resource allocation and discipline. bottom-line performance. You can’t spend too much time on the profitability of the innovation because you need to let the organisation know what innovation is about. Huët is doing his best to ensure this happens by putting finance in a key place to affect the right decisions.3bn for 2012. Three years into the plan. This is an important year for us to demonstrate that discipline because we’ve . innovation has to add to your margin. says the 44-year-old Dutchman. including making sure that the right existing products are in new countries. Around a third of the group’s revenue comes from innovations introduced over the past three years. but I would say that the lion’s share needs to be. There is some innovation you’re going to do which is not margin-accretive.” says Huët. Unilever’s finance department is at the forefront of every area of the group’s innovation Unilever CFO Jean-Marc Huët recently donned a spacesuit. “Something we didn’t focus so much on in the beginning was how profitable the innovation was. When it comes to the innovation of products there are two types.” When it comes to the level of discipline finance can impose.

We must never be complacent about this process and must always be seeking continuous improvement in this area. “This is especially the case if traditional forecasting becomes more difficult in a volatile world. Jurgens and Van den Bergh. “Using data in the wrong way can sometimes inhibit decisions. “We’ve been in India since the 19th century. “Rather than talk about what is not possible. Although our industry is quite leading edge at exploiting data. resulting from increasing demand for personal care products such as Dove soap and Tresemmé hair products. India and China are exciting new territories for peers. 2002: Portfolio reshaped through acquisitions and the sale of 87 lowperforming businesses.” He says Unilever’s approach to global decision-making. We develop these levers by looking through various lenses.” he insists. has operated in those countries for generations. so it’s very much about collaboration.” Given that most data is backward looking. “We believe it is important to apply the right levers to the business in individual country and category reporting. It also acquires Batchelors. doubling its business in fragrances and food flavours. “We have built up an enterprise data warehouse to cut. “At the end of the day we are .” than ever before. Google and research giant Nielsen. “We are more diversified and less dependent on one country. 1955: Unilever airs the first commercial on UK commercial TV for Gibbs SR toothpaste.” But the challenge is to apply tight discipline without squashing creativity. regional and global data. in the original entities that formed the Anglo-Dutch giant. the greater the threat to its reputation.” he says. in Indonesia since 1933 and China since 1912. it’s better to work in everyone’s interest. which owns Birds Eye. Take the situation in India – Hindustan Lever is one of the leading companies in the country.” In recognition that the more widely spread a company’s activities are around the world. a brief history of unilever Global presence The intensive approach to capturing data has certainly paid off in emerging markets. 1943: Unilever becomes majority shareholder in Frosted Foods. Huët says the key to maintaining a good reputation is training and developing the best people in the areas Unilever specialises in. Huët believes it is better to seek a balance of good data and experience to achieve useful forward-looking indicators. We are disproportionately investing in other emerging markets where we see opportunities. Like-for-like sales surged 10. such as those of the customer. which owns Pond’s and Vaseline. ethical sources. Huët is mindful of the limitations of relying too much on raw data. On different line items within gross margin we can be more disciplined. The Americas kick-started the growth and have shown an improved track record. 1986: Unilever acquires Naarden. is reliant on the finance team being operationally closer to areas of the group ‘Just having heaps of data is not a panacea. We’ve got no big sticks to do this. 1929: Lever Brothers and Margarine Unie sign an agreement to create Unilever. you have to have the right platform to undertake the right action.3bn 2012 pre-tax profits 2012 global sales 2012 sales in emerging markets [Turnover by geographical area/ operating profit by geographical area (%)] Asia/AMET/RUB Its 25 largest brands account for around 70 per cent of total sales. which Huët labels “white countries” (because they represent a blank canvas) that are responsible for more than half of Unilever’s sales. Russia. something we think is critical when trying to build some of the top products globally in the fields we operate in. you have to have the right platform to undertake the right action’ presence. We have not been as consistent as others in investing in China or Russia. employing forecasting using forward-looking indicators. 1977: Across the European Economic Community. 1894: Lever Brothers becomes a public company.7bn The company owns more than 400 brands. begin producing margarine. which should include more capital decisions as well as innovation.6 per cent in growing economies in 2012.” he says. “Any form of inertia within the business has to be tackled. It’s a reflection of our global Crunching the data One of the strongest contributions from Huët’s team is the compilation of an algorithmic data dashboard from a variety of sources as diverse as Facebook.” The result is a set of key performance indicators (KPIs) that are required to be globally relevant. Fishfingers introduced into the UK.” says Huët. Unilever is prepared to make substantial investment in staff development. Unilever isn’t in a hurry to grow fast in the so-called BRIC countries. where we’ve been a long time. to analyse trends to improve performance. 2007: Commits to source all tea from sustainable. so there is more to be done. To do this finance has moved much closer to various business practices. It’s a very good example of working in a market for a very long time. “We are a people business. “Just having heaps of data is not a panacea. used by two billion people every day 10. But while Brazil.3bn. In three years this positioning has improved dramatically by working to understand inherent profitability. slice and analyse information from local. 1894: Lever & Co starts producing Sunlight soap. Unilever employs nearly 177. I887: William Lever buys the site on which he will build Port Sunlight – a purpose-built village in Liverpool for workers in the company’s large factory. Acquires ChesebroughPond’s in the US. But while he describes Unilever as a data-driven company. generating �6. consistent and tangible measurements that can be linked back to P&L reporting and cash flows. 14 “billion-euro brands” have annual sales in excess of €1bn €6.Financial Management | May 2013 31 £1bn [Unilever by numbers] €51. but we are now investing cautiously.6% 40/38 27/27 Europe 33/35 1872: Two companies. 1995: Unilever publishes its Code of Business Principles. My view is that an over-reliance on data makes you far less agile. That’s because Unilever. especially as the world is so volatile. concedes Huët.” says Huët. we need to look at a lot of indicators. 2009: Named foods sector leader for the tenth year running in the Dow Jones Sustainability Indexes.000 people in 200 offices and factories.

been run with the shareholder as the prime focus.” Photography by Matthew Stylianou Eyevine . one that is motivating for employees. integrated reporting is an important step towards bringing this about. which established 50 social. If they do this well. “We should now understand that the consumer is interested in all aspects of our business in a way that was never the case before.” says Huët. “We also work closely with clients such as Marks & Spencer. “Businesses have. Sustainability is now an integral part of our business model. Some parts of sustainability are about driving costs down – driving sustainability also means driving growth because consumers want to deal with responsible companies.” he says. “Finance has a very important role here. to explain and be ready to explain its position to NGOs. “We have to demonstrate governance and transparency while recognising that a government’s role is to develop the right frameworks. ‘With public trust in business undermined by scandal after scandal. including halving greenhouse emissions and water reduction by the company and its suppliers. as will other stakeholders. Businesses – certainly those such as Unilever – should concentrate on staying close to consumers and serving them well. economic and environmental targets. we would do well to listen and act quickly’ ‘Businesses should concentrate on staying close to consumers and serving them well’ a bunch of brands that can be weakened within 24 hours. It gives credibility to everything we do and offers differentiation between us and others. “If we want people to properly judge a company on more than its financial performance. making it easy for them to make the right choices for the planet at the same time. while on a few we will have to wait before they are addressed.” he insists. Globally. so we have to be consistent in strengthening our brands.” “Sustainability is an integral part of our business model. collating the information that forms the basis of the KPIs. The call for integrated reporting is beginning to rise in volume.32 Financial Management | May 2013 Unilever has to be transparent with authorities regarding its activities and be willing to engage with stakeholders – to listen. integrated reporting has plenty of resonance for Huët – a keen advocate. We have two billion consumers so we have to be clear about what our role in society is.” With this in mind. for too long. “We have a set of tax principles that demonstrate what is important to Unilever. which we believe is a fair rate.4 per cent. With public trust in business undermined by scandal after scandal.” says Huët. The strength of our brands is sacrosanct. Unilever set out its Sustainability Living Plan. Wal-Mart and Kingfisher to ensure we are in the vanguard when it comes to sustainability issues. says Huët.” In this day and age. companies’ reputations are often determined by their global approach to tax matters. “Of the 50 or so KPIs we think we can achieve a large majority in the near term.” Sustainable measures What of Unilever’s sustainability targets – another major test of its reputation? In 2010. We have to have a strong sustainability plan. we would do well to listen and act quickly. it is 26. they will be rewarded by people increasingly choosing their brands over others and ultimately the shareholders will benefit.

In addition to this. . says it’s no surprise CFOs are concerned about the future. provided in a report of the findings entitled “Closing the Gap: Priorities for finance in the ‘new normal’”. the survey also revealed that. ADVERTORIAL 33 they were keen to reduce planning cycles. which can compromise both productivity and timely decision-making. Vantage Performance Solutions. In many businesses. The findings of this report were also discussed at a roundtable dinner in London. is that there is a willingness and desire to address these challenges quickly. almost all respondents said that any plans their organisation does have to improve its performance management and analytic capabilities are scheduled for the next one-to-two years. “There is evidence of failings in data quality and data integration that compromise both productivity and timely decision-making. ranging from financial analyst to chairman. not accurate enough or insufficiently detailed – as well as being laboriously time-consuming at a time when finance needs to share some of the pain that other business functions are going through and become much more efficient. accurate and easy-to-understand information.com/ cima_survey. To do this effectively and efficiently. Despite these findings. an opportunity has arisen for the finance function to lead organisations to stability and even growth. The problems have been identified and the will exists to fix them.Financial Management | May 2013 Closing the gap New research carried out by Vantage Performance Solutions in association with CIMA has set out the finance function’s priorities for the coming years. Respondents to the survey said they feel systems are either too slow. that marketing budgets remain viable and that managers make better decisions by having access and insight into both financial and non-financial data. tracking and making KPIs were a priority. Finance’s priorities David Werrett. amid fears that competitors with fit-for-purpose performance management capabilities will take competitive advantage. And it showed the finance function would like to see a rapid move to address these challenges. “We recognise those needs and can leverage our own consulting methodology – alongside the SAP Enterprise Performance Management solutions and SAP Business Objects Business Analytic solutions we prefer to work with – to deliver projects that rapidly and dramatically benefit the organisations that choose to engage with us. however. while more than half thought their company had poor quality non-financial data. director. The research. visit: http://tinyurl. revealed that many finance professionals feel their performance management solutions are in fact past their sell-by date.vantage-ps. “The good news. There is little time to waste in making performance management fit for purpose in the ‘new normal’. a clear recognition that cost and profitability management is still insufficient to optimise operating margins in today’s difficult trading conditions. 62 per cent of respondents said Further info To download the report. Fifty-four per cent of respondents highlighted linking KPIs to strategic objectives as a priority for improvement. The responses from this research suggest that many working in finance and accounting roles see timely action as imperative in closing the gap between where they are today and where they need to be.” Getty Images Despite the survey respondents having a broad spread of responsibilities. there was considerable agreement on which areas of finance are priorities for improvement initiatives. Nearly half said improving cost management and defining. at a time when investments need to deliver demonstrable value in as short a time as possible. Responding to the issues Finance’s concerns Recent research. To read a report of the key messages from the event. The report sets out some major concerns – but help is at hand for those ready to steal a march on their rivals… As businesses face the most challenging economic conditions for decades. visit: www.com/cucqhmx. revealed finance professionals are concerned by failings in data quality and data integration. “The findings suggest ongoing frustration with planning and budgeting. carried out by Vantage Performance Solutions in association with CIMA.” he says. it is finance that is exploring ways to ensure the research and innovation essential for future growth continue to be funded. it seems. combined with an increasingly competitive business environment and a complex regulatory framework. it is essential that the processes and tools for managing performance are up to date and providing fast.

