www.cimaglobal.

com

June 2010 4.50

Good food Why global brands are buying into fair trade

Full measure: Diageos head of global audit and risk, Stephen Bolton, on the issues facing the drinks industry

12 22 35
CSR Ltd: why true corporate social responsibility is an organisational state of mind, not a department One-hit wonders: the business risks of investing in countries whose economies lack diversification

Smarter bartering: negotiation techniques that will help you to achieve a win-win outcome

>inbusiness

Gaining influence in your organisation means being up there to be shot at, but its a risk worth taking
I started my presidential year stressing the importance of keeping the CIMA qualification relevant to business and I end my year on the same theme. Looking to the future, members must ensure that we become not only business advisers but also business navigators. During the spate of corporate scandals a few years ago, much of the blame was heaped on our colleagues in auditing. Today the blame for the financial crisis is usually aimed at bankers, their bonus culture and the regulators. We could consider ourselves lucky to have escaped censure again, but perhaps we should beconcerned that no one is asking: Where were the management accountants? We know from CIMAs research into the future of management accounting that many leading companies are already transforming their finance functions to be more efficient and provide better decisionmaking support. But it must not stop there. Consider what happened in banking as an example. Over many years bankers devised innovations to improve their banks return on capital and increase the returns reported to shareholders. These met societys demand for credit and gave the banks clients higher returns. The banks reported huge profits, which generated value for shareholders, too. But was all this in the public interest? The bankers were awarded bonuses in line with their contribution to shareholder value, yet their activities eventually destroyed shareholder value and created huge costs for the global economy. So where were the banks corporate navigators? The ensuing economic crisis has highlighted the need for finance to assume a broader role: not only supporting a business but also using professional objectivity to ensure that risk and performance are managed in the long-term interests of all stakeholders. As the world emerges from recession, businesses need management accountants who can combine financial expertise with commercial knowledge. Why management accountants? Because they are the only professionals with a complete financial toolkit and the business understanding to use it. This kit includes the ability to provide a longer-term planning framework to ensure strong governance at board level and more informative external reporting. The toolkit also enables CIMA members to help their firms strike a balance between improving operational efficiency and developing their competitive positions. We can also play a key role in assessing the data available and filtering information to inform all stakeholders. In short, CIMA members are objective professionals who can support and challenge managers to help them improve risk management and navigate around the worst turbulence in any future economic storms. The real challenge is for us to get engaged by business to play such a role. This would advance the science of management accounting, perhaps not in terms of new quantitative techniques, but in terms of influence, which is more important. Of course, with greater influence comes greater accountability. In times of crisis it would be much more likely that wed take some of the blame. But wed be relevant and we would have been guided by our ethical principles, so we should be able to avoid the worst of what might blow our way. This is a little food for thoughtto leave you with

Aubrey Joachim CIMA president

CIMA members are objective professionals who can support and challenge managers to help them improve risk management and navigate around the worst turbulence in any future economic storms
after my fascinating, enjoyable and enlightening term as CIMA president. Iam hugely proud of the institute andits members. We have achieved a great deal together and I look forward to seeing the influence ofchartered management accountants continue to grow infuture.

CIMA is the Chartered Institute of Management Accountants, 26 Chapter Street, London SW1P 4NP. Tel: +44 (0)20 7663 5441 President Aubrey Joachim FCMA Deputy president George Glass FCMA Vice-president Harold Baird FCMA Chief executive Charles Tilley FCA

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CIMA, 26 Chapter Street, London SW1P 4NP +44 (0)20 7663 5441 www.cimaglobal.com Editorial and production Caspian Publishing 198 Kings Road, London SW3 5XP T: +44 (0)20 7368 7170 F: +44 (0)20 7368 7201 E: rp1@caspianpublishing.co.uk Editor Ruth Prickett Chief sub-editor Neil Cole Creative director Nick Dixon Art editor Clare Meredith Account manager Tina Franz Head of production Karen Gardner Advertising T: +44 (0)20 7368 7117 F: +44 (0)20 7368 7112 E: loris.giovinazzo@ caspianpublishing.co.uk Group advertisement manager Matthew Blore Advertisement manager LorisGiovinazzo Account manager Jonathan Wood Head of integrated solutions Nick Beaton Subscriptions E: subscribe@caspianpublishing.co.uk T: +44 (0)20 7368 7200 45 (UK), 54 (Europe), 72 (rest of world). Back issues: 5.50 including postage, subject to availability. Allpayments should be in sterling drawn on a UK bank. For the USA FM (ISSN 1471 9185) is published ten times a year for $60 by Caspian Publishing, 198 Kings Road, London SW3 5XP. Periodicals postage paid at Rahway, NJ Postmaster. Send address changes to: Financial Management, c/o BTB Mailflight Ltd, 365 Blair Road, Avenel, NJ 07001. Caspian Publishing Founder and editorial director Stuart Rock Founder and communications director Matthew Rock Finance director Kate Andrews Commercial director Roger Beckett Reproduction Zebra Printing Headley Brothers CIMA reserves the right to grant permission to reproduce articles. Opinions expressed in FM are the authors own and do not necessarily represent the policies of their employers or CIMA council. Caspian Publishing and CIMA accept no responsibility for views expressed by contributors. The publisher reserves the right to refuse, cancel, amend or suspend any advert or insert. Noliability is accepted for loss arising from non-publication, incorrect or late publication of any item. The inclusion of any advertising material does not imply that CIMA endorses the product, service etc advertised.

To give online feedback about Financial Management, join the FMfeedback group on CIMAsphere at www.cimasphere.com/groups.

Contents
8 One2one Stephen Bolton, head of global risk and audit at Diageo, explains how the recession has affected the drinks groups operations worldwide and reveals which African nation has adopted Guinness as one of its favourite tipples. 14 Chocs away The Fairtrade label has earned enviable influence over western consumers concerned with how retailers treat their suppliers in the developing world. Is joining the scheme a good investment?

8
4 Letters
The costs of resigning on ethical grounds; applying lean thinking to the finance function.

39 Study notes

6 First in

All the latest news affecting accountants in business, including regulations updates.

Your guide to entering, taking and passing the CIMA qualification. 39  Exam tips: paper F2 FinancialManagement. 44  Exam tips: paper F3 FinancialStrategy. 46  Exam notice: essential information for candidates.

12 Opinion

Why true CSR is not something tobe departmentalised.

29 Technical matters
29  Cost management. Strategic analysis. 32 

22 Without portfolio A report on the 49 Institute update countries CIMA news and a diary of at most events,featuring the CEOs economic risk notebook by Charles Tilley. because of their dependence on a 55 So you want single industry. tobe
financial manager in the telecoms industry.
CIMA is a gold sponsor of the

Jul 1, 2008 to June 30, 2009: 154,496

35 Career development

56 Last out

Win-win negotiation techniques.

Bizarre communications from the wonderful world of business.

>letters
Please send letters to: Financial Management, Caspian Publishing, 198 Kings Road, London SW3 5XP. E-mail: nc1@caspianpublishing.co.uk
Fire precautions I feel very proud of the correspondent who wrote the letter entitled When push comes to shove in Aprils issue. I have also been fired from an organisation, although for different reasons. With the same limited information I possessed at the time, I would go through it all again. But, with the knowledge I have today and the lessons I have learned from that experience, I would now take different steps. My circumstances were not the same as those of your correspondent and I do miss the money. According to the procedure laid out in CIMAs code of ethics, the final stage in such situations is to resign. Quitting may be the bravest response, but who is going to pay your bills? How can the institute help its members to stand up for themselves and protect the professions reputation? If you have to resign, will CIMA pay your expenses until you find another job? Atala Blackman CIMA replies: Doing the right thing is not always easy and it can, of course, come at a cost. But the consequences of not doing so can be even more expensive both professionally and personally. If a member facing anethical dilemma does not heed the warning signs and takeaction, and is then called toaccount by the profession, this may affect their membership, reputation and employment prospects. Resignation is, as the code ofethics suggests, a last resort. Any member facing this kind of situation can access CIMAs ethics support package, which

includes a legal advice line as well as a whistle-blowing helpline, to obtain free, confidential and independent advice. Gail Stirling, director of professional standards and conduct, CIMA Keen for lean I enjoyed Bill Fischers overview of Toyotas problems in the April issue (That was Kaizen; this is now). Many critics have rushed to blame the companys unyielding focus on the lean manufacturing philosophy for its recent troubles. I suggest that the opposite is the case: the approach has helped Toyota to address and tackle its quality problems at source. Few other car manufacturers would have acted as decisively as Toyota to do the right thing by its customers and shareholders. Now is the time for CIMA members to follow Toyotas example and wage a war for quality and against waste.

I have been working for some time with clients and staff of a large consultancys finance transformation team to see how lean concepts can be applied to the finance function to improve its performance. Despite the dramatic improvements that lean thinking can achieve on the factory floor, many companies fail to harness its potential benefits for their support functions. The big difference between manufacturing and administrative processes is that people inherently introduce variability into the latter. In my experience, this presents challenges that are quite distinct from those posed in the manufacturing environment. Typically, the greatest source of waste from a lean perspective is the flow of information among people and departments. The application of lean thinking to back-office operations finance in particular can lead rapidly to both cost

and quality improvements by doing the following four things: n  Reducing processing errors and work that does not add value for the customer. n  Eliminating unnecessary and conflicting controls. n  Speeding up finance processes by reducing lead times and complexity. n  Ensuring a constant focus onidentifying improvements that customers want. Management accountants areuniquely placed to advise corporate leaders on how finance can be a trailblazer in theorganisation and show how lean thinking can reduce cost and waste while at the same time improving customer and employee satisfaction. Toyotas manufacturing operations have led the way across the world on lean thinking. Now its time for every CIMA member to take the war on waste to their own organisations. Noel Cullen FCMA

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>firstin
The 2010 CIMA annual awards are now open for nominations and this year there are four extra categories. The competition honours outstanding performers individuals, teams and organisations thathave demonstrated excellence in management accounting and led the way for the profession. If you know a person or team that has achieved considerable and measurable success this year, CIMA would like to hear from you. The existing categories n Case Study success award. n Tutor of the year. n  Part-qualified of the year (sponsored byBPP). n  Finance team of the year public sector/not-for-profit. n Finance team of the year private sector. n Recruitment consultancy of the year. n Responsible business. n Innovation in business. n Unlocking business intelligence. n  Medium-sized employer of the year: under 5,000 employees (sponsored by Robert Half). n  Large employer of the year: over 5,000employees (sponsored by Hays Senior Finance). n  Outstanding contribution to business performance by a CIMA member.

All the latest news affecting accountants in business, including regulations updates
IASB seeks feedback on financial liabilities plan
The International Accounting Standards Board (IASB) is inviting comments on its proposed changes to accounting for financial liabilities. These follow work already done on the classification and measurement of financial assets (IFRS9, Financial instruments). The IASB is proposing limited changes to accounting for liabilities with amendments tothe fair-value option. These are a response to criticisms that volatility in profit or loss resulting from changes in the credit risk of liabilities that an entity chooses to measure at fair value is counterintuitive and does not provide useful information to investors. Theproposals will affect only those entities that choose to apply the fair-value option. A summary of proposals is available free at www.snipurl.com/w76uu.The exposure draft is open for comment until July 16 and can be accessed at www.snipurl.com/w53l0.

Institute expands its awards

The new categories n  Consultant of the year: the individual consultant or consultancy firm that has demonstrated commitment to the longterm success of its client. n  Best annual report of the year: the organisation that has most clearly described its strategy in the narrative section of the report. n  Distance-learning student of the year (sponsored by BPP Professional Education): the CIMA distance-learning student who has demonstrated outstanding commitment, motivation and discipline in their studies. n  Business partner of the year: the finance team providing the best example of what business partnering really means. All nominations will be reviewed and selected by an expert judging panel. The shortlist will be available to view online from September. The winners will be announced at a prestigious awards dinner at the Royal Lancaster Hotel, London, on the evening of November 22. Visit www.cimaglobal.com/ awardsfor nomination details, the judging criteria and the shortlist.

CIMA study shortlisted for sustainability Nobel

A CIMA research project entitled Accounting for climate change was one of five nominated projects at the prestigious Globe Forum and awards ceremony in Stockholm. The event featured the best organisations and innovators who shared experiences with their sustainable solutions. Visit CIMAsphere (www.cimasphere.com/blogs) to read a blog entry on the event by theinstitutes R&D manager, Sandra Rapacioli, or visitwww. cimaglobal.com/sustainability for a copy of the research report.

Students offered tailored lifelong learning support

The CIMA Business School has been launched as a pilot, initially offering extra support to students who wish to make a sideways move as they progress through the qualification or take a study break. Members of the school can take advantage of three stepping-off points: the certificate in business accounting (acomplete qualification); the diploma in management accounting; and the advanced diploma in management accounting (professional recognition levels in the main qualification). In return for a subscription (similar to the student fee), members of the school gain the following benefits: n A CIMA Professional Development toolkit that can be adapted to meet individual needs. n  The right to use designatory letters after their names as active CIMA Business School members. n Careers and job advice, plus dynamic networking opportunities via CIMAsphere. Visit www.cimaglobal.com/businessschool for further information.

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www.cimaglobal.com
Further findings: Ireland
In the Republic of Ireland 55 per cent of CIMA members and students believe that the recession will last another 13 to 24 months, according to the institutes fourth Mid-size business confidence monitor survey of the country. But, while 48 per cent were confident about their businesss performance in the current economy, only 42 per cent were confident that it would survive. Respondents believed that most performance factors would stay the same; many thought net profits would increase in the next quarter; and half expected overhead costs and supplier prices to fall. Only 23per cent said they were securing extra finance (down from 35 per cent on the previous quarter). More than half believed that foreignowned banks are important to the economy.

