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Insight – Listen and Learn

The government is running out of money. This was a disturbing finding
presented by HSBC chief economist Dennis Turner at this magazine’s first ever
Financial Director Summit, held at the grove, Hertfordshire, in mid-June. After
51 successive quarters of growth – the first 19 of which Chancellor Brown ought
to credit to his Conservative predecessor Ken Clarke – the Treasury now finds
itself living on borrowed time, Turner argued, as government expenditure starts
to outstrip taxation receipts and the growth in the economy itself. Moreover
consumers, too, are borrowing heavily, Turner warned the delegate FDs in
attendance, and the economy is sucking in imports. GDP growth is set to slow
down and tax increases are needed to fund the budget gap, he concluded.

Stuart Stephen, pensions and benefits director at Barclays, presented a case
study on how the banking group changed its £13bn staff pension scheme. The
emphasis was on reducing risk rather than cost, as the switch from a defined
benefit scheme to a defined contribution scheme was designed to generate a
pension equivalent to about 50-60% of final salary. The structure provided for
various ratchet effects that would minimise the downside risk for staff members.
“It’s like a with-profits policy, but without the minimum guarantees of
Equitable Life,” Stephen explained.

When times get tough, it often comes as a surprise to top management. It
shouldn’t, not with proper forecasting tools that take the emotion out of
tracking performance, generating objective projections of possible outcomes.
Robert Bittlestone, managing director of Metapraxis, demonstrated a model that
calculated four different scenarios: 

– The rest of the year will be on budget;
– The year-to-date percentage variance from budget will continue for the rest of
the year; 
– The rest of the year will be the same as it was last year; and
– The year-to-date percentage change on last year will continue for the rest of
the year.

“By applying these risk scenarios to the trend of incoming data, we can take
the emotion out of the process of challenging subsidiary forecasts and budgets,”
Bittlestone said.

Ian Ailles, managing director of specialist businesses at Thomas Cook, gave a
presentation on his company’s experience of outsourcing and offshoring. He made
an interesting Sarbanes-Oxley comment when he pointed out that Thomas Cook had
no need to be Sarbox-compliant, but its outsourcing partner, Accenture, did.

From PricewaterhouseCoopers, Ian Dilks highlighted the communications issues
that many companies have still to resolve properly in their preparations for
international financial reporting standards. “It is still possible to gain some
advantage through strong communications,” he said, “relative to your peers in
your sector and by providing forward-looking analysis.”

Sarbanes-Oxley featured in a presentation by Alex Cohen, a partner at law
firm Latham & Watkins. Focusing on the section 404 internal controls
requirements of the legislation, Cohen drew attention to a particularly onerous
definition within the act which says that a significant control deficiency is
one in which there is “more than a remote likelihood that a misstatement… that
is more than inconsequential will not be prevented or detected”. Cohen warned:
“That’s a pretty low trigger.”

Senior executives from two Scandinavian businesses, Ahlsell of Sweden and
Statoil of Norway, discussed how they have managed to scrap the budgeting
process, working instead with key performance indicators while introducing
better information systems and better reward schemes. “If you buy anything
expensive, that will hit your wallet,” explained Ahlsell’s Bengt Colmander.
“That is the best internal control we can have.”

A news scoop at the Financial Director Summit, as Financial Reporting Council
chief executive Paul Boyle revealed the findings of the Turnbull review
committee. He announced that the committee’s research project found that the
Turnbull guidance is very highly regarded by companies and investors, and so is
remaining largely unchanged.

Want to destroy shareholder value? Usually, the easiest way is to undertake a
badly planned, badly executed acquisition. Stuart Duncan, head of integration at
consultancy Collinson Grant, presented a number of interesting case studies of
acquisitions that have gone badly wrong, and a few that have worked well.

Ironically, in the later category was the recent acquisition success at
building products group Hanson which, back in the 1980s, was an unfocused buyer
of businesses that ultimately succeeded in creating shareholder value only when
it demerged itself.

Finally, the winner of the 9-hole golf challenge was John Duckworth, FD of
KGA Fragrance Distributors. In second place was Paul Hart, FD of Microsoft UK.

For information on next year’s Financial Director Summit, please contact VNU
Exhibitions on 020 7316 9000.

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