consistency. No company is immune and the higher your profile. followed by share price collapses. Although public condemnation was extreme in the short term. partner of the Reputation Consultancy. “In addition. To this end. With an eye on the bottom line. companies recognised the value of this very direct form of marketing. but we only use British and Irish beef. “Today. This is in a time when people’s trust in institutions and in bigger things has been dented and they want to be reassured. Reputational risk relates to the damage that can be done to a company’s profile – something that is increasingly important whenever larger elements of corporate value are tied to brands and other intangible assets. in order to get a complete and accurate profile. but a scar is invariably left behind and sometimes the wound is fatal. There have been plenty of other major issues that have damaged companies’ reputations in recent months. “Reputation is an incredibly valuable but vulnerable business asset. says: “The horsemeat issue showed you’ve only got to screw up once and you’ve lost trust. firms’ reputations are at risk like never before. from employees to suppliers. says Rachel Griffiths.” says Rod de St Croix. issues and initiatives.” he arrival of social media was heralded as an exciting addition to a set of channels through which companies could market their products and services effectively. All these aspects must be measured across all stakeholder groups. corporates relished communicating to end users in such an economical way. it is more likely to be used for expressing a dislike for a company’s offering. “Their ability to weather a crisis can be a good indicator of their reputational strength. But the horsemeat scandal has revealed greater scope for long-term damage. to understand their risk in relation to the sector and Food for thought No issue could have had a greater impact on consumer behaviour than the recognition that horsemeat had entered the food chain across Europe earlier this year. Stefan Orlowski. says de St Croix. powerful and easily identifiable brands. mapped against activities. A new wave of corporate scandals has accelerated that process and Starbucks. even brands not directly affected by issues such as the horsemeat scandal are still vulnerable. can become an Achilles heel if a well-defined reputational risk strategy is not put in place.” Brand equity In order to measure reputational damage there is a need to measure all aspects of reputation. So your reputation must be protected and managed with the utmost care. Amazon By Lawrie Holmes . Recovery is possible. perceptions around leadership and being a fair employer. such as the revelation of how little corporation tax has been paid by global giants such as Google. visibility. as obvious concerns over the quality of the food supply could continue to be expressed virally. a management rout and business implodes. the complexity and ambiguity surrounding the issue meant the furore eventually tailed off.” says Griffiths. Such was the danger to reputation that those supermarket and restaurant groups affected were swift to address the issue.” Senior executives in other industries recognised the challenge to reputation created by the horsemeat scandal. it allows boards to prioritise reputational risk. the greater you are at risk.000 suppliers going into ingredients. Its significance reflects fundamental and age-old fears – brands first came into existence as a means to identify reliable food sellers. As consumers became a more discerning and increasingly fragmented body. corporate leaders on guard against any impact by extension on their reputation are quick to point out how their practices differ to those that were tainted by the scandal. Although consumers may approve of a product or service through social media. knowing full well the online carnage that would have ensued. In this context. a partner of Londonbased PR and communication consultants 3:nine. who is about to run the drinks giant’s operations in the Americas. says Griffiths. which for generations have been the emblem of corporate success.” The most successful firms know this and take reputational management very seriously. “When reputation is measured over time. then management teams can gauge the echo and reach of reputational change and its effects over time. says: “We have a single basket of 3. and we are always visiting farms and abattoirs to ensure quality. Paul Pomroy. senior vice president and chief financial officer of McDonald’s UK & Northern Europe. “These elements include aspects such as trust. which includes responsibility for the supply chain. This information provides companies not only with the ability to quantify reputational damage but also provides a context and allows the organisation’s leaders to distinguish between “a storm in a teacup and a growing reputational threat”.34 Financial Management | May 2013 AVOID AN IDENTITY CRISIS T Financial Management | May 2013 35 A fast-changing environment has forced companies to take a fresh look at how they manage reputational risk. managing director of Heineken UK. Digital channels such as Twitter can be used to spread uncorroborated negative messages quickly. In a fast-moving social media environment. But a wave of recent scandals has brought on a wider understanding of the impact of social media. Firms riding high on their reputation only need make one ill-judged slip to fall from grace.

or even – it can happen – enhanced. and don’t get involved in arguments. Tell your story – not anyone else’s. companies will have to recognise that social channels. can be their ally and foe in equal measure.” says Curtain. says Allerton’s Curtain. warns Griffiths. “In the case of most scandals. “Values and culture are important. consistent with its objectives and transparent. tracked and understood. says Intangible Business’s Whitwell. hard process and can be dependent on the level of reputational equity that exists in the organisation at the time it is tarnished. “This may not seem a high priority until the need becomes apparent and you find yourself unprepared. whether accurate or not. but if you employ a spokesperson make sure they understand the media. tackling any blind spots. such as product recall. So. easily lost. turn to the communications and corporate affairs department. Illustration: Hey Studio/Dutch Uncle .” When bad news breaks. including a strategy to reduce food miles.” The organisations that are the most effective at minimising their reputational risk are those that value their reputation the most. emerge with the brand unscathed. investors and regulators require utter clarity on why a business exists. and work through different scenarios. companies should get on the front foot and produce a controlled. including those with little or no apparent connection to your business. or the BP oil spill in the Gulf of Mexico. Risk depart- ments. effective managers will respond fast to any threat in order to minimise harm and.” For consumables. managing director of Allerton Communications. or have more time to prepare a response.” ‘Directors should identify the problem and defuse the story before the media become involved’ Fighting back It’s when a crisis breaks that an organisation needs to have the best understanding of its brand’s equity. The message should ideally come from the CEO. they already have in place continuous tracking. And avoid keeping quiet. legal. many of whom are not only unfamiliar with the tangible concept and narrative around reputation.” he says. as well as implementing best practice and seeking best advice to prepare your firm for traditional and digital crisis scenarios. joint managing director at consultancy Intangible Business. until now when the speed of reputational impact has increased. suggests Whitwell. Operational risk is understood and firmly owned by the risk department. Customers. In the long run. such as the horsemeat scandal on Tesco’s brand value. if possible. are likely to have predicted and prevented the risk.” she says. “After the Gulf oil spill. and internal protocol will have to consider costly measures.” he says. The difficulty is this. In some respects the best defence against reputational crises is to conduct a business that is at heart productive.” she says.” he says. says Peter Curtain. i.Financial Management | May 2013 37 competitors. Reputational risk has always been a poor relation to operational risk. and the tone should be set by the board to ensure consistency. Companies generally seek to repair damage to their reputation through designing and deploying an effective communications strategy to acknowledge and deal with the crisis. Directors should build structures to provide reliable information on reputation and risk. Be confident. credible and comfortable in your position. as well as traditional broadcast and print channels. they should identify the problem and defuse the story before the media become involved. “Communication channels should stay open and messages should express concern for those affected and a commitment to fix the problem. unfamiliar with the intangible concept of reputation. apologising profusely and honestly for the mistake and educating the public about the steps it will take to improve the reliability of its food sources.e.” he says. “It is also highly dependent on how skilled the organisation is in exercising its reputational capability. a London-based corporate and financial PR firm. If possible. When it comes to response. the accountability of its leadership and the quality of its relationships with staff and stakeholders. If there has been a negative impact on the brand.” The next stage – rebuilding reputation – can be a long. the Reputation Consultancy’s Griffiths says speed is key when social media and online channels can amplify and speed up any communication and speculation. says Griffiths. in the digital age. BP issued several public apologies and dedicated a whole section of its website and a lot of money to animal conservation and supporting the community and ecosystems affected by its mistake. “Through brand checks and tracking studies. effective response. so the best advice is to plan for the worst – examine risk factors. then blame has to be assigned and communicated frankly to stakeholders. says Stuart Whitwell. is now a must. “Ensure communications reflect and underpin the wider corporate story. the transparency of its operations. but do not have measurements in place that provide meaningful analysis. “If crises were easily identified they wouldn’t exist. says de St Croix. the issue is often complex. focus groups could be considered to get a deeper understanding of the issues and negative feelings toward it. “Understanding and monitoring the communication channels that could compromise your firm’s reputation. an investigation will have to be made into the cause of the mistakes made. can be measured. especially if there is a risk to human health. Have the best possible information to hand. “Many of the damage limitation practices refer to both the reactive behaviours of leaders and actions that address digital and social communications. staff. Reputations are hard won and. Tesco has undertaken extensive PR since the horsemeat scandal. Similarly. the level of its responsiveness. the reaction to a key piece of damaging news. lest people assume the worst. “Committed to the long term. ethical. to learn from previous poor or best practice in the market and even begin to predict and prevent reputational risk.

many of whom I ended up meeting. Before I joined I had looked at the financials of the company and knew it was a venture capitalistbacked business (Accel Partners and Index Ventures) and non-revenue generating. It was an incredibly humbling feeling that there were loads of kids and parents that wanted to pay for it. When I joined in 2006 he let me run the whole operations side of the business as he wanted to be more involved in the creative and product strategy. It was much smaller than it is today. If the membership side is sticky enough you have an exponential membership uptick that allows you to build up a big cash buffer over a period of time. To launch the membership element of the game and make the business profitable we had to raise a further small round of capital (after burning through our Series A cash developing Perplex City). I ran both businesses for five years – working with famous interior designers such as Colefax and Fowler and Candy & Candy. when we were about to launch season two of Perplex City we realised it wasn’t going to be the biggest commercial success in the world as it only appealed to a very niche audience. CGMA. How did Moshi Monsters happen? Michael had always been fascinated by virtual pet experiences. Madonna and Mick Jagger. such as the Japanese Tamagotchi and Furby. Taking any job is a risk – taking that job at that time was more of a risk. but we went back to them to explain to them our desire to pivot and create Moshi Monsters. but when I met Michael I had a strong feeling that he would take it forward and be successful. we realised the concept worked as kids really wanted to play it. towards the end of my degree I realised that it was a difficult field to succeed in. However. I’d already read a bit about Michael and knew he was incredibly creative and inspiring. got their feedback and figured out what it was with the product that really resonated.FCMA. How did you end up there? I was set on being an archaeologist and studied at the University of Wales. I had to do a lot of modelling in the early days and sensitivity analysis around our projected revenue from subscriptions. After just over a year I joined HOWE. We then optimised it over a period of time. We launched monetisation in January 2009 and it went incredibly well. It was quite a difficult decision because our venture capitalists had invested a lot of money in the project and we had built the business around it. but what was Mind Candy doing in 2006? When I joined there were only 15 people. We were getting desperate because we were worried we wouldn’t be able to pay people’s salaries at that point. How do you measure the data available? We set up event tags in the game whereby you could see what kids were doing on the site. It’s obviously a really healthy business model. although we really loved working on it. Shortly after that we added some more social features into the game. When our bookkeeper left I took over the financial side of things and took some bookkeeping courses to give me some foundation knowledge to help me. The product took a long time to develop. I have always had an affinity for antiques and all things vintage so I took a job at the London Silver Vaults. which we achieved when a private investor jumped in. helping run an antique silverware business called I Franks. At what point did Moshi start becoming a success? In the first phase of the closed beta launch we tested the gameplay. Then. Mind Candy minding moshi By Lawrie Holmes . We were working on a game called Perplex City and Moshi was merely an idea. Lampeter. taking the business forward. I was drawn to the fact that it was partly a PA role as I could work closely with him. who also had a bespoke upholstery fabrics and leathers business. opened the game up to the general public so that anyone could sign up for free and started getting really good feedback. We got really excited about the idea and just got started working on the project. Moshi Monsters is a huge global success. an antiques and bespoke furniture design company run by Christopher Howe in Chelsea. with the core of the gameplay around the monsters themselves and children’s interactions with them – the rest has grown over time.38 Financial Management | May 2013 Financial Management | May 2013 39 Divinia Knowles has seen Moshi Monsters grow from an idea into a worldwide phenomenon. COO and CFO. she talks about her role in its success and the plans to expand the brand into new markets Mind Candy. I worked really well with Christopher because I was much more on the operational side and he was the creative side. How did you arrive at Mind Candy? Mind Candy were looking for somebody who could be studio manager as well as a PA to founder Michael Acton Smith. based on his children’s enthusiasm for Moshi. talked to kids. Our registration numbers took off at that point. and a celebrity client list that included Sting. creator of the Moshi Monsters game played by millions of children in more than 200 countries. which helped it grow virally. so it was a much smaller business. Here. It was fascinating how quickly it took off and the business was cash flow-positive really quickly. producing one of those “hockey stick” graphs that you don’t often see. has grown into a successful global organisation. When it went live and we watched the first players start to register. I would take all the information from the game to Divinia Knowles.