Malaysia and Sri Lanka

CIMA has launched its first survey of business confidence among medium-sized businesses in Malaysia and Sri Lanka. This involved members and students in 55 firms and was finished in March. In Malaysia 52 per cent of respondents thought that their national economy was in recession, compared with 35 per cent in Sri Lanka. Although 69 per cent of Sri Lankan businesses were confident about their performance, 75 per cent believed that their business would survive in the longer term. This was a contrast with Malaysia, where only 29per cent were confident about their current performance but 72per cent believed that their business would survive the downturn. Transport and fuel were the costs that Sri Lankan businesses considered most likely to increase next quarter. Their Malaysian counterparts cited supplier prices. More Sri Lankan companies were securing extra finance (59 per cent) than those in Malaysia (50 per cent). The most challenging issues for Malaysian companies included: competition; the ability to expand into new markets; the availability of financial management skills; changing government policies; and recruitment and retention. In Sri Lanka the key issues were how to innovate and add value; the availability of non-management skills; the ability to expand into new markets; and the availability of strategic management skills.

Poll finds green shoots

CIMA members and students in medium-sized UK businesses believe that the country is still in recession, according to the institutes fifth UK mid-size business confidence monitor survey. But they were marginally more optimistic than in the preceding quarter, with 25per cent expecting the downturn to continue for another 13 to 24 months down from 33 per cent in the fourth quarter of 2009. The survey, which covered 333 medium-sized companies nationwide, also showed that 59 per cent were confident about their current business performance (eight percentage points higher than the figure 12 months ago). In the longer term, just under half were confident that their business would survive the recession, but almost six out of ten were worried that an increase in VAT to 20 per cent would harm their business. Most indicators suggested that businesses were maintaining their performance, but there was evidence of increasing company turnover, net profit and domestic sales turnover. Looking ahead to the next quarter, most respondents were expecting increased overhead costs and supplier prices. This situation has changed since the third quarter of 2009, when they were falling. Respondents also expected basic salaries for full-time staff to increase by up to five per cent, along with transport and fuel costs. Most firms are still focusing on efficiency: almost half said they had changed suppliers sincethe previous quarter. Value for money and price remained the principal reasons for this cited by 55per cent and 70 per cent of those changing respectively but 17 per cent said that theyd had to act because a supplier had ceased trading or gone into administration. Fewer mid-size businesses are seeking additional finance from a bank (a fall of 15 per cent on the previous quarter) and 77 per cent of respondents are not seeking extra finance. Those that were doing so cited business acquisitions, working capital and cash flow as reasons. The next survey will take place this month. The 2009 annual report on the monitor is available at www.cimaglobal.com/midsize.

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Stephen Bolton FCMA Head of global audit and risk, Diageo

Diageo has an enviable reputation for building global brands. To what extent have the downturn and shifts in official attitudes to alcohol consumption dented the companys growth? The recession and changes to the regulatory framework are the biggest challenges for us. Of these two, its the regulatory framework that we know will become increasingly important. Our industry is fairly resilient, but the recession has changed our assessment of the most important risks and made us review our strategy. It has slowed our growth, of course, but this sector hasnt been affected dramatically. Having said that, it has made us focus far more on cash and working capital, and on ensuring that the necessary organisational restructuring didnt increase our risk exposure or compromise compliance and corporate governance. We had to assure ourselves that the overhead cost base was appropriate, although our main focus has still been on growing market share and winning approval from customers. The US and Europe have been particularly strapped for cash. Is this why youre attempting the biggest multinational buy-out to date in China? We need to ensure that were well placed to build on our strengths when the recovery happens. This is why its so important to focus on emerging markets such as the Bric nations (Brazil, Russia, India and China) and Africa. Part of this involves the bid to increase our stake in Shui Jing Fang, a premium Chinese white spirit. Well continue to invest in our European and North American businesses, but significant opportunities lie in developing and emerging markets. Isnt this a headache for risk analysis? Were highly conscious of the risks of trading in such regions, so we invest disproportionate amounts, compared with the sales we generate there, in putting exemplary control and compliance frameworks in place. We need to work to the same standards wherever we do business and we do this by having a clear code of conduct and policies. We train our staff to understand Diageos core values and then follow this up with audits to ensure that its having the right effect. Wehave to be clear about our values to new recruits right from the start and reinforce them by rewarding people who adhere to them and showing the consequences if they dont. Its the only way to achieve the conditions under which you can deliver to international standards globally and rely on people to use their own judgment. Your policy is to build up your premium brands. Is this tricky in a downturn? We believe that this is the right approach. Inthe long term consumers will continue to aspire to premium brands itshuman nature. Last year we launched a $3,000-perbottle brand of Scotch in Asia and it sold out. We are seeing changes in some regions. More people are entertaining at home in Spain, for example, and in Russia weve responded to a change in consumer spending power by marketing more affordable whiskies. But over time we believe that people will migrate back to these brandswhen they can afford to and the richest will continue to buy them. Youve been through this kind of crash before, havent you? The job that prepared me best for this situation was being FD of Unilever in Malaysia. It gave me a chance to work in a very different culture and I was also part of a board that had to respond to the Asian financial crisis of 1997, when the currency devalued by 60 per cent over night. It meant that our cost base increased by 60 per cent, while consumer demand, which had been rising by eight per cent a year, went flat. We had to adjust our strategy and focus on getting our margins back to pre-crisis levels within a year. We grew our market share by responding to changes in consumer requirements by, for example, producing smaller packets and a more mass-market shampoo range. I learned a lot from this. Weactually based our response in Malaysia on Unilevers previous experience in Latin American countries that had gone through many economic problems. We see similar issues here at Diageo, but the key is to keep in touch with consumers, wherever they are, and respond to their circumstances. Corporate governance regulations havebeen tightened since the recession, butare you also affected by licensing laws and anti-drinking campaigns? All alcohol companies need to be responsible about the way they promote their products and were playing a leading role here at Diageo. Its not only the right thing to do; itsalso critical to the future of the industry. This is why we invest heavily in promoting responsible drinking activity. For example, wehave a tough marketing code that we are diligently implementing worldwide. We never promote irresponsible drinking eg, among those below the legal purchase age. We try to engage with all the groups that see the issue differently from us. Rather than viewing this pressure as unfair, were being positive and responsible, but its clearly a risk. Diageo owns famous brands worldwide.Does this reduce orincreaserisk? We produce and sell our drinks around the globe Guinness is hugely popular in Nigeria,for

Photographs: Tony French 

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One2ONE

instance but we have some limitations. For example, by definition Scotch whisky can be produced only in Scotland and is matured for an average of seven years before its bottled. Wehave 30 distilleries in Scotland, each producing a different type, so weneed to predict demand many years ahead. It also means that we will always have a global supply-chain challenge because we cant move distillation nearer to key markets. How important are environmental risks? This area is important to us and we set out our environmental policies in our corporate citizenship report. While were not one of the biggest energy users, our target is to cut our total greenhouse gas emissions by half between 2007 and 2015. To this end, our supply business in Scotland has achieved a Carbon Trust award for its bio-energy investments in our Cameronbridge and Roseisle distilleries. Audit hasnt traditionally been the sexiest part of accountancy. Has the recession changed this perception? I had no background in audit when I took this job two years ago, but I grew up in Unilever, where audit is seen as a fundamental route for developing finance talent. Ive been benchmarking our performance here against other great companies that use audit and risk as a source of the best talent. I feel strongly that we must promote audit as the best place in an organisation to develop your career in finance, irrespective of whether theres a recession or not. If the function is seen as the corporate policeman, whos responsible only for ticking, bashing and checking petty cash, then its not sexy. But, if it involves identifying key risks and assessing how your actions have mitigated them, this leads to a broad range of activities that are engaging and enjoyable. Why is audit so vital for a finance career? Its a great place for people to start out in finance because it gives you licence to hunt and fish across the business. You get to see different markets, functions and aspects of the supply chain. It allows you to observe how products are sold and strategy is executed. Experience in audit and risk also teaches skills that are vital to every finance professional. Regardless of their qualification, all accountants must understand the way their business works, the risks it faces and how it can manage them.

This is why weve increased investment in this area by about 50 per cent in the past two years, mostly in staff costs. Beyond this, all organisations are coming under increasing scrutiny by the authorities and the public, so anyone who aspires to be an FD must have a good grasp of the principles of control and governance. Its good to hear that youre investing in finance people despite the downturn. Weve been implementing a whole development programme across our global finance function about 2,000 people called Keep learning. Weintroduced a tool to help people assess their development needs and our first global training programme was designed to hone the teams control and compliance skills. Were delighted that we were awarded global training accreditation from CIMA in March. I see this as agreat way to help us attract the best talent because it recognises the quality of our training. There are 150 CIMA members working across the company, all of whom will benefit from the way this accreditation supports their CPD. What made you move to Diageo after a quarter of a century with Unilever? It was for family reasons. We lived in Malaysia forthree years and then returned to the UK and, although my wife is Malaysian Chinese, she was keen that we should stay in one country for the rest of our sons education, so when the Diageo job came along I went for it. It was important to me that this company has similar values to Unilevers but doesnt compete with it and is a leading player in its industry. Do you have a dream job? Ive never had one in mind I just know that I want to enjoy my career and stretch myself untilIretire. I tend to assess each opportunity asit arises. I do need to know that I can always make a difference and its good to be able to apply my overseas experience. Its important to think about how you can broaden your impact, and Im in discussions about taking up a non-executive role. Its also important to put something back into society, soIm looking into what I can do for a charity forchildren who are brain-damaged at birth. Mybrother has cerebral palsy and hes becomea successful CIMA member. I seem to know a lot of CIMA accountants: my wife and my best friend since I was a child are both CIMA-qualified, too.

Quick CV 1981-2006
Bolton joins Unilever as a CIMA trainee in BOCMSilcock, its animal feeds business,in 1981. He becomes finance manager for BOCMs Scottish operationsin 1985 and two years later hetakes up the same role for the northwest of England. In 1988 he moves to Unilevers head office as management group accountantfor agribusiness, medical products and packaging. Within three years he is vicepresident of mergers and acquisitions. In 1993 he is appointed FD of Lipton Soft Drinks and four years later he takes up the post of supply chain and finance director of Unilever in Malaysia. His next role, starting in 2000, is vice-president ofinvestor relations for Unilever. In 2003 he becomes finance director atUnilever UK.

Bolton moves to Diageo as finance director, global supply and procurement. In 2008 he is appointed head of audit andrisk.

2006-

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>opinion

Incorporated social responsibility

Authentic CSR isan attitude that pervades every business decision, rather than a stand-alone activity to be departmentalised, argues Mike Brooks.
Some years ago a friend of mine was offered the job of corporate social responsibility manager at a big multinational company, which threw him into a state of mild panic. We met after work for a couple of soothing pints to discuss his dilemma. At first I couldnt understand why he was worried. The job involved a double promotion, he would be reporting to a main board director and hed been promised a budget sufficient to provoke serious envy among his colleagues. This was also a completely new position, so he could largely set his own agenda and would have few hard targets to meet. To me this seemed the perfect opportunity for him to make his mark. The trouble is that Im not really ready to be a good person, he explained. Ive spent the past 20 years in sales and Im rather good at it. Im aggressive and competitive by nature I love stealing customers from the opposition. Some of my competitors hate me for the way that Ive undercut their prices and rubbished their products. I even drove a couple of them out of business. All of that required some really creative nastiness, I can tell you. And now I have to become Mr Nice Guy and make the world love this company. Im not sure I can do that. After several days of agonising he decided that he could just about bring himself to do it. And, over the next few years, he devoted his considerable skills to building a highly successful CSR activity for his company. But I think he always saw CSR as an activity ie, something to be done in addition to business as usual, rather than something that would change the way things were done. I began to think again about CSR and how companies actually put it into practice.

Itbecame clear that I could put firms into two categories: those for whom its principally an activity and those for whom its an attitude. Some have set up a substantial CSR team similar to the one run by my friend while others have embraced CSR in a more subtle and pervasive way. The latter have changed their values as a result and require all activities to reflect these new values. Often, the more embedded CSR is, the less apparent it is to outsiders. Companies are entitled to be proud of their achievements in this area, of course, but theres little doubt that some do CSR so that they can have something to shout about and see this as a legitimate part of their public relations activities. Others do it because they want their economic activities to benefit more people than their traditional stakeholders. You could argue that it doesnt really matter whether firms adopt CSR in order to create a favourable impression or because

Theres little doubt that some firms do CSR so that they can have something to shout about
12

they believe they have a duty to society. Aslong as it happens, its a good thing. Andit would clearly be a foolish company that spent large sums on projects that didnt directly improve its profits and then failed to ensure that such laudable activities gained wider recognition. For an organisation and its top managers, the question is: what is our attitude to CSR? Do we simply approach it in the same way that we tackle, say, tax compliance, or is it a corporate state of mind that guides everything we do? And, if the former is true, do we want to change? What would be the advantages of doing so? Those firms that have embedded CSR can argue that their big advantage is that they dont have to consider the societal effects of every proposed change in their business separately these aspects are considered part of the normal process. CSRcannot be neglected because it is hardwired into the thinking of everyone concerned. Once you have put CSR at the heart of your organisation in this way, theres usually no going back. Its not just for this years chairmans speech its for life. Mike Brooks FCMA is a business writer and consultant. He can be contacted at mikebrooks@gatehouse10.demon.co.uk.

