Serving shareholders
New Zealand Institute of Chartered Accountants Chief Executive Terry McLaughlin FCA identifies top of mind issues for directors in 2012.
Having canvassed the views of a number of NZICA members who are also senior directors, it is clear that directors need to have their minds on the economy in 2012.
Directors must form a view about the likely progress of the New Zealand economy over the next 12 months, and when a recovery might kick in. This means keeping abreast of developments not just in the local economy but in the world economy, and assessing the potential for fallout from Europe and/or a slow recovery in the US.
A director’s first concern must always be the strength of the balance sheet.
If the world economy grows weaker, debt may become very expensive, exchange rates may fluctuate dramatically and the capital markets may slow for months. In such circumstances, directors need to be confident that their companies have a good relationship with their bankers, for example, and that their financial position is sustainable.
NZICA members revealed a number of other issues that they expect to confront in their roles as directors this year, including staffing concerns, the difficulty of putting into place growth strategies and dealing with a changing political and social environment.
Protect your people
Directors must have regard to elements of risk within the company, but one risk that is often overlooked in difficult economic circumstances is the potential loss of key staff. There is an assumption that staff will stay put in tough times, but this is not necessarily the case.
A prudent business will look to bolster its resources – which may mean a prudent competitor will approach your good people. You need to be comfortable that your people are stable.
When thinking about your people, include your customers. If your customers get into financial difficulty then they won’t be able to pay you – so it is vital to make sure your business is alert to the quality of the customer base.
Review growth opportunities
Most organisations are already operating prudent, conservative strategies. At some point, the prediction of slow growth becomes a self-fulfilling prophecy. However, serving your shareholders means growing production and making investments – things you do when you are optimistic but which can be incredibly hard in difficult times.
For CAs who are directors, this presents the challenge of thinking outside of our compliance and regulatory training.
Like other directors, we must develop an understanding of the business and the industry the company is in. What CA training ensures is process discipline. We have IFRS knowledge and good governance skills and when this is combined with business acumen it is invaluable to a Board.
Developments in compliance
To say directors must focus on the business environment is not to suggest compliance and regulatory issues will no longer arise.
Regulators are reacting to a changed world financial environment. Keep abreast of regulatory change, particularly if you operate in the international market.
At home, for example, the Financial Markets Authority has started looking closely at alternative profit measures, particularly normalised earnings. They are expected to release guidelines on what should, or should not, be acceptable in terms of reporting profit in the financial statements. A director with chartered accountancy skills can blend an understanding of the issues this raises with knowledge of the business and play a valuable part in that discussion.
Wider considerations
Lastly, the times are changing. The global financial crisis undermined faith in the economic system and it is in that context that the Occupy Wall Street movement managed to gain traction at a global level.
There is a growing problem for governments in securing an income for a large disenfranchised group. This will potentially lead to a sustained challenge to the current economic model around the world.
There is a sense in which we may be at a crossroads, as we were in the 1980s when free market philosophies changed the game.
Directors should take an interest in such issues and ensure their organisations are positioned to thrive in a changing social and political environment, as well as in a challenging economic environment.
February 2012
- Terry McLaughlin FCA is CEO of NZICA.