helping us build on the English-speaking markets where we currently do well. We need enough users to have a decent data set – we don’t want to hard launch the products until they are thoroughly tested and we believe they are good enough. PA and accounts management at Mind Candy. Although I built the models myself I talked a lot to him about how he would approach it in terms of the KPIs I should be looking at and how granular I should go in building models from metrics and information. 2006: Studio manager. occasionally dipping into things I remember from my study days – it has really helped me. but was worried as I had no formal qualifications. how many players churned out and over what time period. medium case. We are currently expanding into new products so we built a small team of three people – a product manager. We looked at how long players stayed for. We keep costs to a minimum and make sure that products are profitable in their different streams. building for mobile and tablet. It was really difficult. A film is also out at the end of this year. 2001: Joined HOWE. For example. teams can test products really easily by soft launching on the app stores to a small group of users. worst case – I could then chat to Michael about where I thought the opportunities were. it is about making the very best product you can for your audience. with a degree in archaeology. who is a non-executive CFO who works with lots of different startups. For our new products. retail management and accounts. We believe we can build Mind Candy into a multi-billion-dollar business and create evergreen brands that will endure. What’s next? The Moshi Monsters tablet experience is coming out this year and will give us access to a truly global audience. financial controller of Firebox. even in the early days when we didn’t have any historic information and it was a bit of an estimate. I also enjoyed learning about performance management. tax and more complex forecasting. 2000: Graduated from University Of Wales. the Moshi Monsters website. How does finance support the development process? We are very rigorous about budgets and have P&L owners across the company. how many registrations we would get in a day. and in practically no time at all we can understand if an idea is viable or not. e. a developer and an artist. Lampeter. We can develop new products quickly for very low expenditure. 2000: Joined I Franks. In product discovery. I have recommended CIMA to other people as well. but it helps bring players back to Moshimonsters. Moshimonsters. We have always come really close to our forecast.g. I still relate to my CIMA books. how many players then converted through to becoming a member.40 Financial Management | May 2013 Divinia Knowles 2013: Joined Mind Candy’s board of directors. The model we built has proved really quite accurate to how the site actually performs. I tried to model what was happening on the site using the information available while being diligent and careful about it. bringing a small group of people into the game to test it. recommended CIMA. help with forecasting and plan out the funnel for the entire website.com. The magazine is less profitable. How did you end up studying CIMA? When I became head of operations and finance I felt I was doing some really interesting financial stuff. some are Moshi related and some are new intellectual ‘We believe we can build Mind Candy into a multibillion-dollar business and create evergreen brands that will endure’ properties. I did all 15 exams between 2007 and 2010 after studying at home and absolutely loved it.com is incredibly profitable because it’s a digital business and overheads are low. . Alison Sakai. soft launching first in one geographical territory. but it gave me a massive insight into what I needed to do more of at Mind Candy. They prototype and come up with ideas. 2008: Head of operations and finance at Mind Candy. and taking all that interesting information put it into a model of how the website actually worked. including compliance. how many players went on to fully adopt a monster. Through Accel I gained a mentor. 2010: COO & CFO at Mind Candy. Michael’s sister company. mobile game and magazine are looked at individually in terms of how profitable they are. but because I was doing a sensitivity analysis – best case. which should help us grow as an entertainment company. retail management and accounts.com. the processes and systems I would need to set up. Ultimately. Some of it was assumptionbased. We will soft launch with a very low level of customer acquisition through online advertising channels. you know how to optimise the game for retention and monetisation. How do you innovate? You have to be very strict about when you launch products. delight and stand the test of time. You know what data you are looking to track. We will seek to optimise over a period of time.

especially the way in which they prepare their accounts. rather than the quick fix of short-term results. says Dr Ines Wichert. uncontrollable. “Appreciate the importance of only retaining information that is relevant.” says Alex Tamlyn. the right pricing and so on – and the better results are a consequence of making more right decisions. So it is vital for the board to have a clear grasp of the kind of information the business holds. “Conscientious boards try to get everything right – the right products. The BSI says its work is a response to the fact that existing governance guidelines are failing to alter the cultures of businesses. At the moment. “But make sure you’re compliant with regulations and legal standards when destroying unwanted data. For example. And it is not just about having a certain number of NEDs on the board. Governance failures often result from the absence of critical information. it wants governance to provide a framework to ensure principles are acted on in the way a company works. Costs should be detailed and not amalgamated under headings such as ‘cost of goods sold’ or ‘sales and marketing’. Instead. The BSI wants governance to be more than something boards just talk about. is unpredictable and.” 6 8 Develop the role of women in corporate leadership Watch out for the British standard on corporate governance 4 Appoint effective non-executive directors It is the NEDs who should be bringing an independent view to the quality of the company’s governance. or in relation to investor return. challenge and debate with each other. who has advised more than 100 boards and is the author of Developing Directors.” Automated information management systems can capture and index information and keep information that is still required for legal or other reasons.” says Tamlyn. consultancy and agent costs. or from the misuse of information that does exist. “They must be able to contribute in an informed way from the outset. which specialises in forensic accounting. assigned accountability for their achievement and secured strong commitment from the top team. The standard is seeking to develop a code of practice based on four principles – system. Boards that cut corners encounter difficulties. opportunities and threats. Then a company should make sure that its policy for developing women leaders is comprehensive and integrated. a company that provides information management software. But it is also important for full-time executives to devote the time to make sure the NEDs That means more than just appointing token women to the board. an executive at Recommind. it is not necessary or desirable that the infrastructure of the business is treated in the same way. a partner at Forensic Risk Alliance. “Even in businesses – such as certain hedge funds – where the cutting edge of the business tool is about short-term changes and arbitrage.” Tamlyn warns. Companies need to think globally but act locally. Short-termism at an organisational or human capital level.” he says. a stand-alone training course to increase skills or confidence will not yield lasting results unless followed up with mentoring from a well-connected sponsor and access to high-visibility assignments. it is looking for financial services firms that can trial the standard. entertainment. A company that wants to develop the role of women needs to start by researching what helps and hinders their career progression. Directors and finance professionals need to be aware of provisions in the UK Bribery Act and Companies Act. direction. weaknesses. from the Kenexa High Performance Institute. “Good NEDs should demonstrate that they can listen. have a full understanding of the company’s strengths. eventually. but destroy that for which there is no longer any need. says Tamlyn. and ensure that these transactions have their own discrete ledger accounts – such as commissions. And that is all about finding NEDs with the correct skill sets. partner and head of the EMEA international securities group at the law firm DLA Piper.” The British Standards Institution (BSI) is currently working on a standard on corporate governance.” says Tamlyn. character and absence of conflicting interests. and the US’s Foreign Corrupt Practices Act. says David Lawler. It is important that the board adopt a defensible information policy.” says Coulson-Thomas. gifts and travel expenses. “Companies making noticeable progress on gender diversity have specified clear targets. “The key to the right dynamic in the boardroom is having the correct representation around the table. “Identify higher-risk activities for potential bribery transactions beyond entertainment. says Nick Patience. 7 Adopt strong anti-bribery measures 5 Adopt an effective information policy 3 Focus on the medium and long term It is short-termism – the rush to get results too quickly – that often causes problems. rather than merely following a governance code. a governance principle to avoid excessive risk has little effect if employees are rewarded to get results “whatever it takes”. “Strive for a medium and long-term view of a business. Lawler advises: “Maintain a chart of accounts which is sufficiently detailed to allow identification of transactions by their economic nature. Explains Wichert: “For example.42 Financial Management | May 2013 Financial Management | May 2013 43 Professor Colin Coulson-Thomas believes there is a link between good governance and good financial results. control and accountability. Peter Bartram is the author of The Perfect Project Manager (Random House Business Books) .” says Patience.

ly/E3Mar2013). (b) Discuss the potential project management problems that might arise by allowing each medical centre and hospital to discuss its own usage directly with the project team (nine marks). rather than simply reading the answers. This question.ly/VelocityASAP). four performance measures that could be ­ .Financial Management | May 2013 45 RESOURCE study notes Paper E3 Enterprise Strategy STudy & tech notes/the institute/events In this issue: Paper P1: Performance Operations (also relevant to paper P2) p49 H E3 candidates tend to fare poorly on IT-based questions. was doubtless inspired by the UK’s hapless National Health Service patient record and booking system. you can establish a method that should significantly improve your chances of passing first time. I suspect. but these often come up in the exam. (c) Recommend. concerning an IT implementation project. Passing E3 is not a lottery. which was abandoned in 2011 having cost £12. This question was a warning shot to remind students that they will face questions on IT and that they are expec­ t ed to recall knowledge gained in studying for previous ­ E nterprise papers. This applies the following steps: l Analyse the requirements. l Plan your answer. anything involving IT has not been popular. By understanding and practising the process of answering past questions. l Analyse the scenario and data given. Candidates generally struggled with it – historically. Studying previous papers can help you to pass the next exam. they had previously studied project management for E2 – and who remembers anything from a paper they have already passed. right? The E3 examiner knows all this. with reasons. In an article for Velocity in June 2011 I introduced the ASAP method of answering exam questions (bit. l Source the syllabus knowledge. Your best bet for scoring a good mark on them is to keep practising past questions using the ASAP approach By Adrian Sims ow much would you pay me for telling you the winning numbers for last week’s lottery? Not a lot. Question 3 requires candidates to do the following: (a) Evaluate how the features of the information system can assist in improving the services of the medical centres and hospitals in country Q (eight marks).7bn. That’s because knowing last week’s winning numbers won’t help you to land next week’s jackpot. Also. Let’s apply this approach to question 3 in section B of March 2013’s E3 paper (bit.