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Chocs away
As regulators, investors andconsumers demand ever more assurance about how companies manage their supply chains, many businesses are wondering whether the self-penned note on their ethical behaviour in the annual report is really enough. As a result they are considering whetherto seek some form of independent, internationally recognised accreditation. Oneof the best-known seals of approval is the Fairtrade Mark, an eye-catching logo that could signify a farmer holding up their product, a shopper reaching for their purchase or a campaigner fighting for justice in global trade. The logo is a registered trademark of Fairtrade Labelling Organizations International (FLO), the independent global body thats responsible for setting Fairtrade standards. Aligned with 20 fellow initiatives around the world, the Fairtrade Foundation is the UKbased body that licenses the use of the certificationmark on goods that meet these standards. The label appears on products as a guarantee that the retailer is giving disadvantaged producers a better deal ie, an agreed minimum price although its not an endorsement of all the retailers practices. The scheme has gained an enviable following among consumers. Sales of Fairtrade goods were worth an estimated 799m in the UK last year, reached 2.5bn worldwide and are expected to increase. AGlobeScan poll commissioned by the Fairtrade Foundation before World Fair Trade Day (May 8) found that a fifth of consumers penalised socially irresponsible companies through their shopping choices, while nearly a third were likely to reward companies for being socially responsible. The Fairtrade Mark was their most trusted certification label and 64 per cent of respondents linked it to fair pay for producers and their workers. Asimilar number were likely to recommend Fairtrade products to other consumers. Fairtrade is clearly no longer a fringe sector in retail, says Cheryl Sloan, marketing

Global sales of Fairtrade goods increased by 22 per cent in 2008, despite the recession. Neil Hodge explains the pros and cons of joining the initiative.

director at the Fairtrade Foundation. Companies should take note that shoppers are prepared to send a strong message to them about their global accountability. The mark has won some high-profile retail supporters since it was introduced in the UK eight years ago. The Co-operative Group was the first supermarket chain to switch all of its own-brand chocolate to Fairtrade in 2002, followed by coffee in 2004 and tea in 2008. The Co-ops sales of Fairtrade products, which account for about two per cent of its total food revenues, totalled 61m in 2009 a 25 per cent increase on 2008. The group hopes to maintain at least the same rate of sales growth and is seeking further Fairtrade products to stock. Its competitors are reporting impressive gains, too. Sales of garments made from Fairtrade-certified cotton at Tesco leapt from 500,000 units in 2007 to five million in 2008, for instance. And in February Sainsburys announced that it was selling the largest range of Fairtrade products of any retailer in

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the world, reporting a ten per cent year-onyear increase in Fairtrade product revenues to 218m, although that figure was dwarfed by its total annual sales of 19bn. Other big names have recently signed up to the scheme. Last July Cadburys Dairy Milk became the first mass-market chocolate bar to go Fairtrade. The firm says that consumers will not see any increase in price (they tend to perceive all Fairtrade goods as more costly than their rivals, although this isnt necessarily true). The chocolate in the four-fingered variety of Nestls flagship confection Kit Kat is now ethically sourced, so the product carries the Fairtrade logo. It is the UKs biggest-selling chocolate biscuit nearly one billion units are produced every year. James Maxton, a spokesman for Nestl, says that the company plans to have all of its Kit Kat varieties certified as Fairtrade, but that its currently unable to do so because there arent enough accredited cocoa growers in its chosen source area predominantly the Ivory Coast, where there are only seven certified

Fairtrades social development standards

For small farmers, FLO standards require that: n A non-discriminatory, democratic organisational structure is set up that enables farmers to bring a product to the market. n The organisation must be set up in a transparent way. n It must not discriminate against any particular member or social group. For hired labour, FLO standards require: n The company involved to bring social rights and security to its workers. n Training opportunities. n Non-discriminatory employment practices. n No forced or child labour. n Access to collective bargaining processes. n Freedom of association. n Conditions of employment exceeding legal minimum requirements. n Adequate occupational safety and health conditions. n Sufficient facilities for the workforce to manage the Fairtrade premium.
Source: www.fairtrade.org.uk

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Cocoa channels
n  Number of people who depend upon cocoa for their livelihood worldwide: 45 million. n  Annual cocoa production worldwide: three million tons. n  Increase in demand for cocoa: three per cent per year for the past century. n  Current global market value of annual cocoa crop: 3.5bn. n  Proportion of cocoa that comes from west Africa: 70 per cent. n  Length of time required for a cocoa tree to produce its first pods: five years.  n  Duration of peak growing period for the average tree: ten years.
Source: www.worldcocoafoundation.org

co-operatives. It takes about 4,000tonnes of cocoa beans to produce the four-finger range of the biscuit. To supply all of our Kit Kat ranges we would need about 20,000 tonnes, which is just not possible at the moment, he says. While Maxton admits that theres a slight premium in switching to Fairtrade suppliers, he says that the business wont pass it on to the consumer. Just because weve opted to use Fairtrade producers, it doesnt mean that the costs of our products will increase as a result, despite the economic climate. Our Kit Kats cost the same now as they did one year ago, despite being Fairtrade and slightly more expensive to produce. Companies with diversified supply chains, particularly in developing countries, often gain a practical benefit when they go Fairtrade. There can be a lot of bribery, corruption and other opaque practices in the countries where commodities such cocoa and coffee are produced, says one expert, who declined to be named. TheFairtrade Mark is an attempt to cut out such abuses, not only for western companies buying the materials, but among the producers that need the certification to guarantee their minimum prices and the Fairtrade premium, which goes towards helping the wider community. Not all businesses are convinced that they need labels to show how ethical they are, of course. Many companies support the concept of fair trade, but far fewer are willing to go to the trouble of gaining Fairtrade certification, according to research group Organic Monitor. While the food and drink industry has largely embraced accreditation, the cosmetics industry to take one example has remained aloof and the number of brands bearing the logo remains relatively low. Amarjit Sahota, director of Organic Monitor, highlights a discrepancy between brands that use the phrase fair trade in their marketing materials and those that are actually engaged in Fairtrade practices as recognised by the FLO. Companies do not always distinguish between Fairtrade and fair trade. Only the first concept is independently audited and internationally recognised, he says. The other is a business idea that may involve many of the same practices embodied in the Fairtrade Mark, but which can be justified only by that company without any other substantiation. Firms that use the latter term arent necessarily trying to deceive consumers. Its simply hard to distinguish

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Cost a coffee
Coffee was introduced as the first certified fairly traded product in 1988 under the MaxHavelaar brand in the Netherlands. Max Havelaar and other national certification schemes were later grouped under the umbrella body Fairtrade Labelling Organizations International (FLO). This has become the largest and most widely recognised certification system, butthere are other schemes, including UtzKapehs Utz Certified label; the Rainforest Alliance; Starbucks CAFE label; NestlsAAA guidelines; the label of the Fair Trade Federation (www.fairtradefederation.org); and the Common Code forthe Coffee Community Association. Coffee is the Fairtrade product with the highest sales volume, but the market share of Fairtrade-certified coffee is estimated at only one per cent. About 78 per cent of all certified coffee is produced in Latin America, with Mexico, Peru, Guatemala, Colombia and Nicaragua being the largest suppliers. Since June 2008 the FLO system has guaranteed a minimum price of $1.01 to $1.45 per lb, depending on the type of coffee. The Fairtrade premium, an extra sum that goes into communal funds for workers and farmers, is set at $0.10 per lb. Ten years after its introduction in the US, coffee remains the most common Fairtrade product in the country, accounting for 64 per cent of total Fairtrade imports in 2008. Imports of Fairtrade coffee to the US have grown annually by 40 per cent on average over the past decade. The chart below compares Fairtrade and New York prices for Arabica coffee in 1989-2009. The Fairtrade system proved highly effective during the price crisis of the late Nineties. While world market prices fell to a 30-year low of $0.45 per pound, the Fairtrade system guaranteed a minimum price that was 180 per cent higher. Fairtrade coffee sales in many EU countries registered double-digit growth in 2001-06, and it remains the fastest-growing segment of the European coffee market. Fairtrade coffee now accounts for 20 per cent of the UKs coffee market and about four per cent of Irelands.
Source: study for an FAO project by Ellen Pay, Food and Agriculture Organization of the UN, 2009 (www.fao.org)

between fair trade as a concept and Fairtrade as a form of accreditation, he says. Sahota cites the example of Aveda, one of the first cosmetics firms to show a strong commitment to environmental sustainability: the companys products should not be considered Fairtrade because they do not contain certified ingredients, he says. The Body Shop, a cosmetics brand well known for its ethical stance, supports Community Trade, an independent movement that was originally launched by the firm itself as Trade not Aid. Through this, the Body Shop is committed to trading fairly and responsibly with suppliers. The company states that it actively seeks out small-scale farmers, traditional craftspeople and rural cooperatives and even tribal villages to forge deep, long-lasting relationships, rewarding our suppliers with good trading practices and a reliable, independence-building wage. Although its aims closely resemble those of Fairtrade, the firm has no official certification. Other organisations are staunchly against the Fairtrade movement and criticise any formof market subsidy. Tom Clougherty, executive director at economics think-tank the Adam Smith Institute, argues that the concept is in fact far from fair. It offers only a very small number of farmers a higher, fixed price for their goods. These higher prices come at the expense of the great majority of farmers, who unable toqualify for Fairtrade certification are left even worse off, he says. Clougherty claims that 80 per cent of the produce sold by Fairtrade farmers ends up in non-Fairtrade products and adds that its possible that many items marketed as Fairtrade might not be anything of the sort. He also argues that only ten per cent of the

New York and Fairtrade prices for Arabica coffee, 1989-2009 (in cents per pound)
320 280 240 200 160 120 80 40 0 Oct 1989 Sep 1992 Aug 1994
Coffee and other commodity prices depressed by global financial crisis, September 2008 Frost damage in Brazil, 1994 Drought in Brazil, 1997

Fairtrade price
Ten-year high of 164 cents (highness of coffee supply), February 2008

Collapse of international coffee agreement, 1989

Drought in Brazil, 1999

New York price

30-year low of 45cents (oversupply of coffee), 2001

May 1997

Dec 1999

Nov 2002

Sep 2005

May 2009

Source: Fairtrade Foundation

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SA8000: the Asian variation

SA8000 is a voluntary private workplace certification scheme that has been developed by the non-governmental organisation Social Accountability International (SAI) with the aim of creating better conditions for workers. The certification sets minimum standards to ensure a safe and healthy working environment, freedom of association and collective bargaining. There are also rules for working hours, pay and the prevention of child or forced labour. Some of the largest companies exporting bananas, pineapples, tobacco, wine, canned fruits and processed coffee are SA8000certified. In December 2006 there were almost 500 SA8000-certified facilities in Asia, of which there were 190 in India, 140 in China and 58 in Pakistan. Enterprises that operate production facilities can apply for SA8000 certification by one of the agencies approved by SAI. After the initial inspection and certification, a firm is monitored to ensure its continued compliance. The certification fee covers the audit and any corrective costs. The certification mark is not used on product labelling, but a company may use it in its promotional activities. There is no specific price premium or market for SA8000-certified products.
Source: www.fao.org

premium that consumers pay for Fairtrade goods actually goes back tothe producers. Retailers pocket the rest, he says. Fairtrade does have its limits, of course. While the initiative focuses on achieving a fair rate for producers, it has no involvement in how products are sold. Supermarkets and other big retailers gain significant economies of scale in sourcing and marketing their goods. They purchase in large volumes at low prices and their own-brand products entail few marketing costs. Because ownbrand goods have a fast throughput, they more easily meet the revenue targets per unit of shelf space and can be sold at lower

Banana bread
n  The banana is the most popular fruit in the world: shoppers spend more than 10bn a year on the fruit globally. n  Fairtrade bananas account for nearlytwo per cent of the total worldtrade in fresh bananas. In 2008 one in every four bananas soldin the UK was Fairtrade. n The UK banana industry as a whole isworth 580m annually. In 2008 theFairtrade share of this market was150m. n  Bananas are the third most valuable item sold in UK supermarkets. Only petrol and lottery tickets outsell them. n In 2000-08 Fairtrade-certified producer groups and their communities received 19m in Fairtrade premiums from the UK salesof Fairtrade bananas alone.
Source: www.fairtrade.org.uk

prices. Many firms that market Fairtrade products are tiny compared with their mainstream competitors and have much less purchasing power. They also generally have much higher unit costs, which may have a bearing on the recommended retail price. Supermarket purchasing practices also run counter to some of Fairtrades core principles. As they typically buy on a just-intime basis to limit storage costs, it can mean that their purchase orders can change at very short notice. This means that risks and costs are passed down to suppliers. For example, some Fairtrade fruit producers have ended up having to offload their produce on to conventional markets at below the minimum price having already shipped it when a supermarket has decided at the last moment to cancel the order. The pricing mechanism can also cause problems, as costs of production can differ substantially among countries and between small and large producers. While for products such as coffee the FLO price floor is the same for all products in the same class, for others eg, fresh fruit the minimum varies by country. And, as more suppliers get certified to meet rising demand, supermarket buyers with no commitment to specific producer groups could well seek to cut their costs by sourcing from lower-cost regions. A key problem is that supermarkets arent bound by FLO regulations, as theyre not required to be licencees even for their ownbrand Fairtrade products, since they dont put the label on the goods themselves, says Sally Smith, research officer in the Institute of Development Studies at the University of Sussex. Instead, their suppliers hold the licences and are responsible for ensuring compliance with FLO

standards. This can be hard for them to do when supermarkets are effectively setting the terms of trade. Its a technical loophole that ought to be closed, since any company associated with the FLO mark should be required to abide by the standards that define what it means to be Fairtrade. The Fairtrade Foundations view is that, aslong as its standards are met, the way the finished product is sold is the responsibility of the trading partners. They decide what consumers must pay and we have no controlover this, says Emma Sundt, the foundations business development manager. Supermarkets and their suppliers negotiate the retail price of each product and supermarkets obviously have the upper hand. No retailer will get involved in Fairtrade unless its commercially viable for it. Our role is to ensure that its also a fully viable proposition for the producers. Sundt adds that the Fairtrade Mark is an equity boost for all concerned. Its always been about empowering consumers as well as workers in developing countries. Given the rising sales of Fairtrade products even in the worst recession most people have ever seen consumer demand may play a stronger role in how these products are marketed. The certification can only appeal to consumers, rather than turn them away. Neil Hodge is a freelance writer specialising in business and regulation.

Further information

Visit www.snipurl.com/w1so3 to read a research report on the impact of Fairtrade in the ten years to 2009.

