This article was first published in the July 2012 China edition of Accounting and Business magazine.
Although world markets are showing timid signs of recovery, it is undoubtedly a precarious moment. This year world output is projected to grow 3.5%, according to the latest forecast from the International Monetary Fund (IMF), released in April. At the same time, the IMF has predicted that 2012 will be characterised by high risk. A lull in emerging markets, coupled with instability in Europe, means that worldwide growth is expected to be weak. Greece’s exit from the euro seems possible, while Wall Street stocks languish in negative territory thanks to concern about the global economy following a slowdown in some important territories, including China.
Although China’s economy is still growing, it is doing so with reduced velocity. China’s growth in the second quarter fell by 7.9%, the first dip below 8% since 2009. Growth is especially slowing in the manufacturing sector, something that is causing anxiety for financiers worldwide. In June, HSBC released data showing the seventh consecutive month of contraction in manufacturing. China’s purchasing managers index for May stood at 48.4, compared with 49.3 in April, as demand slowed in both the domestic market and abroad.
With this unstable environment as a backdrop, risk and how best to manage it is at the forefront of many CFOs’ minds. ‘I think risk is a bit like a virus; it evolves and can be a different beast tomorrow,’ says Aaron Au FCCA, CFO of UCCAL Fashion Group. ‘So the most important thing is to make risk management a part of a company’s culture; every employee should have a sense of how to manage risk.’
Accurate and relevant
A fundamental part of accountancy is to provide accurate and relevant financial information with which the right decision can be taken. ‘Accountants are already risk people; they understand risk and embrace the norms of risk management,’ ACCA president Dean Westcott told the conference. ‘They understand that it is better to explain a range of possible outcomes from a course of action than to detail the most likely outcome. This is the essence of risk management.’
Yet since the financial crisis, Westcott says, many CFOs have been playing it safer, avoiding decisions that could expose the company to unnecessary risk. ‘It is clear that the global attitude towards risk management has changed dramatically in the last three years’, said Westcott. ‘That has resulted from increasingly stringent regulatory controls, along with the development of sophisticated financial modelling.’
This timid approach to risk-taking can have a negative impact on a company’s growth. By avoiding risks, CFOs may miss opportunities. ‘As CFOs our natural declination is to minimise risk’, said Luke A Kelly, CFO of Corning China. ‘But risk does present advantages and we see lots of examples of companies or individuals generating huge profits doing things that go against what everyone else is doing.’ Taking a long-term view, Kelly says, is vital for CFOs during times of economic instability. ‘When we look at these macro events in the short to medium term there may be some stress,’ he says. ‘But if you take the long-term view and you have a culture that allows you to take advantage of risk, then you can do so from a position of relative strength.
‘A specific example was in late 2008 to early 2009,’ Kelly continued. ‘There was a major crisis but economic activity continued, things chugged along. A lot of us would like to go back then and invest in companies like HSBC or Wells Fargo who saw their earnings rebound. They weathered the storm and have emerged stronger and diversified.’
The importance of a robust risk management strategy should not be underestimated. Yet achieving effective risk management isn’t easy. It stretches beyond the role of the finance department into the organisation’s core culture, whether there is an integrated approach that incorporates risk management into general practices. ‘The company is on the front line of risk, while the CFO is the second-level order of risk management’, says David Cavanna, CFO at HSBC Bank China. ‘You need to be very clear in informing other employees about what it is they need to look for in order to mitigate and manage those risks.’
Victor Lam, CFO at The Linde Group, detailed different ways that a CFO could manage risk: ‘First, [CFOs] can avoid risk. Second, we can share the risk with others within our organisation. Then there is risk reduction through risk management. Finally, there is risk acceptance; some risks are unavoidable, such as those arising from economics and politics. Both China and America are accustomed to such risks.’
Ultimately, however, there is one variable that even a comprehensive risk management strategy cannot control: the human factor. Just 4% of respondents to the ACCA study believed that dysfunctional behaviour – such as allowing personal bias or political power battles to influence risk decisions – didn’t happen in their organisation. Yet at the heart of good risk management are sound ethical practices.
‘Are accountants only instruments of the CEO?’ asked Westcott. ‘Are they there to report the popular figure that the CEO would want them to report? Or are they interested in promoting honesty, objectivity and the thoughtful use of evidence?’ Accountants should base conclusions on evidence rather than personal bias or opinion not substantiated by evidence, conference attendees were told.
Westcott outlined six key areas in which CFOs can minimise dysfunctional behaviour: questioning proposals regardless of seniority; being able to recognise, measure and manage uncertainties; making unbiased decisions; acting ethically; acting legally; and thinking carefully and using applicable quantitative techniques.
‘Decision-making based on these six practices will always be superior to those that are based on consensus, short-term self-interest, unsubstantiated opinion or following orders without question’ said Westcott. ‘Many believe that these behaviours were the root cause of the financial crisis.’
Shared Services under the spotlight
ACCA successfully co-organised a seminar with Shenzhen Municipal Government State-owned Assets Supervision and Administration Commission (Shenzhen SASAC) in May, focusing on the topic of shared services centres (SSC). More than 60 guests attended.
Chen Hu, vice president of ZTE Corporation, one of China’s most successful multinational companies, and Bonnie Peng, a member of ACCA South China’s steering team and an expert on SSC, gave presentations.
Nicola Davison, journalist