It does not mean: l List the stages of project management. The examiner wants candidates to read the scenario. The examiner wants candidates to read the scenario. Requirement (b) concerns project management problems. Here is what I found on each key issue from the scenario. l What is being discussed by the medical centres. to develop a performance measure related to each dimension of the Balanced Scorecard. The verb “recommend” is defined as “advise on a course of action”. l Evaluate the system. measurable. l Access to a centrally maintained medical diagnosis system. it’s not asking for negative comments. the hospitals and the project management team. including human issues such as a lack of leadership. In requirement (b) the key words are “discuss”. l Performance measures are not targets – i. so you might assume the examiner probably expects candidates to suggest at least three possible problems and explain how each would be the result of the widespread discussions among so many hospitals and medical centres. “potential”. l Electronic transmission of patients’ records between medical centres and hospitals (from locally held databases). l Processing in parallel. attainable. For requirement (c). take note of any problems in service provision. relevant and time-bound. l Virtual (network) organisations. and write an answer explaining how its features could resolve these problems. l Ease of access to information in one place (doctors. l Government objectives for the project. l Automatic re-ordering facilities for medical supplies from external providers. hospitals. Eight marks are available for four performance measures. l Online access for authorised staff to test results from hospital lab databases. since the question says “potential” problems and the examiner wants candidates to suggest these).Financial Management | May 2013 47 used to assess whether the project objectives. identify the project objectives. l Explain these features. so you can assume that a mark is available for each measure suggested. “four performance mea­ sures” and “project objectives set by ­government”. cost. and “by allowing… to discuss… directly”. “features” and “improve services”.e. Performance measures can be strategic. recall the technical knowledge associated with each area covered by the question’s ­requirements. l The timing of connection. the key words are “evaluate how”. l Booking facilities for appointments with medical centres and hospitals. l Before you get to the scenario. l Write an essay on the “iron triangle” (scope. Government objectives for project: l Establish the technical requirements for each hospital and medical centre. These may be reflected in elements of the iron triangle: ­ l “Project creep” stemming from an unclear or changing scope. Eight marks are available for this. l Write one on the Balanced Scorecard. l Any signs of project management problems (unlikely to appear in scenario. The verb “discuss” is defined as “examine in detail by argument”. l Supply-chain management and supplychain integration. l Try A: analyse the requirements In requirement (a). In requirement (c) the key words are “recommend”. identify the features of the new system. l Ensure that local users have access to technical guidance and training. Features of new system: l Access to email facilities. PRINCE2 – in place. It does not mean: l List the features of the system. Note that the question is asking you to evaluate how its features can improve services – i. l Performance measures must be Smart – i. l Write an essay on PRINCE2. It does not mean: l Write an essay on Smart objectives. paramedics and visiting nurses all need information on a patient). specific. not in sequence (enabling several medical functions to access the same notes simultaneously). a loss of key team members and stakeholder discontent. post or fax. since candidates are required ­ to suggest these). A: analyse the scenario . they don’t specify actual levels of planned attainment. are being met (eight marks). “project management problems”.g. l All information is exchanged by telephone. with signed off stages and documentation. l Identify all the problems that have happened with the project’s management. But the syllabus teaches us the following things about objectives: S: source the syllabus knowledge Read the scenario to find the key issues from your analysis of the requirements. as set by the government of ­ Q. and invent four performance measures that would measure these. Problems of existing services: l Most information is held in manual paper-based systems. l Performance measures for these ob­ jectives (also unlikely to appear in the scenario. You have to ask yourself: “How might this knowledge relate to the requirements of the question?” ­ Requirement (a) brings to mind know­ ledge about issues of business process re-engineering and e-commerce such as: l Communication speed (time can be a matter of life or death in medicine).e. managerial or operational. Project management problems: l None stated. identify what is being discussed by the hospitals. But don’t let this become an excuse to write all you know about the topic or about some trigger terms in the question. What is being discussed: l Hardware and software requirements. There should also be a development method – e. Nine marks are available. ­ l Cost overruns. l Accuracy in transmission. l Failures to hit crucial deadlines. So you might conclude that the examiner probably intends candidates to evaluate four features at two marks each. l Problems of existing services. your choice of performance measures will depend on the government’s objectives for the project. and identify the potential project man­ agement problems that this might cause. time) of project management. For this question they are as follows: l Features of the new system. This will help you to spot relevant issues as you read the scenario. l The aspects of the information system used by hospitals and medical centres. The examiner wants candidates to read the scenario. plus a further mark per measure for an explanation of which objective each would measure and how. medical centres and project management team.e. The meaning of “evaluate” is defined on page 23 of the question paper as “appraise or assess the value of”.

Key point: this will help to save lives.000kg (F) Material usage variance: 1.000kg x $26/kg $910. l Justification: there will be a need for bespoke training because each centre may have a slightly different system. TP uses just-in-time purchasing and production systems. So it’s easier to use “problems of the current system” and “benefits of the new system” as pegs.000kg x $25/kg $25. I didn’t mark the March exam this time and I have yet to read the examiner’s model solution on the CIMA website.000 Standard cost of 35. The important point is that we can distinguish between variances that have arisen at the planning stage and those that have arisen as a result of opera­tional performance. 3.48 Financial Management | May 2013 Financial Management | May 2013 49 Have 80 per cent of medical centres and 90 per cent of hospitals connected to the information system and fully operational by July 2014. the original standard was incorrect.000 favourable) reconcile back to the original total material cost variance of $10. remembering that P1 candidates are assumed to have brought forward all of their knowledge from their C01 studies. Higher quality: expert systems for d ­ iagnosis.000 adverse – $23. l Direct material cost of ingredient A: 35. medical staff have the information they need in a timely fashion. author and CIMA exam specialist.000kg Operational usage variance 1. system won’t be ready until all have connected. We now calculate the operational variances based on the new standard as follows: Material price variance for ingredient A Actual cost of 35. The approach to project management in introducing the new system has failed on all three. Key point: the project may fail to achieve most of the government’s objectives. Benefits of the new system (use as heading): 1.000kg x $25/kg $875. reduced administration time.000 (F) But the question scenario adds that “the general market price at the time of purchase for ingredient A was $23 per kg”.000 units x 4kg x $25/kg $900. but that’s OK. My plan for the answer is in the panel on the right. Monitor costs in order to stay within the budget.000kg x $26/kg $910. better patient care. if my performance measures are different from those of the examiner. 3. Ensure that local users have access to technical guidance and training.000 (A) Divided into material price variance… Actual cost: 35. it’s more complete than what I would actually write in an exam and the parts in italics show my thinking.000. Four measures are needed. electronic record transmission. 2. Operational variances can relate to any element of the standard product specification.000kg Actual output should have used: 9. 2.000 Revised standard cost: 9. There’s not enough time to discuss each of these individually – and it would be r ­ epetitive.000 Planning variance $72. breaks government budget objective. In the absence of any further information. which means that there is no opening or closing inventory during the period. To be more helpful to you. Don’t write an elaborate plan in your script. l Justification: these are standard measures that should be available from the project management system. l Measure: monthly variances against the budget. Problems of the current system (use this as a heading in the answer): 1. software and training. here we P: plan your answer When planning your answer’s structure.000 Actual cost: 35. CIMA’s official terminology refers to these more formally as: l Planning variances: “A classification of variances caused by ex-ante budget allowances being changed to an ex-post ­ basis. ­ The standard direct material cost of cake ingredient A is given as 4kg at $25 per kg = $100. Quicker: email. He is a member of the marking panel for the E3 paper and teaches the subject for Independent Colleges Dublin and ­ elsewhere.000kg (F) Material usage variance: 1. Also known as a revision variance.000kg x $23/kg $805. post and fax communication: slow.) November 2011’s P1 paper (which can be downloaded from the CIMA website at bit.000 units. therefore. try to remember two things: l The mark allocation. I anticipate that my answer will differ from it.000 units x 4kg x $25/kg $900. Monitor how the medical centres and hospitals use the information system.000 Material price variance $105.000 favourable – $72. Establish the technical requirements for each hospital and medical centre. high risk of loss. CIMA Publishing. Timing of connection (use as heading): assume this means when they will implement. l Sample answer plan and notes Requirement (a) This offers eight marks. Hardware and software requirements (use as heading): centres can dictate budgets for hardware. For example.000 units x 4kg x $23/kg $828.000kg: 35. (P2 candidates are assumed to have brought forward all of their knowledge from C01 and P1 – so standard costing remains examinable in the P2 paper.000 (A) Material usage variance for ingredient A Actual output did use 35.000kg at $26 per kg = $910. These are known as planning variances. One topic in this area that often causes problems is that of planning and operational variances.000 (A) Requirement (b) This offers nine marks. The splitting of a total variance into its planning and operational elements recognises that: l Variances can arise from changes in factors external to the business. but the responsibility for this lies with senior. l Measure: percentage of users satisfied with system in monthly electronic survey. high risk of data loss. . l Measure: number of centres that have signed off their systems specification. managers.000kg Operational usage variance 1. 2012. It should be noted that all deviations between actual and budgeted costs can be subdivided and attributed to either planning or operational causes. so there can’t be one measure for each objective. For example. The correct approach. These are known as operational variances. rather than operational.000 Material price variance $35.” (I tend not to use the terms “ex-ante” and “ex-post” and will instead use “original” and “revised” respectively.000 Standard cost: 35. l The “pegs” in the requirements – for example.) Managers will want to draw a distinction between these variances to gain a realistic measure of operational effici­ ency. More secure: probably encrypted with password protection and other access controls. But eliminating the “target” will leave four objectives: 1. greater staff efficiency. l Monitor costs to stay on budget.000 (F) Note also that the three variances combined ($105. then markers would have the discretion to award marks. Adrian Sims is a freelance tutor. l Monitor how the medical centres and hospitals use the system. In other words. 2. 1.000kg x $23/kg $23. which may not have been known or acknow­ ledged by standard-setters at the time of planning.000kg x $26/kg $910. The information system has six features. Paper P1 (also relevant to P2) Performance Operations … and material usage variance Actual output did use 35. providing that my suggested measures relate to the objectives and are sensible. is first to calculate the dif­ ference between the original and revised standard costs and report that as the planning variance. but there are five government objectives. challenges the core concept of an integrated system. Key point: both limitations can cost lives in a medical environment. lower costs.000 units x 4kg 36. automatic reordering. Three things are being discussed.” l Operational variances: “A classification of variances in which non-standard performance is defined as being that which differs from an ex-post standard. Let’s revisit some basics of standard costing. 4. increases users’ confidence in data integrity. we would calculate the variances as follows: Total material cost variance for ingredient A Standard cost: 9. breaks government goal of 80 per cent / 90 per cent online by July 2014. T The key to splitting a total variance into its planning and operational components – a crucial P1 skill – is to find the planning variance first and then base your operational calculation on the revised standard By Ian Janes he application of standard costing methods is a core area of the syllabus in which P1 candidates should be highly prepared. since it suggests how long you should spend writing and the number of points you need to make. Only a few words are needed to remind you of the structure and the key points you want to make. Phone. Keep relating back to the case to i ­ llustrate your points using the mnemonic “Pert” (make point. 4. online data availability.ie for details of the revision courses Adrian runs in Dublin. Introduction (use as heading): state the iron triangle of scope. improved patient care.000 (F) Note that this is a favourable variance because there has been a reduction in the e ­ xpected cost of the ingredient. inaccurate. poor data security. Planning variances may arise from faulty standard-setting. I’ll let you go and see whether or not my approach would have passed.000 adverse for ­ingredient A. Paper-based system: data available only in one place.000 Material cost variance $10. slows down development time and increases initial costs and maintenance burden. 3.000kg Actual output should have used: 9. Further reading CIMA Official Study Text – E3 Enterprise Strategy. 2. and then to calculate the ­ o perational variances based upon the revised standard cost as follows: Total planning variance for ingredient A Original standard cost: 9. Email elena. performance measures related to objectives in requirement (c). Use these as the three pegs and relate back to the iron triangle of project management. will affect compatibility of system. The actual results obtained for the period include the following: l Production: 9. Aspects of the information system that will be used (use as heading): affects the availability of information in the system and so the attainment of project objectives. medicines are in stock when needed. time and cost. Less labour-intensive: automated bookings. l Justification: this will show that they have been consulted and are happy. l Measure: number of centres with dates set for in-house courses.000 units x 4kg 36. explain it and relate it to the case in the time available). affects the completion date of the overall project. l Other variances can arise through factors that are almost entirely within the control of operational managers.000kg: 35. Performance measures: l None stated (but note that the third government “objective” is actually a target).martin@ independentcolleges. l Justification: a greater percentage of satisfied users will indicate that more people are using the information system.ly/P1Nov2011) contains a question featuring a wedding-cake company called TP and I shall use some of the information from its scenario here. labourintensive. Requirement (c) This offers eight marks. back-ups ensure that records can’t get lost.