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Without portfolio
Would you invest in a nation thats heavily reliant on one industry? Scott Payton discoverswhich economies are most exposed to the risks of low diversification.
Toyota entered 2010 as the undisputed global leader of the automotive industry. The Japanese company had made more sales than any other vehicle manufacturer in the previous year, earning an unrivalled reputation for quality. Then it all went wrong: in January a safety recall of millions of its cars worldwide could, by Toyotas own estimates, cost the business $2bn in lost output and sales. Thesame month, salesof Japanese cars in theUS dropped 4.3 per cent year on year, with the Toyota recalls widely blamed for the decline. By February, Tokyos Daiwa Research Institute was predicting that the knock-on effects of the debacle could push down Japans GDP by as much as 0.12 percentage points. Its not only single high-flying companies that can fall from grace with dire economic consequences: whole sectors can crash, too. In the UK the financial services industry grew faster than any other part of the economy between 1996 and 2006. By 2007 financial companies were directly contributing 12bn in UK tax revenues, with their employees paying 15bn in income tax, according to the British Bankers Association. In all, the sector accounted for more than 100bn of GDP a year. Then the global recession struck, and the UK was the last of the G20 to recover from it. Some economists believe that this was because the country had grown too reliant on financial services. The importance of diversification Although the Icarus-like falls of Toyota and the UKs financial services industry have hogged the headlines, economists are more concerned about the risks associated with anunhealthy dependence on vulnerable sectors in emerging markets, rather than developed ones. If I were going to compile a shortlist of nationsat highest risk owing to a lack of diversification, I would put African states at the top and Middle Eastern states second, says Peter Zeihan, vice-president of analysis at Stratfor, a US-based geopolitical intelligence consultancy. This is because many countries in these regions are overwhelmingly dependent on exporting a single agricultural commodity or natural resource such as oil, he explains. Detlef Kotte, a macroeconomic and development policy expert at the United Nations Conference on Trade and Development (Unctad), agrees that countries reliant on exporting one commodity arethe most economically vulnerable. Prices for

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Roughly half of the Russian governments revenues come from energy tariffs in some way
these products are determined in international markets and are subject to large fluctuations much more than is the case for manufactured goods, he says. Measuring the risks associated with a lack of economic diversification is important for companies as well as policy-makers especially for businesses sizing up a new potential market, overseas acquisition or jointventure, or for those conducting a longterm risk assessment in an existing location. After all, the level of diversification in a particular market will have a direct impact on future growth across the wider economy, as well as affecting that markets sensitivity to international volatility. So where can financial managers find a country-by-country analysis of diversification? The World Competitiveness Center atSwitzerlands IMD business school produces such an assessment as part of its annual ranking of countries long-term competitiveness. The most economically diversified countries tend to be those that lack a bounty of natural resources, says Suzanne Rosselet-McCauley, deputy director of the centre, who cites the top three Austria, Denmark and Switzerland as examples (see panel, next page). Conversely, resource-rich countries loom large amongthe least diversified economies: Venezuela and Russia lie at the bottom of IMDs league table. These nations have a very high dependency on external markets and are extremely exposed to changes in oil and other commodity prices, RosseletMcCauleysays. Why dont governments do something about this? Some Middle Eastern economies have tended to pursueinteresting reform agendas when the oil price is declining, shesays. But, as soon as theprice begins to recover, their reforms are not perceived as so important. Zeihan agrees that Russia is highly vulnerable because of its lack of economic diversification. Roughly half of the governments revenues come from energy tariffs in some way, he says. It used to beonly 30 per cent and will probably be 60per cent by the end of next year, with most of the rest of Russias economy related to some form of raw material production. Croatia and Spain also suffer especially from a lack of diversification, according to the IMD research, but this is nothing to do with their reliance on natural resources. These two countries have been highly dependent onrevenues from tourism; they have focusedtoo much in the past few years on construction and real estate; and they have been overly reliant on inward foreign direct investment, Rosselet-McCauleysays. Specialisation versus diversification Economic diversification may help to hedge acountrys bets in the global markets, but shouldnt you also seek to specialise in areasin which you can realistically maintain acompetitive edge? And how can these twoimperatives be reconciled? Rosselet-McCauley agrees that countries should play to their strengths, but cautions them against going too far. If you become sospecialised that your entire economy depends on one sector for its jobs, exports, and growth, then your competitive advantage will turn into acompetitive disadvantage if

something like the financial crisis happens, she argues, citing Icelands banking crisis as a perfect example of thedangers of overspecialisation. The key is having a certain degree of specialisation in order to be top of the innovation game, but at the same time ensuring that theres enough diversification so that, if something disastrous happens in one sector, there wont be too much of an effect on the entire economy. Which countries have successfully mastered the balancing act? The Asian tiger economies have really understood the ideas of diversification and of moving up the value chain, Rosselet-McCauley says. Taiwan and South Korea, for instance, realised that they could no longer maintain their growth by being low-cost manufacturers. South Korea is now the world leader in wireless telecoms products, for instance. Kotte is also an admirer of what Taiwan and SouthKorea have achieved. They have succeeded in building industrial sectors and thereby reduced their dependence on primary exports, he says. Economists opinions are split on whether the UK took specialisation too far in the financial services industry. The sector as a whole accounted for only about eight per cent of GDP, Zeihan points out. So its not all that overexposed. Ian Stewart, chief economist at Deloitte, isalso sceptical about the idea that the UKsfinancial services sector grew too large. The problem was more about unsustainable credit growth and asset prices than about the size of the industry, he says. But Rosselet-McCauley points to figures that tell a different story: In the past ten or 15years the financial sector contributed close to a quarter of all of the UKs growth; represented 12 per cent of GDP when you include all of the industries supporting it; and accounted for nearly 20 per cent of all UK jobs. Stephen Overell, associate director at the Work Foundation, a not-for-profit UK research consultancy, agrees that this growth went too far. The

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Variety performance
The top five economies in IMDs 2009 league table of diversification: 1 Denmark. 2 Austria. 3 Switzerland. 4 Germany. 5 India And the bottom five from the research sample of 57 countries: 53 Argentina. 54 Croatia. 55 Spain. 56 Russia. 57 Venezuela.

scale of the UKs financial centre and our reputation for financial flexibility were so great that they destabilised the entire basis of our competitiveness. Other sectors have been thrown to the wind. Manufacturing, for example, has plunged in importance as an employer, yet that industry remains crucial to our ability to innovate. Corporate collapses Although no developed economy depends directly on a single company for its prosperity,the failure of one or two big names can still have far-reaching consequences, Rosselet-McCauley points out. The crisis surrounding Toyota has had a huge impact on Japans reputation for manufacturing excellence. In Switzerland the problems at Swissair and UBS have also had a wider reputational impact. And in the US the collapses of Lehman Brothers and AIG haveaffected confidence, too. All of these failures have contributed to a negative image of the country in question that has scared investors away, she says. Individual collapses and the sector-wide crisis such as the one experienced by the City of London during the recession canalso lead to panic and anger in the homemarket. Senior bankers became public hate figures in the UK when they accepted big bonuses even after the government had to pump billions of pounds into HBOS, Lloyds TSB, Royal Bank of Scotland and others to keep them in

business. The cost to the banks of restoring customers trust will be massive. Reputational damage aside, the downfall of a single company is unlikely to have a lasting negative impact on a developed nations economy, argues Gerben Bakker, lecturer in economic history and management at the London School of Economics. He cites the bankruptcy of Dutch aircraft maker Fokker in 1996 as an example. It had been a major company in the heartof the Netherlands with lots of suppliers. Whenit went bankrupt there was a great dealof gloom and talk of the decline of industry and manufacturing in the country, Bakker says. But the collapse actually made other Dutch companies realise that they couldnt rely on the government to protect them from bankruptcy. It forced them to gettheir act together. Since Fokker went bust, the Netherlands has enjoyed among thelowest rates of unemployment in the European Union, he adds. Encouraging diversification Governments in developed markets are relatively powerless to stimulate economic diversification, according to Bakker. If you look at the history of many countries, you often have eras in which growth is dominated by one industry and also eras where it is more equally distributed across sectors. Im not sure what a government could do aboutthis, he says. But Overell disagrees. There isa case for a

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government to intervene and help certain sectors for instance, to provide funding for future high-growth areas such as green jobs, he says. Yet the importance of encouraging diversification is much greater in the developing world, stresses Kotte at Unctad. The problem in most emerging economies is that the share of national income going into the creation of new productive capacity is too small. The important thing is to create incentives for global private investors to come in, he says. In many poorer countries this entails creating a stable and transparent legal environment and lowering interest rates for investment projects. What about the oil-reliant economies of the Middle East? A 2008 report from Booz & Company, Economic diversification: the roadto sustainable development, focuses on the importance of diversification to the Gulf Co-operation Council (GCC) countries. Itargues that Norway and Canada offer proof that oil-rich nations are not destined to suffer from poor diversification, and it urges GCC governments to invest in education and technological innovation to stimulate growth in other sectors. Norway started with the areas in which itwas strong and then slowly but surely diversified, says Chadi Moujaes, one of the authors of the report. So countries need to build on the core sectors they have and steadily build a portfolio of economic activity. Its always a process that takes time. Scott Payton is a freelance business journalist and editor.

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>technicalmatters
32 Business strategy
For more articles on management accounting, careers and development, see www.cimaglobal.com/insight.

Cost management
The company that Im writing about no longer exists: a victim of the recession. Based in the Midlands of England, it assembled electrical components to order. It was a small subsidiary of a large international group and its cost performance was erratic. All employees were salaried, so profitability varied according to sales, which were driven by an international sales team that often seemed to overlook the interests of the minnow. When the recession struck, the group decided to move some of its production to Europe and outsource the rest to save fixed costs. I never worked with the firm and dont know the underlying reasons for its closure, but business decisions are too often driven by cost alone, with no appreciation that performance drives cost, not vice versa. Tomake effective decisions we must first understand performance and how it affects cost. To reduce the cost of a process you should not arbitrarily slash budgets or cut jobs. You should study the performance of, and then improve, the process to maintain orimprove customer service for less. The flow time of a business process sometimes called the lead time, although its not always the same is how long it takes a product (or service) to move from start to completion. But only part of this time is spent actually working on the product. The rest is spent waiting, checking, reworking, transporting etc. The productive time is often 25 per cent or less of the total flow time. The rest adds no value and generates no revenue. If you cut the flow time, you increase productive work from the same resources. Assuming that you can sell the extra products, this means you could increase profitability, improve efficiency and boost customer satisfaction simply by

Ross Maynard ponders lessons from a firm that forgot to link its costs to performance.
reducing delays and waste without putting pressure on people to work faster. So how do you measure performance to work out where theres room for improvement? Taking our late company as an example, the data in the table on the next page covers ten weeks of activity in summer 2008, at least nine months before its closure. This is real data, so trends arent always clear and fluctuations caused by the product mix and other events do cloud matters, but we can use it to identify the main cost drivers and work out some other solutions that the group might have considered. First we need to measure the flow time: itsclear from the table that efforts to improve the process are having an effect the number of days it takes falls from 6.5 to 3.5 over the ten weeks and this is also reducing inventory. But the data indicates that the mix of products sold varies from week to week (illustrated by the revenue per unit indicator). The number of units produced per employee doesnt seem to be linked to the value of each unit. You might expect highervalue goods to take longer to assemble and test, but this doesnt seem to be the case. The profitability of the process depends on the sales mix, so the first priority should be to work with the sales team to review the market and plan how to target customers who want higher-value products and also try to understand the weekly fluctuation in orders. Making the demand side of the process more stable would help other improvement activities significantly. The data does not give us a measure of productive time, but there are proxies we can use: productive time differs from flow time because of delays, checking, reworking, downtime etc, and we can measure these interruptions. Inventory turns are improving

Further information

A new CIMA Mastercourse entitled Understanding and improving business processes will be held on June 17 and November 8 inLondon and onAugust 4 in Glasgow. Visit www.cimamastercourses.com for more details.

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>technical matters

Key process data for ten weeks of production Week Output (units) Employees Units per employee Revenue per unit () Material cost per unit () Revenue per head () On time to request (%) Flow time (days) First time through (%) Inventory turns Sales revenue () Materials purchased () Conversion labour () Other costs () Value stream profit () Value stream profit (%) 25 1,943 29 67 24.46 6.07 1,656 71 6.5 74 10.71 47,520 11,785 9,274 5,184 26,243 45 26 1,856 29 64 22.23 5.51 1,411 87 5.5 88 10.71 41,262 10,223 9,274 5,184 24,691 40 27 2,523 29 87 29.82 7.39 2,595 86 7.0 77 10.71 75,227 18,656 9,274 5,184 33,114 56 28 1,988 28 71 15.20 3.31 1,091 65 7.0 73 10.94 30,221 6,588 9,245 5,135 20,968 31 29 1,827 29 63 22.03 4.80 1,374 65 8.0 91 10.94 40,224 8,773 9,245 5,135 23,153 42 30 2,016 28 72 12.26 2.67 881 72 5.5 79 10.94 24,711 5,387 9,245 5,135 19,767 20 31 2,340 26 90 20.03 4.37 1,796 88 4.0 83 10.94 46,862 10,216 9,245 5,135 24,596 48 32 2,050 25 82 18.28 3.46 1,492 88 3.0 85 11.11 37,479 7,084 9,610 4,008 20,702 45 33 1,225 25 49 25.83 4.88 1,268 92 3.0 88 11.11 31,643 5,981 9,610 4,008 19,599 38 34 1,470 21 70 31.29 5.91 2,141 79 3.5 91 11.11 45,994 8,693 9,610 4,008 22,311 51

slightly, but this is hardly significant. In addition, first time through quality is 91 per cent at best. This is costly and affects customer satisfaction measured in the ontime to request line, which shows an improvement, but is still variable. Stabilising quality in the process should help the company to improve throughput and delivery performance. This may stabilise material costs and in turn help to reduce inventory. Training to improve quality in the process should be the second priority. The throughput of the process (units peremployee) doesnt link clearly to the product mix. But the weeks with the highestthroughput (27, 31 and 32) are generally the most profitable ones, although this isnt true in weeks 25 and 34, which arehighly profitable but with a much lower throughput.Again, the level of demand and the product mix affects the profitability of theprocess and the employees cant necessarily influence these factors. Nevertheless, identifying best practice and training employees in it would increase throughput per person and help to reduce the number of days between order entry anddelivery, thereby reducing inventory andimproving customer service.

