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BUSINESS & ICAEW.COM/BAM ISSUE 271
MANAGEMENT FEBRUARY 2019
FACULTY
PUBLICATION
Business &
Management
DIZZYING HEIGHTS A SURE SIGN MAKE SOME NOISE
HOW MUCH IS TOO THE PROS AND CONS EX-HARLEY-DAVIDSON
MUCH WHEN IT COMES OF MAKING OPTIMISTIC BOSS KEN SCHMIDT ON
TO EXECUTIVE PAY? FINANCE FORECASTS THE ART OF LISTENING
P L A N E S A I L I N G
Handling the finance function in the fickle world of aviation
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CONTENTS
February 2019 Issue 271
16
FLYING HIGH
12
MAKING PREDICTIONS
David Craik looks
at how airline CFOs
navigate the unique
challenges of the
aviation industry
Displaying optimism when
making forecasts can be risky.
Andrew Don evaluates
the pros and cons of
optimistic forecasting
04 Editor’s letter
Dipak Vashi ushers in a new
year, and a new era
10
MAKE SOME NOISE
05 News
Faculty and world finance
Former Harley- roundup
Davidson director
Ken Schmidt on 07 Events
listening to what Dates for your diary
people are saying
about your business 09 Embracing MTD
Kim Hau looks at a recent
survey on tax professionals
and Making Tax Digital
20 Dizzying heights
How much is too much when
it comes to executive pay?
24 Just the job
28
CRACK THE CODE
Breaking down the latest
statistics on remuneration
Matthew Leitch
explores how 26 Go your own way
information theory The benefits of ditching
can help accountants lengthy board packs
communicate better
31 Technical updates
A roundup of legal and
regulatory changes
34 Get reading
Highlighting some of the
best business books around
ICAEW.COM/BAM 3
A new beginning
A new year always brings with it new horizons
and new opportunities, as well as a chance for
new beginnings. And here at the Business &
Management Faculty it’s no different. The team
has been shuffled around and I will be aiming to Business &
carry on with the good work previously done. Management
Many of you will have no doubt started the
Faculty
THE TEAM
new year with resolutions and targets in mind:
I hope they are still being stuck to! Staying true Dipak Vashi
Technical manager
to our resolutions and having the conviction to see them through often dipak.vashi@icaew.com
requires a great deal of honesty with ourselves. We explore this theme on
Caroline Wigham
page 12 – should the FD always tell the truth, the whole truth and nothing Services manager
but the truth? Certainly not an easy answer. But what we do know is that +44 (0)20 7920 8508
the consequences of dishonesty can be brutal. caroline.wigham@icaew.com
Page 20 looks at the astonishing case against former Nissan chairman Rick Payne
Carlos Ghosn in Japan, as well as the wider issue of corporate remuneration. Finance direction programme
+44 (0)20 7920 8451
Looking to page 26, we assess the ever-increasing size and length of rick.payne@icaew.com
board packs, and how this trend can reverse to ensure board members
THE COMMITTEE
receive the most pertinent information to make the best decisions. David Carr
When corporate failures occur, it is often asked ‘where were the board Chairman
members?’ I wonder if the issue should become more about producing Steve Bastian, Emily Brooks,
honest board packs instead of shorter board packs... Laura de Poitiers, Chris Ford,
Amy Griffiths, Emily
An industry that featured heavily in the news over the summer is Mackinson, Rashad Shamim,
featured in this month’s issue. The airline business is notoriously difficult Helen Stevens, Nick
Wildgoose, Martin Wheatcroft
to be successful in, with powerful forces of competition among high fixed
costs and wildly volatile variable costs. Airlines that weren’t so honest with SUBSCRIPTIONS
Annual membership of the
their customers regarding their punctuality and the likelihood of their faculty costs from £101 for the
flight actually taking off suffered. The industry is currently seeing operators whole year.
drop out of the market as well as consolidation occurring. Could a dose
FACULTY EVENTS
of honesty and treating customers with respect have helped some airlines AND WEBINARS
avoid their fate? Or is the industry far too cut-throat and competitive for Events and webinars are listed in
this publication; details can be
this, when some players must do anything possible to put bums on seats? found on page 7
Honesty is a complex issue, and will continue to be long after the new
B&M ADVERTISING
year’s glow has dissipated and reality bites again. Advertising enquiries to
In the spirit of promoting new beginnings, we are always keen to advertising@progressivecontent.
