High Performing CFO
A tale of two markets
Interview: Vanessa Jones
Vanessa Jones, Head of Corporate Governance, Institute of Chartered Accountants in England and Wales
Vanessa Jones is Head of Corporate Governance at The Institute of Chartered Accountants in England and Wales (ICAEW). Here, she talks to EY about the challenges of managing risks in rapid-growth markets from a governance and reporting perspective.
Companies increasingly consider rapid-growth markets to be their key source of future growth. As they increase their exposure to these markets, what are the issues that CFOs and other business leaders need to think about from a disclosure perspective?
Vanessa Jones: Companies have always invested in new markets but the difference today is the speed and the extent to which they are doing it. Rapid-growth markets pose particular challenges because they are more complex and often less transparent. This highlights the importance of putting in place relevant internal controls and then being able to articulate to external and internal stakeholders how they are managing risks across these markets.
When a company straddles developed and rapid-growth economies, it will inherently be running multiple business models, each of which has a different risk profile. From a governance perspective, it is a real challenge for companies to provide clear and transparent information about those different business models, particularly now that disclosure requirements are much more stringent in many countries.
A lot of the governance frameworks that have been in place for years need to be reassessed. When a company enters emerging markets, it may need to manage risks that it has never encountered before or that are inherent to that particular jurisdiction. If I were a director, I’d be looking for assurance that the information flows were as best as they could be and that there were continuous efforts being made to improve them.
How do companies balance the need for greater disclosure with the desire to protect their own competitiveness?
There is a consensus in public policy circles, stemming from the financial crisis, that what we need is greater transparency. Yet everybody recognizes that lack of transparency was not the cause of the financial crisis. In fact, most of the businesses that failed were incredibly transparent. There’s nothing wrong with having more transparency but we shouldn’t be fooled into thinking that greater transparency is going to prevent another crash, because it won’t.
There is also a contradiction at play here. Policy-makers want greater disclosure and transparency. Yet, at the same time, they are asking companies to produce annual reports that are shorter, tighter and more succinct. Those pressures pose significant challenges to companies.
Obviously, policy-makers would argue that companies need to report more smartly, and most focus on disclosing the key and major risks. But the problem is that what’s a key and major risk is in the eye of the beholder. And if companies make decisions that turn out to be wrong, then there are implications for them not to have disclosed those decisions to stakeholders.
How do companies ensure that they have internal controls that are effective and embedded in the business?
There is a danger that you put policies and procedures in place, but they sit in splendid isolation and they’re not lived and breathed. If I was a CFO, I'd want to make sure that the company had an iron grip on these risks, particularly those related to the Bribery Act and the Foreign Corrupt Practices Act in the US. Even then, you can never legislate for everything, but at least you can say that you did everything that you could.
The problem with internal controls is that once you start writing rules, it is human nature to find ways around those rules. So when internal controls are too prescriptive, there is a danger that they run the risk of being circumvented or do not cover all the eventualities. That’s why assurance is so important because these controls need to be constantly monitored and updated. Good companies do this by embedding the controls within their employees’ behavior and making them part of their incentives through key performance indicators.