We need to know more about the process and a longer period of data to establish full links between performance measures and finances. Even so, a small number of indicators, measured frequently, provide a good picture of how well a process works and the potential to bring total flow time nearer to productive time. If we connect this data with the financial performance of the process, we start to see how performance drives cost and which improvements will deliver financial benefits. This combination of measures and cost data for the process gives us more to work with than costs alone. In this case it allows us to predict the impact our actions might have had. First, working with the sales team to stabilise demand and focus on higher-value customers and products could have helped to smooth out the workflow and the number of employees required. Improving quality would have brought greater control to material costs and helped to improve performance (on time to request). Working out best practice and training people in it would have helped to improve quality and should have reduced flow time. This would push stock levels down, benefiting cash flow. Perhaps together these actions could have

stabilised the process with a value stream profit of 45 per cent or more. Would it have saved the company? I dont know perhaps the group simply didnt want such a small subsidiary any more. But I do know that its failure was disastrous for its staff and I wonder how many other companies have gone the same way because managers have focused too closely on costs without adequately understanding what drove them. We need to stop focusing on costs alone and strive to understand performance. Management accountants in every business must take more interest in linking the costs of processes with performance. A better grasp of the connections will lead to better decisions. When you next make a costing decision about a process, look at the flow time for the product or service in question and see how it differs from the productive time. Ask yourself whether you can reduce costs by cutting the flow time of the process and soincrease its capacity to do profitable work. Itmust be worth thinking about. Ross Maynard FCMA is senior consultant with BMA Europe, specialising in valuestream management accounting, pricing and lean transformation.

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>technical matters

Business strategy
Indias cultural and linguistic diversity make the country unique in many ways, so can general management theories be tailored to suit Indian business? I decided to apply the famous five forces model, which was designed by Michael Porter, professor of strategy and competitiveness at Harvard University, to give a company insights into the potential profitability of a market and help it form its strategy accordingly. The first force covered by the analysis framework is the threat of new competition. Unless the barriers to your market are formidable, new players can enter and poach your share of it. If you wish to enter a new market, you want these barriers to be low, of course. If Porter were Indian, he would recognise that factors such as state protectionism and a lack of infrastructure are a greater barrier to entry in India than they are in more developed nations, where market forces are more powerful. This is because governments of emerging economies are usually reluctant to open the doors to new players in many sectors. Even if they do, its likely that they will adopt more interventionist policies at a later stage. For example, Indias airline sector is poised for growth, but the fact that it has recently been deregulated makes it more difficult for competitors to develop long-term strategies, because all such strategies will collapse if the government feels that new entrants are threatening its home market. One factor that could play a crucial role in India ispublic opinion, which exerts a considerableinfluence on the government. Agood example of this is the campaign by local retailers, which feel that the arrival of USretailgiant Walmart could put them out ofbusiness. Walmart has madehuge investments in India, but is having to findways roundstringent regulations that prevent it from doing things as basic as putting its brand name on stores. The psychological profile of stakeholders can be crucial to your competitive strategy, because it means that you have to handle

Srikant Parthasarathy applies Michael Porters classic five forces model of competitive analysis to Indias singular business environment.
the regulators before you deal with your competitors. This is not so true in developed economies, where regulators are more prepared to let the market prevail. They dont rely entirely on market forces to determine competition, of course, and there can be opposition to takeover bids for household names, which is what happened in the UK when Kraft acquired Cadbury, for example, but developing nations tend to be far more conservative and treat such M&A deals with great scepticism. For example, even in telecoms, which is arguably Indias most sophisticated industry, Bharti, one of its big players, is still experiencing problems concerning its proposed merger with South Africas MTN Group. Its foreign suitor continues to be viewed with suspicion and the on-off deal has been smothered in bureaucracy. While innovation is seen to contribute to the economy in the west, in India it is still seen more as a threat. Porters second force is the bargaining power of suppliers. The model assumes that they can exert significant influence over a corporate customer. Companies in developed countries generally have a bigger pool of high-quality suppliers and fewer concerns about their ability to honour their contracts, but this is a big issue in India. Most companies here have a plan B ie, they have already selected a supplier that will be chosen if the first choice fails to deliver. Most companies in the developed world have learned the hard way that any system that aims only to reduce costs is flawed and that they also need to consider quality. In India buyers are less likely to demand quality, so retailers are lethargic when it comes to seeking it. Indian companies tend to experience two extremes: they either have no suppliers at all for prospective products or they have too many unreliable suppliers overcrowding the industry. This is because of the bandwagon effect: any firm that makes a profit quickly attracts rivals into its market. These new competitors may not have the infrastructure or the quality processes to outperform the original player, but they create pressure on it to deliver quickly at the lowest cost. This is different from western or Japanese business cultures, in which few companies would consider suppliers working below a benchmark standard of quality.

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As long as their desire forchocolate of any kind is sated, Indian consumers will tend to goforthe cheapest option
The third force is the bargaining power ofbuyers. As an Indian consumer myself, Iknow that getting a company to reduce theprice of a product would be a big achievement, but the real question is how many of us it would take to manage it. Although customers can be influential, the truth is that most accept the price of the product, either because they feel they cannot affect its price or because they lack knowledge about its true cost and value. The bargaining power of buyers is also more disguised by tariff regulations in India than it is in developed countries. Take the countrys growing mobile telephony market, for instance: the cost to the operator of a text message does not exceed Rs0.01, whilethe normal charge to the user for each text is Rs0.50 to Rs1.00. Customers pay this either because they dont know that the tariff is at least 50 times the cost or because they want the services too much to complain and cant find an alternative. The concept of pay per second rather than per minute came late to India because buyers were ignorant of the global situation. The fourth force is the availability of substitute goods. A substitute is generally understood to be the closest equivalent, but the definition can be different in India from that in more developed markets. For example, most Indian consumers view a Mars bar as the same thing as a bar of Cadburys Dairy Milk. While these are priced similarly in the UK, they are priced differently in India, where Cadbury has pursued an aggressive strategy. A price war has meant that a chocolate bar called Munch now retails for Rs2, which has taken competition to a new level: Cadbury now charges Rs5 for a Dairy Milk bar, while Mars bars cost Rs25. Its clear that the sales teams for Munch and Dairy Milk are seeking high volumes of sales at the cost of profitability. As long as their desire for chocolate of any kind is sated, Indian consumers will tend to go for the cheapest option. Here, consumer choice is influenced more by price than by quality. The same applies to business schools in India. An MBA is considered to be a premium qualification, but most students dont seem to worry about what the degree offers, as long as they can put those three

designatory letters after their names. Its difficult, therefore, to differentiate your brand in India by anything except price unless you adopt the strategy of projecting your product as being a completely different macro element. For example, marketing a Mars Bar as something with a much higher status than mere chocolate could have the desired effect on Indian consumers. The fifth force competition within industries is often more virtual than real in India. Most industries are dominated by two or three top players, even when the sector seems to be flooded with competitors. Whilethis can also be true in more developed countries, the gap between the top players and the second tier in India is often much wider. Lower-level players may have the desire to compete, but they tend to lack the experience or size to gain traction against the strongest companies. Lack of competition at the top affects howthe other four forces apply. The leading company has to compete against only a few smaller rivals and always wins. As the competition flows down the pyramid to the second tier, it intensifies until it becomes most intense at the lowest level. New entrants can easily set up shops by copying a few profitable companies, but many of these have no chance of growing and they exist merely to make as much profit as possible at the lowest cost. In this way they drag down other smaller companies by creating constant virtual threats. Companies in India spend much of their time and resources dealing with lower-tier rivals rather than with players at the same level. The government supports the small entrants with its tax regime, but it has yet to provide the infrastructure they need in order to develop and become serious competitors further up the scale. Srikant Parthasarathy ishead of Chakra Consulting and alsovisiting professor of strategy at Christ University in Bangalore.

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Connective bargaining
A week may be a long time in politics, but most financial teams have been accustomed to being able to forecast and plan for the long term, making gradual adjustments as they measure their predictions against steadily developing trends. The financial crisis changed all this, causing rapid and dramatic fluctuations in most markets. One inevitable result was that suppliers immediately faced pressure from their corporate customers to cut prices. Many have been told that their offerings are too costly and that their rivals are charging less. Although most economies are emerging from recession, this pressure is likely to remain strong for some time. Similarly, many financial managers are likely to face far tougher negotiations with other departments within, as well as outside, their companies. You may not be comfortable with this, especially if you think your position is weaker than that of the other party, but someone with a firm grasp of the finances whos able to negotiate effectively and produce a win-win situation is likely to add value for their organisation and put themselves in a strong position for promotion. Of course, buyers wont always be trying to establish a tough negotiating position to see if a price cut is on the agenda. They may simply be letting the supplier down gently because they have already decided to place their business elsewhere. But, if they are hoping to gain concessions from a longer negotiation, youll have to know the best way to counter their arguments and salvage a deal that still works for both of you. You need to start by examining some of the key challenges inherent in the customer-supplier relationship and then consider the techniques that good negotiators use to achieve a mutually beneficial outcome. A downturn often puts a strain on the winwin goal as the basis of long-term partnerships between customers and suppliers. Indeed, received wisdom states that such an aim is no longer realistic in such conditions: customers are typically seen to hold most of the cards and the power

Its easy to see negotiations as a war of attrition, but thats a mistake, writes Pete Belsey. He offers a guide to achieving a win-win result.

imbalance closely resembles W C Fields adage: Never give a sucker an even break. If true, this theory is fatally short-sighted the result of a win-lose outcome in the long term remains the same as ever: lose-lose. Ifthe deal ends up so unprofitable for the supplier that it cant afford to provide the service the customer needs, neither party gets the outcome it wants. Yet this factor is often forgotten. Some suppliers and buyers say that they aim for win-win and do really practise what they preach. Yet it is easy forbuyers to be affected by the lure of shortterm gains and pressure from their bosses, so they end up abusing their power. But suppliers must also share the blame for the consequences if they cave in because they misunderstand their own position. The key to successful negotiation is to know how to plan for a win-win outcome and how to recognise and handle someone who is playing win-lose. This may sound easy, but

the reality is always complex, fast-changing and challenging. Suppliers, especially in manufacturing, are having their margins squeezed: not only are buyers driving down prices of their finished goods, but also high energy costs are feeding through to cost of manufacture, together with the increased cost of capital. Despite this, a supplier cant hope to ride out a short economic storm by, say, agreeing unprofitable deals to keep it afloat on the basis that they are contributing to overheads. Whatever strategy it adopts, it must be sustainable and work on the basis that the effects of the downturn are likely to be with us for some time to come. Its too easy to believe that buyers hold all the cards. It is true that corporate customers facing similar pressures will try to protect margins by striking a tough bargain with suppliers and that this is likely to be exacerbated by an overriding focus on shortterm cost-cutting. But, as recessionary

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pressures ease, were likely to see another shift back to the suppliers and they may well retaliate with similarly short-term policies that will abuse their new power. However tempting this adversarial approach may be, it creates a counterproductive longterm relationship. The best negotiator seeks an atmosphere in which the two parties co-operate to solve a mutual problem. So, wherever the balance of power lies at the moment, exercising restraint and acknowledging that youre in the same economic boat is far more likely to lead to a mutually beneficial relationship in the longer term. All this is easy to say, yet much harder to achieve if the other party is dead set on a win-lose outcome. No matter whether you are the supplier or the buyer, therefore, when you face mounting costs, vanishing margins and an awkward business partner, the only tools left at your disposal are your interpersonal negotiation skills. Negotiation is the crucial part of any commercial relationship. It concludes all big contractual agreements, determining their ultimate profitability for each party, and its also the process by which, through renegotiation, commercial partnerships either evolve to mutually profitable maturity or break down in acrimony. There are four elements to successful negotiation. First, whether youre the supplier or the buyer, it is vital to define your firms strategic objectives. This places much greater emphasis on considering the longterm relationship and putting yourself in the other sides shoes to anticipate their position. Second, before entering any talks, each party should systematically analyse and manage the power balance. Third, at the preparation stage each side should again explore the range of possible trades and links and, importantly, the ways in which they could be negotiated. The fourth and most crucial element is a first-class approach to negotiation. This incorporates a surprisingly consultative style based on understanding the other partys needs, maintaining clarity and building trust, while dealing firmly with aggression or other unreasonable behaviour. Historically, the standard approach taught was to make proposals in the conditional form eg, If you do this, we would do that. This has its place in encouraging trading and avoiding unilateral concessions, but it should be seen as only one part of a more complex model. This model covers methods that skilled negotiators use heavily and others that they avoid. The best negotiators ask lots of questions more than double the amount asked by average negotiators. This achieves a number of important objectives, including testing understanding, probing reasons for the other partys stance and summarising progress. The most common use is to reveal the other partys position and explore its rationale. Ask enough questions and the other side will often realise that its stance is untenable. Average negotiators try to persuade the other side by bombarding them with information and reasons to support their case. As we all know from personal experience, such attempts rarely have a positive effect. Effective negotiators are not poker-faced they talk readily about their feelings. This tactic is supported by psychological research which suggests that sharing emotions encourages openness and creates trust. Skilled practitioners also regularly check both parties understanding of the latest situation. Such summaries add clarity and improve the odds of a successful implementation of the final deal. Average negotiators are often happier fudging contentious issues than resolving them. The problem is that these do not go away and cause more problems later in the process. Just as important is the behaviour that most skilled negotiators avoid. This includes gratuitous self-praise and condescension. Two simple examples include prefacing offers with phrases such as this is fair and generous or with respect, young man. Either will almost certainly irritate the recipient and harm relations, yet average negotiators persist in using such language. Similarly, counter-proposals do nothing to advance the talks, as they are typically viewed as blocking tactics rather than serious proposals. Lastly, it is important to avoid diluting your own argument. At school we are often taughtto present as many points as possible to support our case, but skilled negotiators use the strongest argument and repeat it as necessary. Only if its undermined will they introduce a second reason to back up their position. They refuse to dilute a strong argument with a weaker one. Effective planning that determines possible trades and links; analysing and managing the power balance effectively; and using a consultative negotiating style will mean that the process is not a damagelimitation exercise for either party, but a true meeting of equals and the basis for a mutually acceptable agreement. Financial managers and their customers (inside and outside their own organisation) need to take note: behaving this way will change results. The bottom line is that the cynics are wrong. A systematic approach to negotiation works, has a low failure rate and, crucially, keeps both sides happy. Thats win-win. Pete Belsey is business director, financial/professional services, at Huthwaite International.

Further information

New CIMA Mastercourses entitled Influencing skills will take placeat various dates in London and Glasgow. For more details visitwww.cimaglobal.com/mastercourses. CIMA MY JOBS provides an international perspective on the jobmarket, featuring a range of articles on working abroad. For more details visit www.cimaglobal.com/myjobs.