com
hear feedback on what we are doing as well as suggestions on what
we could be doing. If you have any thoughts, please contact me at BUSINESS & MANAGEMENT
FACULTY
dipak.vashi@icaew.com Chartered Accountants’ Hall
Moorgate Place, London,
EC2R 6EA
+44 (0)20 7920 8508
@icaew_finman
bam@icaew.com
icaew.com/bam
ISSN 1471-1818
TECPLM16466
Dipak Vashi
Technical Manager Printed in the UK by
Sterling Solutions
© ICAEW 2019 All rights reserved. The views expressed in this publication are those of the contributors;
ICAEW does not necessarily share their views. ICAEW and the author(s) will not be liable for any reliance you
place on information in this publication. If you want to reproduce or redistribute any of the material in this
publication, you should first get ICAEW’s permission in writing. No responsibility for loss occasioned to any
person acting or refraining from action as a result of any material in this publication can be accepted by
ICAEW, the publishers or the author(s). Whilst every care is taken to ensure accuracy, ICAEW, the publishers
and author(s) cannot accept liability for errors or omissions. Details correct at time of going to press.
To comment on your magazine, please email publishing@icaew.com
4 FEBRUARY 2019 BUSINESS & MANAGEMENT
NEWS & EVENTS
CALL TO ACTION:
YOUR VIEWS SOUGHT AT
ETHICS ROUNDTABLE
NEWS
High-profile corporate failures
such as Carillion and BHS have
caused widespread criticism of the
role of the auditors, but what
about the directors at the helm of
these companies? Consequences
for qualified directors can be
severe compared with other
executives and non-executives.
The ICAEW Ethics Standards
Committee proposes a
roundtable discussion to explore
the issues of corporate culture,
and the responsibility that all
company directors should take
for the financial behaviour of
their organisations.
We are looking for 20 people to
join this discussion, in particular
those who work in business. The
roundtable will take place from
09:30-12:30 on 21 March at
Chartered Accountants’ Hall,
central London. Lunch will be
provided. To register as a
participant, contact Sophie Falcon
at sophie.falcon@icaew.com
BUSINESS WORLD companies to lay on extra ferry expensive tuna ever purchased.
services should they be required. Kimura shelled out $3.1m for a
However, the DfT has since been bluefin tuna weighing in at 612lbs. It
HIGH TIDE FOR criticised for selecting Seaborne was sold at Tokyo’s Tsukiji fish
SEABORNE DEAL? Freight as an investigation by the market during the popular new year
The UK government recently BBC found that it does not own any $13.8m auction. A similar tuna would expect
awarded Seaborne Freight a ferries and has never run a freight to sell for $60,000, but the
cross-channel contract worth service. The dock it intends to VALUE OF THE prestigious auction is designed to
DfT‘S CONTRACT
£13.8m as part of its planning for operate from, Ramsgate, has not WITH SEABORNE attract publicity to purchasers,
a no-deal Brexit. hosted a cross-channel service since FREIGHT resulting in more extreme results.
With fears running high around 2013. It was also alleged that the
potential delays to consignments company’s terms and conditions
at the border in Dover, the had been copied from those of a MAKING A MEAL OUT OF
Department for Transport (DfT) takeaway food company. The DfT SOCIAL MEDIA
shared £109.2m between three said it had “carefully vetted the Bayern Munich and former France
company’s commercial, technical national team midfielder Franck
and financial position”. However, Ribéry has been heavily fined by his
experts have queried whether club for multiple explicit, expletive-
Ramsgate’s facilities could handle a laden and offensive tweets. They
high volume of traffic or even be were sent in response to criticism he
readied in time for Brexit. received on Twitter for ordering a
$340 steak coated in gold at the
Dubai-based restaurant of Turkish
FISHING FOR HIGH-END
BUSINESS
$340 celebrity chef, Nusret Gökçe, also
known as ‘Salt Bae’. Gökçe has built
Kiyoshi Kimura, a Japanese THE PRICE a cult following on social media,
businessman who owns the popular FRANCK RIBÉRY and has restaurants around the
PAID FOR A
Sushi Zanmai chain of restaurants, GOLD-COATED world due to his dramatic
has set the record for the most STEAK IN DUBAI presentation and seasoning skills.
ICAEW.COM/BAM 5
Putting the Finance Team at the
Heart of the Business
Working with Spitfire Analytics has We are finance professionals who specialise in helping
companies bring efficiency, speed and agility to their
resulted in the Finance Team becoming Finance Teams.
an integral part of the business. We are
now able to provide analysis and strategic
We do this by designing and implementing the automation
advice on the future direction of the of your planning, budgeting, forecasting and analysis
business, rather than spending our time processes, using IBM® Planning Analytics, powered by IBM
TM1.
poring over endless spreadsheets.