000 units x 4. Tower One. In fact.tan@cimaglobal. Colin Drury.500 (F) Note once again that the three variances together ($105. 93100 Kuching.89kg per unit (35.
Kandy T: +94 (0)81 222 7883 E: kandy@cimaglobal.000kg x $2 per kg = $72. Islamabad T: + 92 51 260 5701-6 CIMA Pakistan: Lahore Flat 1. This reveals the extent of the error made at ­ the planning stage. This new information can then be used when setting standards in future.contact@ cimaglobal. Southern Wing.000 x (4kg – 4. 2012. 12th Floor.000 adverse. There are two alternative methods that could be used to split the planning variance. Shahra-e-faisal.000kg ÷ 9. Dhaka-1212 T: +8802 881 5724 E: zareef. which they must take forward through their P2 studies. Rehman Chambers.com CIMA Pakistan
 201. Dubai. International Chamber of Commerce.000 units x 4kg x $25/kg $900. Gallerystock overestimated the cost of ingredient A required by $2 per kg.000 adverse + $31. Fuhua Yi Lu. 11th Floor. This may be because of poor planning and intelligence-gathering. Futian District. 39 Alfred Rewane Road. in addition to our new knowledge about the general market price of ingredient A. l Operational efficiency. PECHS. Bandra (East). Sarawak
 T: +6082 233136 E: doreen. Tower 4. New Garden Town. Block 3. Yuzhong District. Dubai Knowledge Village. It can be demotivating for an operational mana­ g er to be held accountable for errors made at the planning stage. resulting in the favourable planning variance of 36.05.com CIMA Zambia 6053 Sibweni Road. l Planning effectiveness.000 favourable = $31.000 as before. Menara Boustead Penang. Azia Center.com CIMA Bangladesh
 Suite 309. Madina.com CIMA Pakistan: Islamabad 1st Floor. once we revised the standard ­ cost of ­ i ngredient A per kg. Level 19. Ian Janes is CIMA course leader at Newport Business School. 2012. Their actual performance is then being rated against fairer standards that better reflect the prevailing conditions when they were doing the work. Chongqing 400010 T: +86 (0)23 6371 3538 E: infochina@cimaglobal. Chongqing Tiandi. 1st Floor.5kg x $23/kg $931.com CIMA Singapore 3 Phillip Street.500 adverse – $72. CIMA Official Study Text – C01 Fundamentals of Management Accounting. Ruitian Road. Awami Complex at 1-4. 1233 Lujiazui Ring Road. Block 3. Front Block 3. Plot 27-A. The actual purchase price of $26 per kg is $3 per kg above the “new” general market price. 8 First Avenue. Bandar Utama. Selangor Darul Ehsan T: +60 (0)3 77 230230/232 E: kualalumpur@ cimaglobal.500 adverse. 1st Floor.000kg Actual output should have used: 9.500 adverse.000 (A) But now Actual output did use 35. Exam questions often ask you not only to calculate planning and operational variances but also to explain why they are n ­ ecessary. Karachi T: +92 21 3432 2387/89 E: pakistan@cimaglobal. Iveagh Court.5kg per unit. 2.com CIMA Malaysia: head office
 CIMA Malaysia. Gaborone T: +267 395 2362 E: gaborone@cimaglobal. The wisdom of the purchasing manager’s decision to buy the ingredient at $26 per kg can. Managers should be held responsible only for v ariances in costs (and revenues) over ­ which they have a degree of control.000 rather than $35. RM Center. Al Sofouh Road. C-62. 20th Floor. Accra T: +233 (0)30 2543283 E: accra@cimaglobal. (3rd Floor).50 Financial Management | May 2013 Financial Management | May 2013 51 As before Actual cost of 35.500 adverse – $81. Lagos T: +234 1 463 8353 (ext 518) E: lagos@cimaglobal. which may have arisen through a lack of market research or a poor appreciation of changes that had occurred in the market.
101 Gulshan Avenue.000kg x $26/kg $910.com CIMA Ghana 3rd Floor. Mumbai 400051 T: +91 (0) 22 4237 0100 E: india@cimaglobal.com CIMA Hong Kong Suite 2005. which for 35. Tower A. Pudong. but could also be because new information has come to light that couldn’t possibly have been known when the budget was set. It also works the other way: in the original scenario. therefore. ul Emilii Plater 53.com CIMA Malaysia: Sarawak Sublot 315.com CIMA China: Beijing Room 605. London
SW1P 4NP
 T: +44 (0)20 8849 2251 E: cima. 1st Floor.000 Standard cost of 35. Mulliner Towers. 47800 Petaling Jaya. since there is an increase in the expec­ ted cost of the ingredient. 15th Floor. KPMG Tower. 00-113 Warsaw T: +48 22 528 6651 E: poland@cimaglobal.com .5kg x ($25 – $23) 81.000 favourable = $31. Then we need to calculate the operational v ariances based on the new revised ­ standard cost.com CIMA Middle East Office E01. 198 Oxford Road.000 x 4. Splitting the planning variance: method 2 Price planning variance: 9. Further reading CIMA Official Study Text – P1 Performance Operations. Block E.000 (F) Usage planning variance: 9.000 Material price variance $105. These are as follows: Splitting the planning variance: method 1 Price planning variance: 9. which values it more appropriately. 2012. Vibgyor Towers. Lusaka T: +260 (211) 290219 E: lusaka@cimaglobal. When calculating these. By isolating the planning variance. you must first deal with the planning variance(s) and only then calculate the operational variances based on the new standards. 21 Jalan Bukit Mata. Colombo 5 T: +94 (0)11 250 3880 E: colombo@cimaglobal. CIMA Publishing. we were to discover that the expected usage of ingredient A in a unit is more accu­ rately stated as 4.5kg per unit rather than 4kg per unit.com CIMA Sri Lanka 356 Elvitigala. Now we are able to calculate the operational variances based on the revised standard cost as follows: Global contact details CIMA corporate centre
 26 Chapter Street.500 Planning variance $31. Business Arcade.000kg: 35.
Sydney.com CIMA China: Shenzhen Room 1121. 5th Floor. So first we have: Total planning variance for ingredient A Original standard cost: 9. 42 Liangmaqiao Road. Times Square. NSW 2000 T: +61 (0)2 9376 9902 E: sydney@cimaglobal. Perhaps more significantly. we can measure the degree to which the original plan was erroneous. Level 1. While it is possible to split the planning variance into its price and usage components. it is advisable to report the planning variance as a whole unless you are specifically required by the question to split it. Shenzhen 518048 T: +86 (0)755 8923 1445 E: shenzhen@cimaglobal. Block 6. PO Box 502221.com CIMA Australia
 5 Hunter Street. Chaoyang District. which are a truer reflection of the efficiency with which operational managers have performed their roles. Lahore T: +92 42 3594 0311-16 CIMA Poland Warsaw Financial Centre. the operational price variance actually came out worse than we had first thought. The reasons can be placed into the following three categories: l Responsibility accounting.com CIMA South Africa
 1st Floor. Usman Block.500 (A) Note that this is an adverse variance.000 x 4kg x ($25 – $23) 72.com CIMA Sri Lanka: Kandy 229 Peradeniya Road.com CIMA Malaysia: Penang Suite 12-04A. United Arab Emirates T: +9714 4347370 E: middleeast@cimaglobal.500kg x $23/kg $126. Northmead. We now need to calculate the dif­ ference between the original and new revised standard costs and report that as the new planning variance. It’s essential for P1 candidates to build a thorough knowledge of planning and operational variances.000 units) compared with the new expectation of 4. 6/F Guangming Hotel. com CIMA Nigeria Landmark Virtual Office. 1 Matheson Street.com www. 39 Jalan Sultan Ahmad Shah.com CIMA India
 Unit 1-A-1. Management and Cost Accounting (eighth edition). By first calculating the planning variance and therefore isolating it.5kg) x $25 112. No 56.com CIMA Russia Office 4009.000kg x $23/kg $805. Bandra Kurla Complex. make sure that you are fully aware of the rationale underpinning their separate determination. CIMA Publishing. Cengage Learning. Lots 1.000.com CIMA Ireland 5th Floor.500kg Operational usage variance 5. We can add to the original scenario used in the exam question by looking at what would happen if. Beijing 100004 T: +86 (0)10 8441 8811 E: beijing@cimaglobal. London
SW1P 4NP
 T: +44 (0)20 8849 2251 E: cima.com CIMA China: head office Unit 1508A.
 Illovo 2196 T: +27 11 788 8723 E: johannesburg@ cimaglobal. The actual usage is 3.5kg) x $23 103.000kg: 35.000 x (4kg – 4.matin@ cimaglobal. 10050 Penang T: +60 (0)4 226 7488/8488 E: penang@cimaglobal. Fazal-e-Haq Road. This says something quite different from the results in the original scenario. we can calculate ­operational variances. Ayele Building. Blue Area. Mawatha. the new operational usage variance shows that we have achieved a much better usage of the ingredient than we had initially thought.ireland@ cimaglobal. Ikoyi. Shanghai 200120 T: +86 (0)21 6160 1558 E: infochina@cimaglobal.5kg 40. Hua Long Qiao. Hong Kong T: +852 (0)2511 2003 E: hongkong@cimaglobal.500 adverse – $126. 3rd Floor. Causeway Bay. the operational price variance for ingredient A is much worse than it was originally. be evaluated more accurately.000 units x 4. Dublin 2 T: +353 (0)1 643 0400 E: cima. 4th Floor.000 (F) Usage planning variance: 9. Commerce Point.000kg is “costing” the company $105.500 favourable) reconcile back to the original total material cost variance for ingredient A of $10. 1st Floor. Moscow 105064 T: +7495 967 9328 E: russia@cimaglobal.000 Revised standard cost: 9. 2nd Floor. Singapore 048693 T: +65 68248252 E: singapore@ cimaglobal.cimaglobal.contact@ cimaglobal.500 (A) Reconciling: $112.com CIMA China: Chongqing Room 2107. Harcourt Road. Note that the operational usage variance for ingredient A is also costed at the ­ revised standard cost of $23 per kg. ­ Lastly. G Block.500kg (F) Material usage variance: 5. IPS/Attraco Road.500 (A) Reconciling: $103. Fairgrounds Financial Centre.com CIMA UK
 26 Chapter Street.com CIMA Botswana
 Plot 50374 .