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Paper F3 Financial Strategy

>study notes
Financial Management
SallyBaker explains how to account for complex groups featuring sub-subsidiaries.
The term complex group is used to refer to a situation where a parent entity has a subsidiary without directly owning shares in it. Instead it owns the shares indirectly via another subsidiary. Remembering that control is normally achieved by owning most of an entitys shares and, therefore, a majority of voting rights, lets consider the two complex group scenarios illustrated in the diagram. The first step to take when dealing with complex groups is to test for control. Its clear from scenario one that the Elm company is a subsidiary of Durian, but we need to consider whether Fig is also a subsidiary of Durian. Imagine a meeting of Figs shareholders, at which Elm holds 70 per cent of the voting rights and so has control. Since Durian has control of Elm, it can instruct Elm how to vote at the meeting. In reality, therefore, Durian is able to control Fig indirectly via its control of Elm, so we can conclude that Fig is a subsidiary of Durian. In scenario two its clear that Ruby has a controlling majority of voting rights in Sapphire. Similarly, Sapphire can control Topaz. Ruby can, therefore, control Topaz via Sapphire, which makes Topaz a subsidiary of Ruby as well. In both scenarios the structure is known as a verticalgroup and Fig and Topaz are referred to as sub-subsidiaries (sub-subs). Once youve determined that the relationship of control exists, the second step is to consider the effective ownership percentages ie, the respective percentages of the sub-sub that the parent and noncontrolling-interest shareholders (NCIs) own in effect. These percentages are used in the mechanics of the consolidation process. Returning to scenario one, Durian owns 90 per cent of subsidiary Elm, so the remaining 10 per cent is owned by NCIs. Elmowns 70 per cent of Fig, so in effect Durian owns 90 per cent x 70 per cent = 63per cent of its sub-sub Fig. The remaining 37 per cent is owned by NCIs. (An alternative way to calculate the NCIs effective percentage is to consider that there are shareholders other than Elm who own 30 per cent of Fig. Also, the NCIs of Elm own ten per cent of its 70per cent holding in Fig and so own 10 per cent x 70 per cent = 7 per cent of Fig. So the NCIs of the group own 30 per cent + 7 per cent = 37 per cent of Fig.) In scenario two, Ruby owns 75 per cent of Sapphire and the NCIs own 25per cent. In effect, Ruby owns 75 per cent x 60 per cent = 45 per cent of Topaz, so the NCIs effective percentage is 55 per cent. It is important to note the distinction between control and ownership here: although Ruby does not own most of Topazs shares, Ruby is able to control Topaz via its control of Sapphire. The third step is to consider the date of acquisition. This is defined in IFRS3 (revised), Business combinations, as the day that the parent achieves control, where the parent of the group is the ultimate parent. It is the date from which a subsidiary is consolidated ie, when the subsidiarys net assets, goodwill and NCIs arerecognised. In scenario one Durian can control Elm from January 1, 2009, so this is the relevant date of acquisition for Elm. Durian cant control Fig until Elm isable to control Fig. That occurs only on January 1, 2010, so this is the date of acquisition for Fig. In scenario two Sapphires date of acquisition is July 1, 2009, by which time Sapphire could already control Topaz, since it acquired its holding on April 1, 2009. Ruby can, therefore, control

Paper F3 Paper P1  Financial Strategy Performance Operations

Two complex group scenarios

Scenario one
Durian Ruby

Scenario two

90% January 1, 2009

75% July 1, 2009

Elm

Sapphire

70% January 1, 2010

60% April 1, 2009

Fig

Topaz

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1 Goodwill calculation for the Fig company Elms cost of investment in Fig Indirect holding adjustment (10% x $700) Fair value of Durians 63% holding (90% x $700) Fair value of NCIs 37% holding Fair value of whole subsidiary Fair value of Figs net assets at acquisition Gross goodwill at acquisition 2 Goodwill calculation for the Topaz company Sapphires cost of investment in Topaz Indirect holding adjustment (25% x $600) Fair value of Rubys 45% holding (75% x $600) Fair value of NCIs 55% holding Fair value of whole subsidiary Fair value of Topazs net assets at acquisition Gross goodwill at acquisition Topaz from July 1, 2009. In other words, the date of acquisition for the sub-sub is the later of the two dates. The fourth and final step in a complex group scenario is to deal with the indirect holding adjustment (IHA). The IHA affects only the calculation of goodwill for the sub-sub and the NCIs element in equity in the consolidated statement of financial position. To calculate gross goodwill, its necessary to compare the fair value of the ultimate parents and NCIs holdings with the fair value of the subsidiarys net assets. Normally the fair valueof the parents holding is the cost of the investment in the parents books, but in a complex group this is not the case, since it was the intermediate entity that funded the investment in the sub-sub. Returning to scenario one, suppose that Elm paid $700 for its 70 per cent investment in Fig. As the parent of the group, Durian effectively owns only 63 per cent of Fig. The fair value of Durians holding for the purposes of goodwill is 90 per cent x $700 = $630. Hence an adjustment is required to reduce the cost of Elms investment by $70 ie, the element of the cost attributed to the NCIs 10per cent holding in Elm. This is then charged to the NCIs in their element of equity. $ 600 (150) $ $ 700 (70) $

PAPER F2

630 300 930 (500) 430

450 400 850 (700) 150

Suppose also that the fair value of the NCIs 37 per cent holding in Fig is $300 and that the fair value of Figs net assets at the date of acquisition was $500. The goodwill calculation is shown in table 1. To reinforce the idea, lets calculate gross goodwill for scenario two. Suppose that Sapphire paid $600 for its investment in Topaz; that Topazs net assets on July 1, 2009 had afair value of $700; and that the fair value A mixed group scenario

Hammer

80% January 1, 2009

Jemmy 40% January 1, 2010

30% January 1, 2010

Knife

of the NCIs 55 per cent holding in Topaz at the time was $400. The IHA would be the NCIs percentage holding in Sapphire multiplied by the cost of Sapphires investment in Topaz ie, 25 per cent x $600 = $150. By reducing the cost of investment by 25 per cent, this will leave the fair value of 75 per cent of Sapphires 60 per cent holding ie, the fair value of Rubys 45per cent holding. The goodwill calculation is shown in table 2. Preparing the consolidated income statement is relatively straightforward for a vertical group because the IHA has no impact. Its simply a case of consolidating the income and expenses of both the subsidiary and subsub in full, line by line. TheNCIs share of the subs and sub-subs profits will be calculated, remembering to use the NCIs effective ownership percentage for the sub-sub. Complex group structures can be further complicated when the parent also directly owns shares in the sub-sub. Such cases are often referred to as mixed groups. Considerthe scenario illustrated in the diagram at the bottom of the page: it shows that Jemmy is a straightforward subsidiary of which Hammer owns 80 per cent and the NCIs own 20 per cent. It will be consolidated from January 1, 2009. It is necessary to establish how Knife should be treated in the group accounts. Taking both Hammers direct and indirect interests into account, it is again necessary to test first whether Hammer can control Knife. Hammer controls Jemmy by virtue of its 80per cent holding. Hammer can, therefore, dictate how Jemmy uses its 40 per cent share of Knife (although Jemmy cannot control Knife because it doesnt have a majority holding). But taking account of both Hammers direct holding of 30 per cent in Knife and the 40 per cent it can control via Jemmy, Hammer can control Knife by dictating how 70 per cent of shareholder votes are cast. Next, we need to calculate the effective percentages. Hammer owns 30 per cent of Knife directly and 80 per cent x 40 per cent =32per cent indirectly, making a total of 62per cent. The NCIs own the remaining 38per cent. Third, we note that Hammer is able to control Knife from January 1, 2010, which makes it the date of acquisition.

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PAPER F2

Complex group structures can be further complicated when the parent also directly owns shares in the sub-sub
3 Goodwill calculation for the Knife company $ Fair value of Hammers direct 30% holding  Jemmys cost of investment in Knife 1,200 Indirect holding adjustment (20% x $1,200) (240) Fair value of Hammers indirect 32% holding (80% x $1,200) Fair value of NCIs 38% holding Fair value of whole subsidiary Fair value of Knifes net assets at acquisition Gross goodwill at acquisition 4 Statements of financial position for Rain, Snow and Thunder on March 31, 2010 Rain ($000) ASSETS Non-current assets Property, plant and equipment 2,500 Investments 3,000 5,500 Current assets 4,500 Total assets 10,000 EQUITY AND LIABILITIES Equity Share capital $1 shares Retained earnings Total equity Non-current liabilities Current liabilities Total liabilities Total equity and liabilities 5 Key data for Snow and Thunder Retained earnings on April 1, 2007 Retained earnings on April 1, 2008 Fair value of NCIs holding at acquisition Snow ($000) 300 500 600 Thunder ($000) 100 300 200 Snow ($000) Thunder ($000) $ 900 Suppose that we have the following data: n  Cost paid by Hammer for its 30 per cent holding in Knife: $900. n  Cost paid by Jemmy for its 40 per cent holding in Knife: $1,200. n  Fair value of NCIs 38 per cent holding at the date of acquisition: $1,140. n  Fair value of Knifes net assets at the date of acquisition: $2,000. When calculating the goodwill, the fair value of Hammers holding will comprise the fair value of both its direct and indirect holdings. The IHA will be required in respect of Hammers indirect investment via Jemmy, but not in relation to its direct holding. The goodwill calculation is shown in table 3. Its worth noting that a mixed group structure can be made considerably more complicated by changing the dates of acquisition on the sub-sub in such a way that its also necessary to consider whether theres also a step acquisition from no control to control or a decrease in the NCIs holding. Now try the following question to test your understanding. The solution will appear at www.cimaglobal.com/velocity. Table 4 contains the statements of financial position of three entities Rain, Snow and Thunder at their reporting date. Rain acquired 70 per cent of Snows equity shares on April 1, 2008, paying $1.75m in cash. Snow had previously acquired 60 per cent of Thunders equity shares on April 1, 2007, paying $600,000 in cash. The balances on retained earnings for Snow and Thunder and the fair value of their NCIs holdings (based on effective ownership percentages) are shown in table 5. It is the Rain groups policy to measure non-controlling interest at the date of acquisition at fair value. You are required to prepare the groups consolidated statement of financial position as at March 31, 2010. Sally Baker is a senior lecturer with KaplanFinancial in London.

960 1,140 3,000 (2,000) 1,000

900 , 600 1,500 2,000 3,500

1,100 0,000 1,100 1,400 2,500

1,000 4,500 5,500 1,500 3,000 4,500 80,000 10,000

500 800 1,300 800 1,400 2,200 0,000 3,500

200 700 900 500 1,100 1,600 0,000 2,500

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Financial Strategy
The examiner for F3 offers her guide to the most significant differences between the new paper and its predecessor under the old syllabus, P9.
The introduction of CIMAs new syllabus has brought some important changes to the way the Financial Strategy paper is examined. F3 differs from the old P9 exam in key aspects including the structure of the syllabus, the format of the paper and the contents of the formula sheet provided. The new paper also requires a more rigorous approach to calculations with respect to working out tax relief on finance lease payments and adjusting for partial years when discounting or applying compound growth. Changes to the syllabus The main change concerns structure rather than content. In the old P9 paper there were four main syllabus areas: A  Formulation of financial strategy (20 per cent weighting). B Financial management (30 per cent). C  Business valuation and acquisitions (25per cent). D  Investment decisions and project control (25 per cent). By contrast, F3 has only three main syllabus areas: A  Formulation of financial strategy (25 per cent weighting). B Financing decisions (30 per cent). C  Investment decisions and project control (45 per cent). The main difference is the aggregation ofP9s old sections C and D into a single new section C in F3. This has important implications for the content of the exam, because the examiner is no longer constrained by the need to give equal weighting to both Business valuation and acquisitions and Investment decisions andproject control. The new upper limit of 45 marks in section C gives the examiner greaterflexibility in setting questions on this area of the syllabus. Coverage of, for example, an acquisition is no longer restrictedto 25 marks, so a longer question with a broader scope can now be included on the subject. The study weighting for the new section Ahas been increased slightly. The weighting of section B remains unaltered, but the content has been expanded slightly to include the financing of investments. Changes to the exam paper The most significant change is the addition ofpre-seen material as preparation for question 1 the case study question. Thestrategic level pre-seen material is designed to allow you to familiarise yourself with the organisation(s) and industry in question. It willbe the basis for section A ofall three strategiclevel papers. It will also helpyou toprepare for the process youll have to go through when taking the final T4part B Case Study exam. When preparing for the F3 exam, you need to acquaint yourself with the facts contained in the pre-seen material. But, although it is important to be familiar with them, you should also note that the exam itself is unlikely to require a detailed analysis of the pre-seen data. An example of how the pre-seen and unseen materials might be used in the F3 exam is as follows. If, for instance, you are required to perform a balance sheet analysis, its likely that an additional forecast balancesheet for a subsequent year will be provided as part of the unseen material. Similarly, any modelling you are required to doin the exam may refer to base data provided in the pre-seen material, but you can expect the modelling process itself to bebased predominantly on new information supplied in the unseen material.

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The new upper limit of 45marks in section C gives the examiner greater flexibility in setting questions on this area of the syllabus
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PAPER F3

There will be useful hooks in the preseen material that will indicate to tutors and students some of the main areas of the syllabus that are likely to appear in one or more strategic papers across two diets. Changes to the formula sheet Several minor alterations have been made to provide more consistency in the sheets presentation. One notable change concerns how exchange rates are presented. They will now follow the internationally accepted standard format, with the first named currency as the base currency and the second currency as the variable currency.