Lee Boyle, Finance Director – Engineering, NG Bailey 0161 464 3687
info@spitfire-analytics.com @SpitfireTM1 /spitfire-analytics
NEWS & EVENTS
WEBINARS
EVENTS &
ICAEW.COM/BAMWEBINARS
WEBINARS The faculty is keen to provide its members with relevant, timely sessions that can
easily fit around your working day, and we are planning a packed programme
of sessions for this year. The following topics are among those suggested:
ALL WEBINARS AND EVENTS The modern finance
Management Negotiation skills
ARE FREE FOR FACULTY MEMBERS department
Time management – getting the What makes a good Advanced motivational
big things done and making project manager? techniques
time for strategic thinking
Leveraging LinkedIn Regular IFRS updates No-deal Brexit planning
Performance management Linking Excel to external Presenting data
data sources graphically
Business valuation/modelling Financial modelling skills Networking
techniques
10-MINUTE WEBINARS
Want to expand your knowledge but are pushed for time? Sign up to these
quick-fire webinars between 12:00-12:10 once a week for six weeks.
11 February 4 March
Equality, diversity and inclusion Managing absence
18 February 11 March
EVENTS Recruitment Managing discipline
ICAEW.COM/BAMEVENTS
25 February 18 March
WHY DON’T STAFF Contracts of employment Ending the employer relationship
ALWAYS DO WHAT YOU
TELL THEM TO DO?
23 April 18:00-20:00
Chartered Accountants’ Hall
Free to B&M Faculty members
20-MINUTE WEBINARS 60-MINUTE WEBINARS
For a spot of CPD while you have Morning webinars run from
In this evening lecture, chartered your sandwiches, these sessions 10am until 11am, and are free to
accountant and chartered HR run between 12:30-12:50. Business & Management Faculty
professional Angus Farr will members and those subscribing
identify the three underlying 17 April: GDPR update to Faculties Online.
reasons why staff don’t always
do what you want them to do. 8 May: Anti-money-laundering 27 February
He’ll suggest tactics to tackle update: what every business Employment law update
each one and an approach to needs to know
motivation that gets us beyond 20 March
Maslow’s hierarchy of needs. 15 May: Influencing and Business VAT update
This session is particularly persuading: promoting your brand
aimed at those who are, or are
becoming, responsible for 16 October: Five key questions all
staff management. boards should ask about fraud
Angus has spent more than a
decade leading graduate
recruitment in a range of ONLINE LEARNING WEBINARS
London-based companies. He is
also an experienced business Last year’s two-day webinar sessions were recorded, meaning you can
trainer, coach and facilitator. still access content on the following topics (member login is required):
See tinyurl.com/BAM-DontDo Planning and forecasting in the 21st century; and
to book your place. Leadership in an era of distraction.
ICAEW.COM/BAM 7
MTD
EMBRACING
BREAKING OUT OF
Companies are still unsure how to THE SPREADSHEET
DIGITAL
prepare for Making Tax Digital (MTD) When storing VAT data, 56% of
for VAT, according to a recent Thomson accountants said they used
Reuters survey of UK tax professionals. spreadsheets, up from 30% in
COMPLIANCE MTD is the latest step in HMRC’s aim
to move towards a digital relationship
with customers and become “the most
summer 2018. Another 22%
preferred other in-house software.
Post-implementation, a third (34%)
Kim Hau summarises digitally advanced tax administration in believed that they will still use Excel
the world”. to store digital records relating to
the results of a Asked about the status of their MTD VAT, suggesting they are considering
Thomson Reuters implementations, 70% of the 146 tax a quick fix approach to MTD.
and accounting professionals surveyed However, choosing a complete tax
survey that found tax said they had developed plans, but not compliance software platform gives
professionals started implementation. companies access to features such as
Furthermore, 37% of respondents exception reporting, full data audit
are stalling on will now hold fire on changing policies trails including manual adjustments,
Making Tax Digital until they hear more from HMRC group and divisional reporting, as
about the revised October 2019 well as being ready for future digital
deadline for “businesses with tax requirements, such as corporation
complex requirements”. tax submissions.