because of illness or any other m itigating circumstances. administrative reviews.com) during and immediately after each sitting. Code of ethics CIMA members and students are required to comply with the CIMA code of ethics. in Velocity and on the CIMA website. which is open for two weeks from the start of each exam period.com/ethics.cimaglobal. Index of technical articles Admission advice Pre-seen material for papers at Strategic level and T4 part B You must download your admission advice online by logging into your “My CIMA” and print it out.cimaglobal. Post-exam guides are available to download from the relevant “Study resources” pages of CIMA’s website. All other May exam results will be released on 11 July.cimaglobal. so make sure that you are familiar with these changes.cimaglobal. It is available in the February 2013 issue of Velocity at www. the institute’s online community. find a study buddy. .com/strategicpreseen. A “clean” copy of the p ­ re-seen material and further unseen material will be provided in the exams. There have been recent updates to the examinable legislations.com for ­f urther information. page 51). 22 and 23 May. to ask ques­ tions.com/Students/ Exam-information/After-the-exams/. It’s your responsibility to download this material and familiarise yourself with it. a void will be placed on any results you receive for papers sat at Strategic level.com/t4preseen. as it contains your candidate numbers.cimaglobal. but the institute may accept later changes under exceptional cir­ cumstances if places are available. exam centres or any other aspect of the process. missed one ­ or more of your Stra­tegic level exams on the first sitting. you will need to take another iden­ tification document to the exam hall – a passport or driving licence. which can be found on the CIMA website.Financial Management | May 2013 53 Exam notice May 2013 exams Visit www. 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However. How could RBS achieve rapid growth through this acquisition without falling behind? Like RBS. Compare a top management team that mainly consists of scientists. the practices that each party to an investment decision associates with due diligence can vary widely. aiming to make. In fact. The top management team will want due diligence to be done. Clearly advantageous is the shared focus of attention on something that is critical for success. while the financiers’ due diligence will be mainly financial. but it also leads to some unintended consequences. if acquir- ers. For the scientists. This conceptual blur can lead to miscommunication. With due diligence. Will both kinds of top management teams pay sufficient attention to cultural due diligence? How well will they be able to request a due diligence needed from external consultants that come with their own perspective and bias? As part of an ongoing research project. many companies have a solution: due diligence. target companies. investment decisions are In this issue: Treasury risk. It has found its way into business jargon in most industries around the world and captures much attention. as a search for “due diligence” on Google reveals. this can increase efficiency of the process and help to focus on what matters most. Also. often under the most severe constraints. In fact. Some have. p57 I not to be made. in a similar context. Simply defined as an investor’s analysis of a potential investment opportunity. they use due diligence as a condition sine qua non. Certainly. This widespread diffusion of a concept has clear advantages. Decisions that can make or break the future of a company often have to be made within days. conducted together with colleagues at the Cranfield School of Management and Erasmus University in the Netherlands. mere diffusion of a label such as due diligence does not necessarily imply that practices related to it are adopted and implemented. we surveyed the literature and have found: i) A broad consensus on the view that due diligence is pivotal for making better decisions.Financial Management | May 2013 55 technical notes Due diligence and bias: Dealing with the unintended consequences of a concept’s success By Professor Patrick Reinmoeller.23 seconds. to one in the financial industry. ii) M a n y a c h e c k l i s t t o c o n d u c t due diligence. This mutual understanding that careful analysis is essential to reduce risk and to make good deals makes it easier for investors and the owner of assets to agree on exchanging information and support. Strategic decisions about acquisitions or major investments require careful consideration. Without a neutral or positive result of due diligence. The term generated 41 million hits in 0. there may be instances in which even this most basic rule is not adhered to. due diligence is a concept that has found widespread acceptance. yet information is scarce and deals are complex. talked about management fashions. or even conflict. . due diligence and services related to it belong to the portfolio of many consultancies and advisers. consultants and bankers speak the same language when it comes to vetting investment opportunities. Remember how the Royal Bank of Scotland (RBS) was leading an international consortium in the acquisition of the Dutch bank ABN/AMRO at a time when the global financial crisis had just begun? Barclays had emerged as a powerful competitor with its rival bid for the same assets. When the top management team want due diligence to be carried out. as frequently found in the pharmaceutical industry. at the time. yet such bad management practice is not what we focus on. which compares strongly to the attention paid to “competitive advantage” (69 million hits in 0. companies seek to identify and select those projects and programmes that will deliver real value to the organisation. due diligence will emphasise the legal due diligence related to intellectual property rights. their views of what this entails may differ.27 seconds). the biggest acquisition in banking history. where executives with a finance background dominate. Cranfield School of Management n rapidly changing environments a company’s superior capabilities in strategic decision-making lead to competitive advantage.

Meanwhile. the unintended consequences of due diligence’s success and a lack of integration lead to two pitfalls. emphasises pragmatism and speed in generating satisfactory answers. Each of these areas requires considerable levels of expertise to conduct appropriate ana– lyses. A third major category is operational risk.g. adviser remain unbiased if he depends on business from clients? Due diligence is frequently meant to check whether to proceed with a strategic option. The second question arising when due diligence is outsourced is: Will the adviser do whatever it takes to get to the truth? Monitoring the adviser’s efforts will need supervision. we ask: “What are the most critical. as well as major areas where a deeper understanding is needed. due diligence relies on in-depth analysis. it remains unspecified what a proper examination of information and analysis is. Visibility and control Companies face a diverse range of risks. two questions need to be addressed by top management. Bringing such a process to a sudden halt can turn advisers with good advice into messengers with bad news. The examination of a target needs to include legal. commercial. treasurers have focused on a far wider range of risks than in the past – most notably in the area of counterparty risk. While most corporations will experience all of these to some degree or another. and conduct in-depth research. regulatory risk and business continuity risk. Managing risk is one of the core responsibilities of a corporate treasurer. Alternatively. a company may lose its deposits – or if those deposits are covered by government insurance. as well as for the company. to these. and we were able to identify three insights. Economic exposure arises if the value of the company’s cash flow is affected by exchange rate moves. effective risk management has never been a higher priority than it is today. While this can be a solution. often tacit. seeks to examine a target company’s accounts to understand the financial underpinnings and associated risks. Role of the treasury in risk and governance By Ben Stollard. an acquisition that top management has spent considerable time developing. Even if the messenger is not killed in the process. Managing FX risk is a central concern for treasurers of multinational companies. yet the missing link of how to integrate the different insights is not yet clear. checklists are useful. translation exposure and economic exposure. but it is not child’s play. outside of management practice and the cross-disciplinary diffusion. Related to an acquisition. Failure to manage operational risk appropriately can have severe consequences for individuals. If an important supplier goes bankrupt. underlining the importance of measuring and managing exposures as accurately as possible. it depends what your definition of “due” is. gaining visibility and control over the company’s exposures is a crucial first step. It is often unclear how to answer a simple question: How much is enough? Where due diligence means to check and corroborate what is known about a target to satisfy oneself of accuracy. the CFO and CEO of American companies are required to confirm in their financial statements that they can attest to the company’s controls being adequate to protect its workflow and information process. Yet. If a bank fails. Different types of risk require different mitigation techniques. Seeking enablers that go beyond accumulating experience through practice. what are the best practices of integrative due diligence? Second. Robust knowledge also requires considerable breadth of analysis. Even if definitive rulings were available for companies. We seek management innovations that increase the quality of strategic analysis so that top management can develop better judgement and get the process right first time. cultural. While this has long been the case. Next orporate treasurers have a key role to play in managing risk and supporting corporate governance within their organisations. For example. lead to variegated meanings that can cause considerable confusion and misunderstanding. Higher awareness is needed about the promise and pitfalls of due diligence. Often. A dedicated Treasury Management System (TMS) mitigates operational risk by reducing the risk of error and fraud. Fortunately. Today. Companies did. vice president of sales Northern Europe at Kyriba Future due diligence In hearings with senior executives. client companies face similar questions and need to stay self-critical enough not to fall victim to self-confirmation bias. commodity price risk. How much to invest in due diligence is not trivial. or indeed deliberate unauthorised actions. volatility in exchange rates and commodity prices has contributed to a more risk-aware mind-set. The way in which counterparty risk is managed has undergone a significant transformation since 2008. the input of specialists into due diligence is needed more than ever. originating from within the company. technological. deliver and therefore sell its own products may be disrupted. it seems easier to entrust advisers with the task of carrying out unbiased due diligence. environmental and social aspects of a company’s operations. manage counterparty risk before the financial crisis. EDS and Palm? Was due diligence carried out when HP topped the list of ill-fated acquisitions by paying $10bn for Autonomy in 2011? Many companies fall for the seemingly simple label of due diligence and then fall with it. treasurers include exposures relating to the company’s suppliers. In these dialogues. or whether it can become a strategic capability that allows companies to excel in the long run. customers and banks when they look at counterparty risk. skills needed for successful due diligence?” Third. If a customer fails to pay. Translation exposure is the risk that the company’s balance sheet may be affected by currency moves and applies if the company holds assets or liabilities in foreign currencies. for many the three types of risk that pose the greatest challenge are foreign exchange (FX) risk. Keeping this promise of justifying a decision or rejecting it. specialist experts are widely available as agents. in most of its different variants. under the Sarbanes-Oxley Act. Such companies typically face three different types of FX exposure: transaction exposure. only to rubber-stamp strategic decisions that have already been made. too much is waste. the company’s ability to manufacture. In other words. counterparty risk and operational risk. though less comprehensive. In an increasingly complex world. we have found that due diligence routines are invaluable in supporting strategic implementation. Beyond cross-boundary teams. of course. financial due diligence. which are robust enough to prevent errors and fraudulent activity from taking place. we are exploring such promises and pitfalls to better understand to what extent due diligence is just part of management’s rhetoric. but when it comes to managing them there is a common denominator: the . too little is hazardous. includ- ing interest rate risk. but whatever the risk. recovering the funds may be time-consuming and slow. The treasury is responsible for ensuring that adequate controls are in place around the flow of cash. similar to recipes. by performing due diligence themselves. while also providing the tools needed to manage other types of risk. Counterparty risk is another major concern and can be defined as the risk that a counterparty fails to meet its contractual obligations. if not exclusively. in the broader context The promise Strategic decision-making requires capabilities to engage in research under constraints such as due diligence which. but in many cases they did so by focusing mainly. This increasing division of labour is a consequence of the concept’s diffusion. if the exchange rate moves unfavourably the company may receive less cash than expected.56 Financial Management | May 2013 Financial Management | May 2013 57 Yet we have found no convergence on what the practice of due diligence is and how this process of making sense of an investment target in a moving context can best be managed. top management may refrain from retaining the adviser. ‘Many companies fall for the seemingly simple label of due diligence and then fall with it’ of managerial decision-making what needs to be done to avoid mistakes can often not be reduced to a prior ruling. they do not enable novices to reproduce unique dishes easily. While in the legal context there may be precedents. The promise of due diligence is that of delivering reliable support for strategic decisionmaking by creating knowledge that can prevent mistakes or support a strategic move. To sum up. Companies came to realise that their counterparty exposures stretched far beyond the area of investments. Transaction exposure relates to transactions carried out in foreign currencies. an executive career can end faster than courts can deliver verdicts. the company loses money. This changed following the collapse of Lehman Brothers and other institutions at the height of the crisis. e. finding that due diligence. How can the C Pitfalls The origins of due diligence. First. narrow in-depth analysis of only financial accounts and current and future earnings power are no longer enough. Risk concerns Today’s corporate treasurers are required to manage a multitude of risks. Did Hewlett-Packard (HP) forget due diligence when it acquired Compaq. due diligence is pivotal. Business practice offers plenty of cases that illustrate this point. on mitigating the risks associated with the company’s investments. for example. which is the risk that losses can arise as a result of errors. Since 2008. often strongly resembles strategic analysis.