Forexample, A$/B$ 3.4000 should be interpreted as A$1 = B$3.4000. This means that the order in which currencies are listed in F3 is now opposite to the one used in P9. In F3 and other strategic level papers, CIMA will also gradually introduce internationally recognised currency codes for major national currencies. You will not need to memorise the currency codes themselves, because questions will state the relevant countries and their currency codes. Changes to calculations F3 candidates are expected to take a more accurate approach to calculating cash flows

F3 exam preparation tips

n  Its clearly sensible to familiarise yourself with the syllabus areas covered by the pre-seen case material. n  When you enter the exam hall you should be aware of the information and types of financial data available for use in answering question 1 so that you dont have to waste time re-reading the preseen material or hunting for information that you know is already provided. n  Remember that any financial analysis required in question 1 is likely to build on new data provided in the unseen material, so the extensive analysis and memorising of financial ratios etc is unlikely to be helpful. n  Focus primarily on the requirements laidout in the question and resist the temptation to answer the question that you were expecting to see. It is important to enter the exam hall with anopen mind, ready to respond to newinformation. n  Check that you understand the changes to the way that exchange rates are presented. You can use the example in the specimen paper as a guide. Remember that old exam papers used for revision may show the exchange rate the other way round. n Make sure that you feel comfortable with the finance lease tax calculations shown in the specimen paper. Although the actuarial method is probably more complex to understand and may not have been the method taught in F1, its probably quicker and easier to use than the sum-of-digits method. But you do need to ensure that you are confident in calculating the implied interest rate, because this will not necessarily be provided. The sum-of-digits method is also acceptable and you wont lose any marks if you use this instead. n  Note that in F3 you might find that a 50mark question concerning acquisition or project decisions may have more than 25 marks devoted to that syllabus area. The integration of P9s syllabus sections C and D means that there is now an upper limit of 45 marks on coverage of acquisition or project decisions. By raising this limit from the old 25-mark ceiling, the examiner is now able to set more extensive questions in this area than had been possible in P9.

arising on finance leases. Youll need to be able to calculate the finance charge element within the finance lease payment and restrict corporate tax relief to that element. Such a method, which will be familiar from your F1 studies, ensures a consistency of approach across the financial pillar. Either the sum-of-digits method or the actuarial method is acceptable. Both approaches are set out in the Official CIMA Learning System and in question 2 of November 2009s specimen F3 paper. Note that, if you do choose the actuarial method, you will be expected to calculate the implied interest rate. This is a change from F1, where a figure for the rate is provided. Also note that lease payments may be payable either in arrears or in advance, according to the scenario provided, and a deposit may also sometimes be payable. A second change in F3 calculations is thatcandidates may sometimes be expected to work with partial years when adjusting exchange rate data. For example, an exchange rate may be provided that is relevant to the exam date of, say, May 20, butinvestment appraisal may be required based on whole calendar years starting on January 1 of the following year. In such a case, youd be expected to estimate the likely appreciation or depreciation of the local currency in the period from May 20 to January1. A full worked example of such a calculation is provided in question 1 of the November 2009 specimen paper. Where the growth in a figure of Y is required at a (compounded) annual rate of rper cent for t days, the calculation to use is Y x (1 + r)t/365. Similarly, where Y is to be discounted by t days at the same annual rate, the calculation to use is Y (1+r)t/365.

F3 further reading

J Ogilvie, The Official CIMA Learning System Financial Strategy, CIMAPublishing, 2009.

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>study notes

EXAM NOTICE
May 2010 exam results The results for all papers will be sent out by first-class post or airmail on July 15. To register to receive your results via email, log into your My CIMA account (www.cimaglobal.com/cimaonline) by July 8. Select My personal details and then My communication preferences. Results will be e-mailed on July 15. The institute cannot give out results on the telephone or to personal callers at any CIMA office. Appeals process Details of the exam appeals process can befound in the Instructions for exam entry document on CIMAs web site. Attendance slip receipts You will have received an attendance slip for each exam you sat. The slips are confirmationof your attendance. You should keep them for at least four months after the exams as proof of your sitting. Question papers The May 2010 question papers and model answers are now available for registered students to download free through their MyCIMA accounts. Question and answer booklets can also be purchased from CIMA Publishing (www.cimapublishing.com). Script review service for strategic level papers and the T4 part B Case Study After the May exam results are released the institute will be offering a script review service for the strategic level papers (E3, F3, P3) and T4 part B. The service is available only if you scored between 40 and 49

Global contact details

n CIMA Contact E: cima.contact@ cimaglobal.com T: +44 (0)20 8849 2251 F: +44 (0)20 8849 2450 n Australia office Suite 1305, 109 Pitt Street, Sydney, New South Wales 2000 E: sydney@ cimaglobal.com T: 1800 679 996 (toll-free in Australia) or: +61 (0)2 9376 9900 F: +61 (0)2 9376 9905 n CIMA Botswana Physical: Plot 50676, Second Floor, Block B, BIFM Building, Fairgrounds Office Park, Gaborone Postal: PO Box 403475, Gaborone E: gaborone@ cimaglobal.com T: +267 395 2362 F: +267 397 2982 n CIMA China office Unit 1508A, 15th floor of AZIA Center, 1233, Lujiazui Ring Road, Pudong, Shanghai 200120. E: shanghai@ cimaglobal.com T: +86 (0)21 6160 1558 F: +86 (0)21 6160 1568 n Hong Kong Division Suites 1414-1415, 14th Floor, Jardine House, Central HK E: hongkong@ cimaglobal.com T: +852 2511 2003 F: +852 2507 4701 n India liaison office Unit 1-A-1, 3rd Floor, Vibgyor Towers, C-62, G Block, Bandra Kurla Complex, Bandra (East), Mumbai 400 051 E: india@cimaglobal.com T: +91 22 4237 0100 n Malaysia Division Lots 1.03b and 1.05, Level 1, KPMG Tower, First Avenue, Bandar Utama, 47800 Petaling Jaya, Selangor Darul Ehsan E: kualalumpur@ cimaglobal.com T: +60 (0)3 77 230230 F: +60 (0)3 77 230231 n Poland contact point Warsaw Financial Centre, ul E Plater 53, Warsaw 00-113 T: +48 22 528 6890 F: +48 22 528 6701 E: thierry.iovane@ cimaglobal.com n Pakistan office No 201, 2nd floor, Business Arcade, Plot 27-A, Block 6 PECHS, Shahra-eFaisal, Karachi T: +92 21 3432 2387 E: pakistan@ cimaglobal.com n CIMA Ireland 45-47 Pembroke Road, Ballsbridge, Dublin 4 E: dublin@ cimaglobal.com T: +353 (0)1 643 0400 F: +353 (0)1 643 0401 n Russia/Ukraine contact point T: +7 906 091 4550 F: +44 (0)20 8849 2472 E: helen.buniatyan@ cimaglobal.com n CIMA Singapore 51 Goldhill Plaza #08-02, Singapore 308900 E: singapore@ cimaglobal.com T: +65 6535 6822 F: +65 6534 3992 n CIMA South Africa Physical: First Floor, South West Wing, 198Oxford Road, Illovo, Johannesburg 2196 Postal: PO Box 745 Northlands 2116 E: johannesburg@ cimaglobal.com T: +27 (0)11 788 8723 or: 0861 CIMASA (0861 246272) F: +27 (0)11 788 8724 n Sri Lanka Division 356 Elvitigala Mawatha, Colombo 05 E: colombo@ cimaglobal.com T: + 94 (0)11 250 3880 F: + 94 (0)11 250 3881 n CIMA Zambia Physical: Plot Number 6053, Sibweni Road, Northmead, Lusaka Postal: Box 30640, Lusaka E: lusaka@ cimaglobal.com T: +260 1 290 219 F: +260 1 290 548 n CIMA Zimbabwe Physical: Sixth Floor, Michael House, 62 Nelson Mandela Avenue, Harare Postal: PO Box 3831, Harare E: harare@ cimaglobal.com T/F: +263 (0)4 708600/ 250475

Visit www.cimaglobal.com regularly for updates.

marks in the strategic level paper for which you want a script review, or if you scored between 20 and 24 credits in T4 part B. Administrative reviews An administrative review service is available for all operational, management and strategic level papers. For more information about this service and how to apply for a review, visit www.cimaglobal.com/scriptreview. Post-exam guides Post-exam guides for each of the professional qualification subjects will be available three to four months after the exams from www.cimaglobal.com/studyresources. These are essential reading for unsuccessful candidates and for those studying a new subject. They contain thefollowing: n All of the exam questions. n The rationale for each question. n  The suggested approach to answering each question. n The outline marking scheme. n The examiners comments. CIMAstudy.com Visit www.cimastudy.com for information about a new online learning resource for management and strategic level papers that can be used for self-study or as part of a blended approach. Computer-based assessments at certificatelevel For full information about entering for a computer-based assessment, visit www.cimaglobal.com/ certificateentry. Queries Visit CIMAs web site (www.cimaglobal.com) or get in touch with CIMA Contact or your nearest office (see panel).

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>CEOs notebook

Beyond accounting
CIMA professionals are best qualified for the increasingly important challenge of measuring non-financial factors, writes Charles Tilley.
I am delighted that the International Federation of Accountants (IFAC) has teamed up formally with the Prince of Waless Accounting for Sustainability project (A4S) by signing a memorandum of understanding. In their joint statement they declare that perhaps the most critical challenge facing business and society generally is to live within our ecological limits while continuing to enjoy economic prosperity. IFAC and A4S believe that an essential part of the answer lies in going beyond traditional ways of thinking about performance and embedding sustainability into strategy, governance, performance management and reporting processes. Few would disagree with that. And, as Robert Bunting, IFACs president, states, professionals accountants play a key role in achieving it, especially when it comes to ensuring accountability and measuring results. A core A4S idea is that an orthodox balance sheet omits ahuge amount of information. Where is the explanation of the business model and how sustainable it is? How is it made clear that the companys bonus structures are aligned with its longterm strategy? And where is the data about the businesss impact on the environment, the workforce and the wider community? The first thing that strikes me about this matter is that its becoming ever more important to measure a whole range of non-financial factors; the second is that management accountants are better placed than anyone else in the profession to do it. This is not simply about green issues. Certainly, we need better ecological reporting so that we know the amount of natural resources that a firm has used in manufacturing, for example. But recent events in investment banking, such as the furore over Lehman Brothers accounting practices and then the row over Goldman Sachs apparent conflicts of interest in bundling sub-prime mortgage packages, show the importance of replacing the narrow view of historical financial accounts with the wider vision of narrative reporting. Broadening the scope of how we calculate benefits is equally vital in the public sector, where many countries are making big cuts. In theory it should be possible to justify expenditure on a particular government initiative, butthis becomes far more complex if the benefits are shared among many people and are hard to

In theory it should be possible to justify expenditure on a particular government initiative, but this becomes far more complex if the benefits are sharedamong many people and are hard to quantify financially
quantify financially. For example, helping one person to kick a drug addiction permanently may improve not onlytheir well-being, but also that of their relations, neighbours and local community. We need to find imaginative ways to measure what has been called the social return on investment. With the explosion of data out there and the narrow focus and complexity of financial accounting, management accountants can provide the greatest value by using their broader perspective and capability. CIMA professionals must be pervasive in organisations, both private and public sector, providing management information, analysis and recommendations that are relevant, clear and influential.

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>instituteupdate
Disciplinary and Investigation COMMITTEES
The disciplinary committee found Matthew Green, registered student, guilty of misconduct. Hehad admitted that between November 1, 2007 and October 28, 2008 hed stolen 30,252 from his employer, leading to a conviction for theft and an eightmonth prison sentence. The committee referred to the principles of integrity and professional behaviour in the institutes code of ethics, the fact that Greens conduct was relevantto his student registration with the institute and, in particular, that the theft was from his employer. The committee took into account mitigating factors, including his guilty plea before the magistrates court; his expression of remorse in a letter to the institute; and reference in a press report to his previous good character. It was not in his favour that the theft was of a substantial sum over 12 months and that it appeared that hed owned up only when a rigorous internal audit was due to take place. The committee referred to the guiding principles of the disciplinary process, including protecting the public, maintaining public confidence in the profession and upholding standards, and concluded that the appropriate sanction was the cancellation of Greens student registration. He was also required to contribute 2,000 towards costs. In attendance before the disciplinary committee, ReginaldCole ACMA admitted misconduct. In March 2009 hed been convicted of two counts of conspiracy and was sentenced to 30 months imprisonment (later reduced to 13 on appeal). The committee took into account mitigating factors including his apology to CIMA and expression of remorse. It referred to the guiding principles of the disciplinary process, including protecting the public, maintaining public confidence in the profession and upholding standards, and concluded that the appropriate sanction was the expulsion of Cole from membership. He was also required to contribute 1,250 towards costs. The investigation committee found a prima facie case for Robert Leonard Carpenter ACMA to answer in relation to a complaint that he had sent a threatening letter to a client. Pursuant to members regulation 6.3.5(v) and council regulation 16, the committee invited Carpenter to consent to the imposition of the sanction of an admonishment by way of consent order without further proceedings, to which he agreed. A finding upholding the complaint was recorded and an order for the imposition of an admonishment was issued.

Study highlights leadership potential of cima members

People who undertake advisory or management accounting roles are best prepared and skilled for leadership positions, according to the latest research report by CIMA and the Centre of Excellence at the University of Bath School of Management. The study gives insights into the skills required of finance professionals.It reveals that the technical and business abilities developed in advisory and management accounting roles are far more closely aligned with those of leadership roles than those of other finance roles.This suggests that management accountants are best placed to move quickly up the organisational ladder. Senior managers said that they rated and required people with finance professional qualifications. But they also said that finance people needed to improve their communication, problem-solving and business skills.Bosses who were recruiting future business leaders were more impressed by personal characteristics, experience and professional qualifications than by university degrees or postgraduate qualifications. While 76 per cent of senior finance managers claimed that they supported staff development by paying for employees exams and course fees and offering study leave, only 29 per cent of respondents had received such support themselves.This suggests that good policies are not necessarily applied in practice. Bridging the gap between policy and implementation when training staff is critical if organisations are to retain key people and provide training opportunities throughout the organisation, said Robert Jelly, executive director at CIMA. Finance professionals must not neglect good interpersonal skills and those with a professional qualification such as CIMAs under their belt will be best placed to take on leadership roles in future. The research was supported by Hays Senior Finance.