There is a real opportunity for tax
DELAYING THE INEVITABLE accountants to embrace software that
Nearly three-quarters of respondents does much more than simply file a
(72%) stated that concerns about return. By accepting the inevitable
software and digital records move towards digital tax reporting,
maintenance are their greatest worries companies affected by the revised
in preparing for MTD. The decision deadline can use it to implement
to delay implementation means indirect tax compliance software
many will miss out on the benefits that will bring benefits such as
digital tax reporting can bring. This automation, reporting, cost savings
could potentially lead to a greater and improved compliance. It will
risk of businesses needing to take mean businesses are ready for 2019,
a ‘sticking plaster’ approach to meet 2020 and other future tax changes,
the deadlines. rather than taking that quick fix,
When asked, 62% of respondents ‘sticking plaster’ approach.
admitted VAT processes are still Accountants are increasingly
tracked manually, despite 80% saying relying on technology partners to
they use the HMRC portal to submit keep them informed on MTD, with
VAT returns, compared with 53% in 40% reporting this to be the case (up
summer 2018. Increased use of the from 16% in summer 2018).
portal is positive, but it is clear that When asked how MTD was being
finance departments are unsure on the communicated within their
technological and process changes organisations, 44% stated it had been
they need to make. communicated at an organisational
level, but not to them personally. This
suggests that training is yet to start
within teams on how processes and
individual responsibilities may
change in respect of VAT.
Kim Hau,
senior proposition
PATRICK GEORGE/IKON
manager,
ONESOURCE
Indirect Tax,
Thomson Reuters
ICAEW.COM/BAM 9
WHAT KIND Believe it or not, businesses and people share something in
common in with my favourite objects in the world:
OF NOISE ARE motorcycles. They make noise. And the noise they make is
either conspicuous, instantly recognised and valued – like
YOU MAKING?
the roar of a powerful Harley-Davidson – or it’s an indistinct
static hum. If at this moment a motorcycle were zooming
up a nearby street, that familiar noise you’d hear would
instantly announce “motorcycle!” But it might not tell you
Ken Schmidt explains why we who built it. Unless, of course, that motorcycle was a
Harley. You’d recognise that roar immediately and attach a
should care what people say name to it. That’s how dominant noise works.
about us and our business When I say that every business in the world makes noise,
I’m not talking about the sounds generated through normal
business activity. I’m talking about something much more
vital. When people important to your business – clients,
prospects, business partners, media, trade associations
and the like – talk about you, that’s your noise. And your
noise is either a predictable, indistinguishable, static hum
or it’s something that stands out as meaningfully,
memorably different.
DOMINANT NOISE
I want you to imagine that somebody extremely important
to you and your livelihood is talking about you right now.
Assume a client you work with regularly is at a business
conference, chatting with a prospective client that you and
your business have dreamed of working with for a long
10 FEBRUARY 2019 BUSINESS & MANAGEMENTBOOK PREVIEW
time, but haven’t been able to land. If that prospective At virtually every business I visit, regardless of its size,
client were to come your way it would be a major coup for scope or industry, if I ask a group of its leaders to write
your business and would enable you to attract other down their desired answers to the second question,
major clients as well. Or picture one of the highest-ranking everyone writes something different. The problem this
managers at the company you work for is sitting across presents is so obvious most people look right past it. How
the desk from the CEO, and they’re discussing a re- can potential customers or business partners know what
organisation of all the people in your department. you stand for in the marketplace when your leaders don’t
Some are about to get promotions while others will know? And how can employees know what they’re
get heartbreak. collectively working toward?
In either scenario, it’s safe to assume that these Equally telling, most of the responses include a litany of
conversations could be the single most important thing that predictable, non-differentiating business-speak, with words
will ever take place in your career. But, because you’re not and phrases like, “quality,” “commitment to satisfaction,”
present, you can’t say anything on your own behalf. “we listen,” “we care” etc. You know who uses language like
So, what is this incredibly important and influential that? Everyone. Including all of your competitors. When
person going to say about your business? Or you? Do you everyone is saying the same things, the world stops paying
have any idea? What would you want that person to say? attention. And the market receives a clear message: “We’re
On my first day of work at Harley-Davidson Motor all the same. Choose whoever’s least expensive or most
Company – and with the more than 1,000 companies I’ve convenient.” That’s not competing. Who’d ever want to be
consulted for in the 20 years since I left – I asked three described the same way as a competitor? So, I’m challenging
questions I believed to be vital to any business’s you, right now, to focus on that second question because,
competitiveness and long-term sustainability: trust me, your competitors aren’t.