Many corporate treasuries continue to rely on spreadsheets. treasurers need to have the best possible visibility over the company’s FX exposures in order to understand them fully. A TMS can help treasurers meet these objectives. Without visibility and control. From broken formulae to inaccurate input of reducing the risk of error. the treasurer must first identify which counterparties the company is exposed to and the nature of them. thereby enabling treasurers to fulfil their role in supporting corporate governance. many companies have introduced counterparty limits into the treasury policy. In order to manage it.Financial Management | May 2013 59 need to obtain visibility and control over the relevant exposures. Managing counterparty risk has become a significantly greater task since the scope of counterparty risk expanded. Getty Images. Likewise. but they also play an important role in helping treasurers manage other types of risk. In the past few years. Other limits can also be integrated into the approval process. The actions taken to hedge FX risks can include the use of financial instruments. For example. information flows and technology. ‘Companies came to realise that their counterparty exposures stretched beyond investments’ Managing risk with a treasury management system Unlike FX risk and counterparty risk. While spreadsheets offer a cheap and flexible way of managing information. For example. For companies that do not have an integrated TMS. but a more senior member of staff may be required to approve a transaction exceeding £10m. lead to errors – and inaccuracies in the company’s core financial data can have serious and far-reaching implications. or made their limits stricter. but how can treasurers do this accurately and effectively? Treasurers are not FX traders and the ability to predict exchange rate movements is not usually part of their skill set. A dedicated TMS is designed to provide and support the controls needed to minimise operational risk. Such limits may identify the institutions the company may bank with and cap the amount the company is prepared to deposit with a particular bank. and it is the treasurer’s responsibility to optimise all three of these areas in order to gain as much visibility as possible over the company’s FX exposures. a TMS mitigates the risk of fraud by employees by enforcing the segregation of duties – in other words. In order to manage FX risk. the treasurer may be able to see pieces of the picture individually. thereby significantly . but they will not be in a position to collate the information into a single dashboard or report that allows them to access. which includes everything from investments and cash to accounts receivable and liabilities. Managing FX risk does not involve anticipating market movements. or with internal governance requirements. the object of the exercise is to reduce the impact of FX risk on the company’s financial assets. Conclusion The object of risk management is to protect the value of a company’s financial assets. the treasurer needs to have the right processes. From that understanding the treasurer has the information needed to manage the risks. which include protecting a company’s financial assets from undue risk and providing proper corporate governance in managing these risks. typically by undertaking a hedging programme. It is the treasury’s responsibility to put in place controls around the flow of cash that are robust enough to prevent errors and fraudulent activity from taking place. operational risk arises from within the business rather than as a result of external factors. If information is held in a range of disparate systems. TMSs have a clear role in mitigating operational risk. it is difficult to manage such risks effectively. and does. such as Sarbanes-Oxley in the US. they are also notoriously error prone. stipulating that the user or users authorised to initiate payments are different to the user or users who approve those payments. A TMS also enables treasurers to establish controls in order to comply with external requirements. the use of this type of technology in treasury can. Processes and formulae are automated wherever possible. but can also involve identifying natural hedges within the organisation. a TMS supports treasurers in managing counterparty risk by providing visibility over the company’s exposures. As with counterparty risk management. Managing FX risk is an essential part of the treasurer’s role. SuperStock data. analyse and make decisions on the data quickly and accurately. treasury staff at a certain level may be authorised to approve low-value payments. treasurers cannot fulfil their responsibilities. but it is widely acknowledged that this practice brings a significant risk of errors occurring in the company’s financial data. Technology plays an important role in mitigating operational risk.

com/ southwestenglandand southwales The accountant and strategic influencer and advisor 21 May. and Ester Martinez. which are free unless otherwise stated. India CIMA hosted a roundtable discussion entitled “L&D: Building efficiency. com/MAUA Charity accounting 20 May. Led by Kedar Vashi. The event saw Charles Tilley.com or visit www. 26 Chapter Street. 10am to 6pm Bristol Hotel. analysis and decision support. l The role of different stakeholders in an organisation in bringing about change in the business approach to learning and development? The roundtable was attended by L&D heads and other HR leaders. Contact conferences@ cimaglobal.cimamastercourses. Prince Street. The discussion allowed attendees to exchange ideas and best practice. Hindustan Coca-Cola Beverages. treasury. Contact mastercourses@ cimaglobal. impacting business”. Evening roundtable with L&D heads 22 March. Shell Centre. 26 Chapter Street. Contact Suzanne Allen on +44 (0)11 7960 9734. email region. com/ASAI CPD Summer Academy 5-6 June. 9am to 5pm CIMA. and that this alone cannot deliver desired business outcomes. on what makes a finance leader.com/events for updates and a full list of events. Bristol BS1 4QF Cost: £30 The voluntary sector in the UK is complex and dynamic. They also addressed the role of diversity in the modern workplace. CFO of BT.com or visit www. the panel discussed their personal views on leadership and how finance can best partner with the business.Financial Management | May 2013 61 Your guide to recent and forthcoming CIMA events Events Past events 26 March. London. national head. while the debate also covered issues including: l The current focus of L&D in organisations. and Tim Morrison. planning. finance downstream. editor-inchief.cimaglobal. 9am to 5pm CIMA. l Tools to measure the business impact of learning.com/ financepartnering Management accounting update – adding value beyond the numbers 15 May.com or visit www. London SW1P 4NP Cost: £749 +VAT This two-day workshop builds on the skills and techniques that are essential for effective collaborative and businesspartnering finance roles.com or visit www. the aim of the event was to help L&D and HR professionals recognise that looking at learning interventions in isolation is not enough. 9. The session heard that there is a clear need to look at the integration of learning initiatives and to keep them at the centre of business. CFO of Shell.com/ summer Visit www. in partnership with People Matters. EVP. CEO of CIMA.cimamastercourses. To submit an event for this page.jackson@cimaglobal.30am to 5pm Manchester Cost: £599 +VAT (£539 +VAT for CIMA members) Gain insight into the changing role of the accountant. Contact conferences@ cimaglobal. Waterloo. Gurgaon.com or call 0845 026 4722. constantly changing to meet the needs of society and growing at a significant rate as an employer and a provider of services. and Simon Henry.com or visit www. at Shell recently sponsored an event on the “DNA of a leader”. CIMA Mastercourses – your catalyst for business change: visit www.cimaglobal. Coming events UK Finance partnering workshop 13-14 May. The Leela Kempinski.30am to 5pm London Cost: £599 +VAT (£539 +VAT for CIMA members) Get up to speed with the latest trends and thinking in budgeting. chair a debate between Tony Chanmugam.com . recently. learning and development. People Matters Media.cimaglobal. email ben. SW1P 4NP Cost: £799 +VAT (early booker rate of £699 +VAT on all bookings received by 20 May 2013) This two-day event will cover a wide variety of topics. London. UK Andy Longden.cimamastercourses. Watched by 150 Shell employees. Contact mastercourses@ cimaglobal. It also incorporates a case study and time for networking.cimaglobal. To what extent does it contribute to improving business efficiency? l Are businesses prepared to change the focus of L&D in the new landscape of business? l The business case to reposition L&D as a strategic agenda. EVP.two@cimaglobal. 9.