Presidential engagements
June 5 Annual general meeting, QEII Centre, London June 9 Incoming presidents lunch, ICAEW, London June 18 Global business challenge 2010, CIMA HQ June 22 Institute of Actuaries biennial dinner, London June 24 New members celebration, London June 25-27 CIMA mayors trophy 2010, Toronto June 25  Members in practice conference, Middlesex (vice-president attending) London and North Thames Students Society June 26  conference, London (vice-president attending) June 28 Pan Accountancy lunch, London

Election result
Election to council, CIMA electoral constituency 3 (East Midlands and East Anglia). Susan Stapleford was elected for Area 3 (East Midlands and East Anglia) for her first term as a member of council to serve from April2010 until the close of the annual general meeting in 2012 to fillthe casual vacancy created by the resignation of Richard Crum inDecember 2009.

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Past events

Coming events

Joachim presents governance paper

CIMAs president, Aubrey Joachim (pictured), presented a new discussion paper from the institute entitled Global perspectives on governance lessons from East and West at a seminar inHong Kong on April 10. The event washosted by the Chinese University of Hong Kong (a CIMA partner offering management accounting courses) and organised jointly with CPA Australia. Joachim also attended CIMA Hong Kong Divisions annual dinner, which attracted more than 100 guests.
Chinese final, CIMA global business challenge April 13, Shanghai A team called Four Up from the South Western University of Finance and Economics beat its rivals to take the national title in the institutes business competition for students. It will go on to Kuala Lumpur to face championteams from other key CIMA territories at the world final in August. An evening with Charles Tilley April 14, New York Having organised the institutes inaugural networking meeting in New York City (see Events, January/ February 2009), Ruby Kaur FCMA invited CIMAs chief executive, Charles Tilley, and its business development director, Andrew Harding, to the Tudor Hotel on East 42nd Street to talk about the institutes strategy and field questions from the audience. CIMA finance shared services forum April 14, Shanghai Approximately 100 finance professionals attended this event, which was held at the Westin Bund Centre. Aubrey Joachim, the institutes president, participated in the panel discussion. Exam technique talk April 15 and 16, Singapore Venkkat Ramanan, CIMA learning and development manager, presented this workshop-style event for students, held at the SMaSchool of Management, a subsidiary of the Singapore Manufacturers Federation. CIMA Northern Ireland presidents dinner April 16, Belfast Over 200 people attended the dinner at Belfast City Hall, which was hosted by Ray Baxter FCMA, president of CIMAs Northern Ireland region. Speakers included SirReg Empey, minister for employment and learning. Female entrepreneurship seminars April 22, 27, 28 and 29 and May 6, Ireland Why do women go into business for themselves, what makes them succeed and what lessons can we learn from them? These were some of the questions that Margaret Heffernan, bestselling author of How She Does It: How Female Entrepreneurs are Changing the Rules for Business Success, addressed at a series of talks around the country. The star of popular TV series Secret Millionaire highlighted the fact that almost half of the private companies in the US are owned by women.

Cima global events

Hong Kong Divisional AGM June 25 6.30 to 7.30pm, The Hong Kong Bankers Club, 43F Gloucester Tower, 11 Pedder Street, The Landmark, Central Hong Kong All members arewelcome. hongkong@ cimaglobal.com Singapore The CIMA global business challenge June 18 9.30am to 2pm, SMa School of Management, City Campus, 410 North Bridge Road, Singapore singapore@ cimaglobal.com
CIMA-ICPAS eveningtalk June 25 7 to 9.30pm, SAA City Campus, 6 Raffles Quay #23-00, Singapore CIMAs president, Aubrey Joachim, will give a presentation entitled Transformation of finance finance professionals role in governance (anAsian perspective). singapore@ cimaglobal.com CIMA Singapore AGM June 29 7 to 10pm, Meeting Room Aquarius 1, Level1, Resorts World Convention Centre, 8Sentosa Gateway, Singapore 098269 Members only singapore@ cimaglobal.com

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Visit www.cimaglobal.com/events for updates and a full list of events. CIMA Mastercourses your catalyst for business change: www.cimamastercourses.com. To submit an event for this page, e-mail michaela.lambert-beresford@cimaglobal.com.

Ireland West of Ireland branchgolf outing (sponsored by DFS Accountants and Business Advisors) June 3 1pm, Athenry Golf Club,Palmerstown, Oranmore, Galway Cost: 25 joegilligan@ arkdiyproducts.com
Mid West branch golfouting June 11 Noon, Dromoland CastleCountry and GolfClub, NewmarketOn-Fergus, Clare Cost: 60 (includes meal) nicola.glynn@ cimaglobal.com

Hotel, Nately Scures, NrHook, Hampshire RG27 9JS This event, presented by the Royal Mints former chief executive, David Barrass, will explain how the special problems associated with running a government-owned business were overcome. www.cimaglobal.com/ centralsouthernengland HMRC tax update June 8 6.30 for 7pm, Holiday Inn, Milton Keynes East, London Road, Newport Pagnell, Buckinghamshire MK16 0JA www.cimaglobal.com/ eastmidlandsandeast anglia or region.three@ cimaglobal.com Fundamentals of transfer pricing June 9 9am to 5pm, London (venue tba) Cost: 580 plus VAT (520 plus VAT for CIMAmembers) www.cimamastercourses. com/fotp Powering profitable growth June 11 9am to 5pm, London (venue tba) Cost: 580 plus VAT (520 plus VAT for CIMAmembers) www.cimamastercourses. com/mrmg The banking crisis: whyand where next? June 16 6 for 6.30pm to 8.30pm,

The Banking Hall, Bank of Scotland Area Office, 110 St Vincent Street, Glasgow G2 5ER Bank of Scotland will present its perspective on the causes and effects of the crisis, focusing on the effects on liquidity and access to credit for all sectors of the economy. This is a joint event with the ICAEW and ACCA. www.cimaglobal.com/ our-locations/uk/scotland/ scotland-events The business performance improvement paradox June 17 6.30 for 7pm, Hilton Bristol, Woodlands Lane,Patchway, Bristol BS32 4JF region.two@ cimaglobal.com Effective change management: utilising a project managementapproach June 17 6 for 6.30pm Hilton Aberdeen Treetops Hotel, 161 Springfield Road, Aberdeen AB15 7AQ www.cimaglobal.com/ our-locations/uk/scotland/ scotland-events Slaying the beast June 22 6 for 6.30pm, Siemens, Faraday House, Sir William Siemens Square,Frimley, Surrey GU16 8QD This event will explain how to save money by reducing the size and

complexity of your organisations structure through integration, liquidation and dissolution. www.cimaglobal.com/ centralsouthernengland Accounting for carbon June 24 9am to 5pm Dublin (venue tba) Cost: 580 plus VAT (520 plus VAT for CIMAmembers) www.cimamastercourses. com/acfc Members in practice annual conference June 25 and 26 9am, Renaissance London Heathrow Hotel, Hounslow TW6 2AQ The 2010 conference will mark the 25th anniversary of CIMA members in practice. There will be a gala dinner on the first evening, featuring a disco and other entertainment. Cost: 310 plus VAT for the full package (465 for non-Mips). 150 for one day (225 for non-Mips) www.cimaglobal.com/ our-locations/uk/ members-in-practice Central London and north Thames studentconference June 26 9am to 5pm Chelsea Football Club, Stamford Bridge, Fulham Road, London SW6 1HS Cost: 20 (15 for bookings paid for before June 7) www.cimaglobal.com/ centrallondonand norththames

Budget and tax update June 30 7 for 7.30pm, Oakwood House Conference Centre, Oakwood Park, Maidstone, Kent ME168AE www.cimaglobal.com/ southeastengland Wolf Brewery visit July 7 6.30pm, Wolf Brewery, Rookery Farm, Silver Street, Besthorpe, Norfolk NR17 2LD Over-18s only. Cost: 15 (includes buffet) www.cimaglobal.com/ eastmidlandsandeast anglia or region.three@ cimaglobal.com Web optimisation July 8 6.30 for 7pm, Holiday Inn Garden Court, Girtford Bridge, London Road, Bedford SG19 1NA www.cimaglobal.com/ eastmidlandsandeast anglia or region.three@ cimaglobal.com Creating highly productive and highly positive teams July 13 6.30 for 7pm, Birmingham City FC, StAndrews, Birmingham B9 4RL region.four@ cimaglobal.com CIMA annual awards November 22 7pm, The Lancaster London Hotel, Lancaster Terrace, London W2 2TY Cost: 180 www.cimaglobal.com/ awards

UK Site visit to Williams Lea inbound/ outbound centre June 3 6.30 for 7pm, Abbey View, Penfold Drive, Wymondham, Norfolk NR18 0WZ Williams Lea is a business process outsourcing company specialising in information management. The guided tour will begin with a talk by its FD, Andrew Gunton ACMA. www.cimaglobal.com/ eastmidlandsandeast anglia or region.three@ cimaglobal.com
Business turnarounds getting the Royal Mint to make money June 7 7 for 7.30pm, Barcelo Basingstoke Country

Most of CIMAs local events are free.

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> so you want to be

Finance manager in industry

Jonathan Kitterhing explains what it takes to secure this popular commercial role.
expect to be in a more hands-on role yet much closer to the board. If youre working in a large FMCG business, you might be looking at weekly analysis, rather than monthly or quarterly reporting. For your application to be successful, youll need to prove your experience of developing business strategy and mentoring junior colleagues. You will also require a solid CV employers generally favour stability, preferring you not to have hopped around too much in your career. Model candidates tend to have two to four years post-qualification experience (or one to three if they have been working in a FTSE company). Crucially, businesses look for more than just an analyst; they want someone who can act on business performance. Strong Excel and Cognos modelling skills are a big plus too. Many finance managers go on to become financial controllers and subsequently FDs CIMA members also often move into financial planning roles so this is a great step for anyone looking to get into such positions. Jonathan Kitterhing is manager of commerce recruitment at Robert Walters (www.robertwalters.co.uk).

Role: Finance manager for a leading telecommunications company Salary: 50,000 to 60,000
This large telecommunications company is seeking a talented financial manger. Acting as an integral part of a senior management team for a significant part of the business, the successful candidate will deploy strategy for a specific set of customer and business partners. You will be a qualified accountant who is able to take decisions and exercise judgment well. You will also be required to manage a team of professional and support staff.

Finance manager roles are always popular with both business analysts and management accountants looking to step up and make more of a direct impact on a business. Although vacancies arent plentiful at the moment, there are significantly more than there were at the end of 2009. The number ofopportunities should increase as business confidence grows, so its a good time for CIMA professionals to get to the front of the queue by applying for such a role now. Competition is always tough: both ACMAs and ACAs go after these jobs, so employers are still being picky. The good news is that youre at an advantage, as you are typically better able to demonstrate the commercial understanding required in order to succeed in the job. This aspect is crucial you really do need to act as a business partner and be able to work closely with the operational side to develop strategy by, for example, checking

the validity of business proposals. But the financial element is still important: you will also have to work on month-end accounts, the P&L and balance sheet reconciliation. Interpersonal skills are also key. You have to be a good enough communicator to run a team and build strong working relationships. You also need to be assertive when required. Most finance managers will spend the first week of the month on month-end accounts and the rest of the time on analysis and examining the figures from management accountants. But the ability to present financial information to managers is probably the most important aspect of the job. This role tends to vary according to the size and type of your business. In larger firms finance managers are normally responsible for one segment or product line, which is perfect for anyone seeking their first job in management. In smaller outfits they can

Need to know

Job level: managerial. Salary: 45,000 to 75,000. Essentials: magic CV words include commercial, manage, strategy, analysis and business partnering.

>...lastout
Dont apply if youre thinking about trading up in future

We rummage through in-box and postbag to bring you astonishing insights from the business world. If youve been on the receiving endofsuch wisdom and would like to pass it on, please send the mostobvious and the most obscure in corporate communications torp1@caspianpublishing.co.uk clearly labelled Last out.

Silver-backed risk quadrants and the seven dwarfs of liability measures: a modern fairytale

A chance to win an OK! wedding of a lifetime.

OK! magazine, April.

The blunt approach to inducement

(what a shame that we missed the deadline)
Dear writer, How would you like the chance to win a nifty and desireable [sic] Apple iPad, just for doing what you do best, writing? Pentaho, the Open Source BI leader, is celebrating its most successful launch ever by giving away an Apple iPad to the winner of its Define agile competition. In addition here in Europe, one lucky European journalist will also win an iPad, delivered as soon as they become available, in our journalistic version of this celebratory giveaway. We are limiting this competition to around 150 members of the European media only, making the odds of bagging the hottest tech gadget around higher than many political parties have of winning the UK election next week. All you have to do enter is send proof of a mention of Pentahos Define agile competition in your publication, your blog or even via Twitter. What could be simpler? Just send the links to your published article or blog post on or before Friday April 30 to pmaher@positivemarketing.org and we will draw a winner at random from the entrants. Paul Maher, Positive Marketing.

If you opened your curtain one morning and saw a 200kg gorilla in your garden, what would you do? Close the curtain and check again in three years time? Probably not. Yet, effectively, that is the decision corporates and trustees are taking when they leave their defined-benefit pension schemes to tick over between triennial reviews and valuations. If you picture your pension commitments as a pipeline running 20 to 30 years into the future, then if you were to cut it at any point you would find the same four risk quadrants: liabilities, assets, governance and employer covenant. By examining each segment of each quadrant, and by looking at Is it shining? allfour together, you will get a No its not muchbetter understanding of Sun activity link yourposition. to cold winters. How recently have your risks BBC online, been calibrated between the April 15. stakeholders? Do they match your corporate risk are they doubling up? Does the company have the same view as the trustees on interest rates and inflation? Which, if any, of the seven dwarfs (the various pensions valuation/liability methods) Not built by accident, then should you be most concerned about? But what if the gorilla is already in the The ninth annual information garden, demanding bananas? exchange payments conference The sudden, often unexpected, willbe held at the exciting new appearance of the gorilla and the purposely built conference venue, associated demand for bananas (recovery The Point, at Lancashire County plan payments) can cause management Cricket Club, Manchester. and the companys banks to rethink cash Caxton House Marketing. flows and lending facilities. Blue Rubicon PR, for BDO Pensions.

Wanted: more bent coppers?

A functioning police force is seen as a prerequisite for a western withdrawal from Afghanistan. German trainers, however, paint a disastrous picture of the quality of Afghan security forces. Too many police, they say, cant read or write, cant shoot straight or take bribes. Der Spiegel online, April 8.

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