OVER the past 12 months, chief financial officers have had to contend with the twin pressures of managing new and emerging external threats, while satisfying investors’ hunger for better returns amid a seemingly healthier economic environment.
Here Financial Director looks back at the events and trends that have shaped CFOs’ agendas in 2015 and how the profession is equipped for tackling what 2016 has in store.
Interstate conflict moves from war room to boardroom
The year ends as it begins, with war – or interstate conflict, to be precise – the biggest threat to endanger countries and business.
When the world’s great and good met at Davos in January for their annual get-together in the Swiss Alps, the World Economic Forum issued a dire warning that 25 years after the fall of the Berlin Wall, “the world again faces the risk of major conflict between states”.
Since the WEF pointed to conflicts with regional consequences as the biggest and most likely risk to endanger countries and businesses – above likelihood of extreme weather events, failure of national governance systems, state collapse or crisis and high unemployment – Russia’s entry in the Syrian conflict, sabre rattling in the South China Sea between China and the US, and the ongoing conflict in Ukraine have only added to the sense of threat.
“Everyone has to be concerned about what’s happening in Ukraine, Syria and Iraq, and in China’s maritime waters,” Charles Hecker, global research director of Control Risks, an independent global risk consultancy specialising in political, integrity and security risks, told Financial Director earlier this year in our cover story on interstate conflict moving from the war room to the boardroom.
Nevertheless, economic uncertainty remains of chief concern to UK finance bosses. Greece’s flirtation with leaving the eurozone seems to have ended and, while China – although slowing – has not imploded, FTSE 350 finance chiefs now have less appetite for corporate risk due to weaknesses in emerging economies and global equity markets.
As the year ends, corporate risk appetite has dropped. According to the third of Deloitte’s quarterly gauges of CFO sentiment, fewer finance directors were willing to take risk on to their balance sheet. That uptick in risk aversion is feeding into a more defensive stance on the part of major corporates, with a greater focus on cost reduction and rather less of a focus on investment.
Culture finds its way onto governance handbook
Delivering the keynote address at Financial Director’s inaugural CFO Agenda, Justin King, the former boss of Sainsbury’s, says “nothing moves a business in a direction as powerfully as corporate culture”.
Within months, two totemic companies of national significance – in the shape of VW and Toshiba – had been brought low by scandals that resulted from a failure of corporate governance and, ultimately, the culture that lies at the heart of the business.
Clearly, both companies represent examples where corporate culture has been, at the very least, ineffective. Yet for the FD, assessing corporate culture – an issue now being examined separately by the FRC and the ICAEW, with the former considering its inclusion in the corporate governance code – remains a hard thing to nail down.
“Unlike good art, which is hard to define but easy to recognise, good governance is hard to define and hard to recognise,” posited Ken Olisa, a director at the Institute of Directors, in Financial Director’s September cover story.
Conglomerates are back in vogue as Google rearranges the Alphabet
One of the most notable CFO appointments of the year on a global level [see box for UK moves] came in the form of Ruth Porat, the veteran of Wall Street, who joined Google as CFO.
Brought in to provide financial discipline not hitherto seen at the business, investors hope Porat will be key to the massive structural overhaul announced by Google shortly after her appointment.
The CFO’s role in change management formed the basis of Financial Director’s October story which looked at how Google, known for its nap pods and multi-coloured bicycles, has gone conventional.
In an attempt to spur innovation within its disparate ventures, Google announced in August that it would restructure and rebrand itself as Alphabet, a new holding company – akin to Warren Buffett’s Berkshire Hathaway – which will oversee eight businesses, including a “slimmed-down” version of the search engine Google.
Under the new umbrella, Porat will be chief financial officer of both Google and Alphabet and will be the only executive with a foot in both camps. Indeed, Porat may well have to serve two masters, and giving the business a durable competitive advantage will involve “tensions” between managing investor and employee expectations.
Clampdown on tax arrangements continues
The year has ended with the European Commission ruling that Luxembourg and the Netherlands granted illegal selective tax advantages to Fiat Finance and Trade and Starbucks. The companies must now pay back between €20m (£14.7m) and €30m in taxes.
The ruling could have far-reaching ramifications for other companies that have found themselves in the crosshairs over their tax structures [see page 47]. Closer to home it emerged that Facebook UK paid less than £5,000 in corporation tax in 2014 after recording a £28m loss in the UK. The social media giant ran a scheme whereby its staff took home an average of more than £210,000 last year in pay and bonuses that drove the its corporation tax bill down to just £4,327.
These latest developments come amid an environment of tightening regulation on tax. The OECD’s Base Erosion and Profit Shifting (BEPS) project – designed to curtail tax avoidance activity by multinationals – concluded with a series of recommendations, including new minimum standards on country-by-country reporting.
The government also heaped pressure on companies to disclose their tax strategies. Earlier this year, financial secretary to the Treasury David Gauke recommended a “legislative requirement” for all large businesses to publish their tax strategy, “enabling public scrutiny” of their approach towards tax planning and tax compliance.
Some large businesses have already taken steps to improve their tax transparency, most notably Barclays and SSE. Overall, businesses in the FTSE 100 are becoming increasingly transparent over their tax structures. Analysis of annual reports, corporate websites, and other social responsibility reports undertaken by PwC reveals a steady increase in tax transparency across big business.
In 2012 just 32 firms in the FTSE 100 provided information on issues such as their attitude to tax planning and relationships with tax authorities. The number jumped to 49 in 2013, and has now risen to 56, based on the most recent 2014 data.
Arguments abound as new banking standard comes in
Bank accounting remained front and centre in 2016, and has caused no little amount of consternation among account preparers, politicians, regulators and investor activists.
IFRS 9, the accounting standard that will force banks to be more candid and forward thinking about potential future losses, is set to come into force in 2018.
Nevertheless, many businesses are only just waking up to the sheer size of the IFRS 9 task. Implementing the systems and processes needed to hit the deadline has dominated CFOs’ efforts to become fully compliant with the new rules. Yet the future of the standard has had its own trials.
A long-running argument between rule-makers and investors flared into open conflict again this year when the Local Authority Pension Fund Forum (LAPFF) and its long-term investor allies published a legal opinion that reiterated the claim that company accounts prepared using IFRS fail to provide a true and fair view of a company’s financial position.
Investors, meanwhile, took the fight to Europe. Here, they found a willing audience among IFRS-sceptic MEPs, among them German Green Party member Sven Giegold and London Conservative Syed Kamall. ?