The course looks at the breadth of information available in any organisation and the recognition that only a fraction (around ten per cent) is actually used. it’s worrying.” PwC research found that 77 per cent of the FTSE 350 companies mention business models in their accounts but only 40 per cent provide insightful detail about those models. The ethical aspect of the CIMA qualification. risk management. performance managers or analysts who critical success factors in the four BSC perspectives. analytics and performance reporting. common traps to avoid. companies only use KPIs that are easy to collect and measure. whether you are a chartered management accountant in the UK or in another profession globally – a doctor. l Innovative ways to measure. getting the right customers and hiring the right talent. financial. Visit: www. while often the wrong information is used to inform strategic decision-making. “It will also challenge the relevance. The proposed definition and discussion in the paper aim to bridge the varied interpretations by highlighting common areas and ensuring a consistent application across industries and sectors. The course includes a complete and practical introduction. As a CIMA member. His most recent book is Key Performance Indicators: The 75 Measures Every Manager Needs to Know. and the report says this highlights the need for a clear. and will look at how leading companies. The business model background paper and a video of CIMA chief executive Charles Tilley speaking on IR is available at: www. l Best practice KPI development through the use of a KPI design template. lawyer or engineer. The key performance indicators (KPIs) course considers how you develop a small number of relevant and meaningful KPIs that will provide real business insights and help drive performance improvements. chief executive of CIMA. such as budgeting.” adds O’Sullivan. Elements covered include an overview of how to clearly articulate your strategic objectives in simple one-page strategy maps and practical ways of cascading and implementing the BSC throughout an organisation. I will outline how to ensure that the KPIs are providing you with the answers to your most important business questions. shows that very few companies clearly articulate their business model – what they do. I Report puts business models at the heart of integrated reporting The key areas covered are: l The Balanced Scorecard (BSC) – a l The four BSC perspectives and their l Defining strategic objectives and strategic performance management tool. l Implementing and cascading the BSC into the organisation. commented: “A previous review of narrative reporting practices. which are summarised in this background paper. your profession and the public. simply want to upscale or refresh their skills. universally applicable. for profit or not. use the BSC. as well as accountants. l Target-setting and benchmarking KPIs. key metrics for your business. But when used to sidestep real issues. which have identified a small number of strategic questions they seek answers to – using KPIs. and how to monitor and manage the execution of this strategy to deliver real performance improvements. it’s fine.randyglasbergen.g. Using case studies I will demonstrate how leading companies are developing KPIs to gain meaningful management insights. Performance indicators have to be updated and changed over time to reflect the changing business challenges a company faces. showing the results of efforts in the past. how to develop both leading and lagging indicators and how to set KPI targets that are both stretching and achievable by asking the right key performance questions.com/ethics T ‘We’ve got to draw the line on unethical behaviour. l The key financial and non-financial KPIs in use today. com/integratedreporting View from Professional Standards o draw the line under something is a phrase that has come to mean “let’s just forget about it” and “let’s move on”. l How to test your KPIs to ensure they are “good KPIs”. It is aimed at anyone who wants an up-to-date overview of how to measure and monitor business performance.cimaglobal. yet provide less insight to investors on how value is created or destroyed. They are your obligations to yourself. So even if the line under unethical behaviour was drawn in pencil. Used in the context of a family quarrel over whose turn it is to wash up. nvestors and other stakeholders want to know what makes companies tick. The key areas covered are: l Using KPIs as vital navigation tools for l How to identify and select the relevant l The different reasons for measuring l How not to develop KPIs and the your business. About the author Marr is also the founder and CEO of the Advanced Performance Institute and has previously held positions at the University of Cambridge and at the Cranfield School of Management. as well as step-bystep guidance and practical templates on how to use the BSC. In a related course I look at Balanced Scorecards (BSC). l How to use key performance questions (KPQs) to guide your KPI development. This course is aimed at directors or managers in a performance improvement and strategy execution function. what they rely on and what sets them apart from the competitors. We also look at best practice BSC design and implementation principles. such as Carlsberg. They include Tesco and Google. l Creating strategy maps and cause-andeffect diagrams to visualise your strategic objectives on a single page.62 Financial Management | May 2013 Financial Management | May 2013 63 The key performance indicators and the Balanced Scorecard Mastercourses What you learn on… Latest CIMA developments and a message from Professional Standards The Institute B ernard Marr is an internationally recognised expert on organisational performance and business success. It should be of particular interest to anyone responsible for developing or using KPIs. a director at PwC. l How to customise the BSC to ensure it is relevant to your firm. The background paper is entitled “Business Model”. reliability and timeliness of the information businesses use to back up reporting of their performance and prospects. be it large or small. Another issue to consider is the balance between financial and non-financial KPIs. To be ethical you need a framework and guidance – a Code. and how organisations create value that is sustainable over time. The analogy used is that of a boat journey for which the correct navigation instruments must be used to guide the vessel along a successful voyage. international definition of a business model. operations and people performance. public or private sector. you are committed to upholding the highest ethical and professional standards and to maintaining public confidence in management accounting. there is wide variation in how organisations define their business models and their approach to disclosure. said: “Corporate reporting plays an essential role in the effective functioning of the market economy. customer.cimaglobal. The latter are forward-looking areas. and PwC have – at the request of the International Integrated Reporting Council (IIRC) – published a background paper highlighting the need for the business model to be at the heart of integrated reporting (IR).’ Copyright by Randy Glasbergen www. it is people like you that can help stop it getting rubbed out. l Principles of how to align the BSC with other key business processes. controllers. said a statement from the bodies involved. Often. and CIMA’s Code of Ethics is enshrined within the Laws of the Institute. the International Federation of Accountants (IFAC). relationships. in the same way that businesses which don’t use these tend to be rudderless. which should help to point to financial performance in the future. project and programme management. He offers some insight into the KPIs and Balanced Scorecard Mastercourses. In response to this conundrum CIMA. while at the same time regulators are increasingly requiring companies to report clearly on their business models. Being ethical is a core part of being a professional.com . e. I explore the use of innovative measures that tap into the ever-increasing and ever-changing amounts of data available. Charles Tilley.” Mark O’Sullivan. performance and prospects. Corporate reports have become more complex. “This information is critical if investors are going to form a view of how they create and sustain value. Currently. such as satisfying customers. The first are backward-looking measures. Looking ahead. l Best practice BSC design principles and common traps and mistakes to avoid.. such as ethical behaviour. But draw it in pencil.. performance and why they matter. IR will involve a change in mind-set for many organisations as they think about how to better communicate strategy. The pace of technological change and the growing complexity of business relationships will only increase the demand for insights into strategy and business models. l Translating a strategy map into a relevant set of performance indicators. And only 8 per cent integrate business model reporting with strategy and business risks. CIMA membership and the CGMA designation is what sets professionally qualified individuals apart. as well as governments. High-quality business-model reporting is critical to helping investors better understand performance in terms of the impact external factors have on an organisation.

Besides being a powerful vehicle for communication. More than 80 entities. business model and future outlook.0 at the end of this year. two companies taking part in the pilot scheme. com/integratedreporting Applications to join the IIRC’s business network pilot programme can be made via its website: theIIRC. In terms of producing the framework for this evolution. connectivity. CIMA members are uniquely equipped to provide organisations with the right information in the right context to turn IR into the game-changing influence it has the potential to be. IR can be used as an effective governance tool for performanceorientated management. including Coca-Cola. fcma. As chairman of the IIRC’s Technical Task Force.Financial Management | May 2013 65 N Illustration: Masao Yamazaki/Dutch Uncle ‘It’s likely you are aware of how energised I am about integrated reporting’ the institute in a more integrated way. CIMA . CIMA. IR will contribute towards the advancement of a more sustainable global economy. The framework is already becoming an invaluable tool for managing It’s likely that you are already aware of how energised I am about IR. CIMA CEO column ext month. as Unilever CFO Jean-Marc Huët discusses in this issue (p28). such a step requires a shift in mind-set and careful planning. IR requires integrated thinking and management. I urge all our members to consider what the organisations they work for need to do to make themselves ready for participation in the pilot scheme. CIMA and the UK’s National Health Service. shared some of their insights into the benefits of this new approach. representatives from CIMA will be travelling to Germany to hear from the organisations taking part in a pilot programme initiated by the International Integrated Reporting Council (IIRC). the IIRC is nearly there. But my most important work is underlining the framework’s importance to CIMA members. are currently testing the IIRC’s prototype framework for integrated reporting (IR). Our findings were recently published in a background paper and provide an insight into how organisations differ in their view of which components make up the business model. Unilever. And by encouraging a different way of thinking. But those who join the scheme early will get the most out of it. CIMA’s recent media roundtable in London introduced the concept of IR and announced the launch of the IIRC’s 90-day consultation draft period. value. I am looking forward to receiving the responses from the consultation and refining the framework in preparation for the launch of Version 1. their investors and other stakeholders by enabling informed decision-making that leads to efficient capital allocation and the creation and More information on integrated reporting can be found at: Cimaglobal. capitals. Traditional annual reports generally provide a one-dimensional view of a company’s identity – an overview of its financial performance. HSBC and Unilever. Obviously. with a clear line of sight to an organisation’s business model and how it creates value in the long term. Part of the fine-tuning of the framework has involved bringing together “collaboration groups” to develop the key themes.org Charles Tilley. cgma Chief executive. IR provides a more three-dimensional view. CIMA has been incorporating the latest guidance on IR into its 2012 annual review. PwC and the International Federation of Accountants have been working together to look at the topic of “business models” and how to develop unified definition. If it becomes accepted globally as the corporate reporting norm it will benefit organisations. There are several reasons why the concept will provide a major leap forward in corporate reporting. The focus is centred on the framework’s key themes: materiality. In contrast. The IIRC initiative provides an opportunity for all CGMA-designated finance professionals to take on the role of global communicators of this pioneering approach to business reporting. preservation of value. At the event.

inwards and downwards. Integration can be the most public element of any project and caution is advised. Managers may shine at objective. is everyone clear whether to paddle furiously or duck and dive? A phase we’re going through Whatever the approach. develop and adapt to any unforeseen factors. confirming back to the commissioning authorities seated on high. Everyone dreads being stuck with one. At any given moment. setting clear phases with corresponding deadlines is vital. upsidedownsizing. contingency can also offer a leeway of negotiation in sticky circumstances. Test. pre-determined moment. Now watch it disappear before your very eyes. a period of detailed consideration and contemplation followed by a torrent of activity in the quest for the pre-determined goal. assist and soothe any executives frustrated by the use and meaning of corporate jargon. Unanticipated hurdles are as inevitable as death and taxes. a business development. Some will stray from the path. phase and deadlinesetting. I tapped some technology experts for their thoughts about project delivery and deadlines. communicate clearly. schedule and set deadlines. by when and why. If nothing else. never? Never on time? Yet the 80:20 rule fits every other aspect of business life these days. test. Whose role is more important. There is never enough testing time.66 Financial Management | May 2013 Watercooler: Why do IT projects never complete on time? By Julia Streets What. you’d be surprised). yet the odds may be stacked against them. working with great talent and excelling as a team. Mission. including the person in charge (I know. No project is immune.streetsconsulting. results and reputation. Feature. Yet contrary to popular belief. Everyone needs to know who is in charge. They need to know where the project fits into the corporate world domination plan and articulate the project requirements. Others skip along merrily. test. Cutbacks. Rigorously. think of a contingency number. This is what they had to offer: Whose project is it anyway? The person in the driving seat is a driving factor for the avoidance of drivel and distraction. It is extraordinary that projects are completed at all. test Thoroughly. www. They may fall foul of a whole new form of creep: team creep. those who play in the sandbox or those who test the acceptance of users? This advice is all well and good. rightsizing. manage upwards. you see. Debate can distract. restructures. Variables. allowing the team to explore. managers appear to be terrible at setting deadlines. only to be tripped by a glitch. marketing and communications consultancy specialising in supporting international financial services and B2B technology firms. Messy implementation can feed a rumour mill capable of grinding away at confidence. Many head off blindly. distracted by their surroundings.com Julia’s book. Scope. Given the frequency of late projects. leaving work to the last minute only to hit unanticipated obstacles and delay? Besides. Contingency – is this your number? As the managerial magician. a more loosely defined outcome taking a less rigid delivery approach. The Lingua Franca of the Corporate Banker. outwards. Project resources – now you see them. Which way are we going? Some managers gush about “waterfall” approaches. Contingency is a vital element. personalities and “pathways” must unite at the perfect. Not for want of looking I have yet to find a helpful statistic*. Factor in the human resource Personality and ego management cannot be underestimated. Illustration: Dmitry Litvin/Dutch Uncle . not least at the integration phase – overruns will have eaten up these vital hours. (*credible data welcome) It’s the creep. along with a magic wand. now you don’t. offers an explanation and exploration of the idiosyncracies of business and includes a 500+ expression glossary to explain. why deliver early? It only increases the pressure for the next project. They need the authority to challenge both above and below their corporate rung and have the skills and support to plan. useful to have in the back pocket. but have heard wails of 90 per cent delay tales too often to ignore. Double it again and someone you don’t know will ask you to divide it into two. experience does not necessarily deliver accuracy. Perhaps they respond to pressure from on high to deliver sooner by setting unrealistic deadlines? Perhaps the project has too many requirements – can some of the bells and whistles be left in the music box for a later phase? No matter how sensible the deadlines perhaps we return to a student default. Regularly. Double it. Surely it must apply. little idea of where they will end up. Julia Streets is the founder and director of Streets Consulting. Functionality. The perfect project may be driven by the best manager. Others are alert to the benefits of an “agile” approach. test.

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