1. What are people saying about us? NOISE STARTS AT THE TOP
2. What do we want them to say about us? The good news is that in today’s businesses, people are
3. What are we doing to make them say it? extremely good at what they do and utilise every tool
available to do that thing more efficiently and with fewer
My reason for asking these questions – which I call ‘Noise errors than they did it yesterday. The bad news? Even with
Cubed’ – was to ensure that my co-workers and I were aware all of that going for them, businesses don’t know how to
of what we as a business, and as individuals, needed to get compete. From brain surgeons to tree surgeons. From
keenly focused on if we were to separate ourselves from repair shops to car dealerships. From bean growers to bean
look-alike/act-alike competitors. It’s impossible to become counters. Dominators crush competitors not because
the dominant player in your industry if you’re easily they’re more skilled, have unique processes, higher levels of
confused or seen as interchangeable with others who do the education or larger marketing budgets, but because they
same thing. make the most noise in their market. Which means they
know how to compete. Which means they make it a
NOISE CONTROL business-wide, leadership-driven priority to ensure that:
What people are saying about you defines every business’s they are noticeably different than their competitors
greatest asset – reputation. Although I’ve worked with – even if they’re providing an identical product or service
leaders of businesses in nearly every imaginable industry, – in ways that customers find attractive;
I’ve met very few who’ve given this any thought or who they place more visible emphasis on the human side of
didn’t assume the responsibility for knowing what the their business than the product or service they sell;
public is saying about them lies with marketing, sales or they have more vocal advocates recommending them
other customer-facing functions. That’s not good, as you’ll than their competitors do; and
soon see. everyone working in their
What you want people to say about you goes to the heart organisation knows what to say and
of your competitiveness and requires specificity. What are how to say it consistently – in all
the precise, powerful, distinct to us, memorable and interactions and through all channels
repeatable things we want said about us? Otherwise – to maximise the effectiveness of
stated as, “What kind of noise do we want to make?” their competitive messaging, inspire
Again, most leaders believe the responsibility for this advocacy and maintain positive
should be delegated to marketing or sales functions. And marketplace narrative.
again, that’s not good. The solution to becoming a dominator
In fact, it is infinitely more vital to your competitiveness is at the source of nearly all competitive
than every facet of your current go-to-market tactics. And problems: the top of the organisation.
here’s why. We have never been more marketing-averse Noise is business strategy, not some sort
than we are now. Thousands of corporate-sponsored of function or programme that gets What kind of noise
messages cross our eyes every day and we’ve learned to delegated to staff. Without consistent, are you making?
Ken Schmidt’s
ignore them at worst or be highly sceptical of them at best. passionate, hands-on encouragement new book Make
The harsh reality is that nobody believes what businesses from leadership, the cultural aspect of
GRUNDINI/IKON
Some Noise: The
say about themselves. But we do believe and act upon Noise Cubed – question three – can’t be Unconventional
Road to Dominance
what influential people, like customers and business realised. And vastly improving is published by
partners, tell us. competitiveness can’t happen. Simon & Schuster
ICAEW.COM/BAM 11WEATHERING
FORECAST
PREDICTIONS
12 FEBRUARY 2019 BUSINESS & MANAGEMENTFORECASTING
says, especially when talking with
When it comes to salesmen. “That is the role of the FD –
forecasting, being to bring some prudence and reality to
what other people are usually over-
optimistic can be risky. optimistically assuming is going to
Here, Andrew Don happen on the forecasting front. It’s just
a reality check.”
examines the Give an over-optimistic forecast today
pros and cons of and you might be popular with the
board for a limited time. But wildly
optimistic forecasting overegging the cake could come back
to bite three months later. Directors “If you have a forecast that is more
will also lose trust in what the FD or optimistic you might want to also have
CFO says. another forecast, or a series of forecasts,
“If you are overprudent and based on different circumstances or
overcautious – and I probably do fall into variance analysis.”
that camp – the board can build in their That way, if the worst-case scenario
own expectations once they get used to was to transpire, you are forewarned that
the FD’s approach,” he says. it might be necessary to take out a loan
While Thewlis would like to be 100% or raise equity. “These are issues you
accurate in everything he says, he would need to be thinking about,” Levine says.
much rather take 5% off and have that
nice surprise when reality kicks in. MANAGING EXPECTATIONS
Andrew Hicks, CFO at British software
Forecasting is not an exact science. HONEST AND PUNCHY and services company Advanced, agrees.
Former veteran weather forecaster Nick Levine, head of enterprise at “CFOs are integral to formulating
Michael Fish learned this to his detriment ICAEW, says honesty is the right strategy, driving growth and guiding
in 1987, when he failed to predict a overarching approach for financial decisions, which means accurate
hurricane was hours away from wreaking professionals and, if they feel the versions of the truth and growth
havoc in south-east England. information being provided by various projections are essential,” says Hicks.
Where finance is concerned, it is an art departments does not ring true, it That does not mean that best-case-
that can be honest, dishonest and should be beholden on them to scenario forecasts based on potential
numerous variations in between. question those individuals. growth strategies cannot be put forward,
Andrew Thewlis, finance director of “If those individuals still hold that view, he says, so long as these are transparent.
food and drink wholesale buying group that’s fine, but at least they have asked “This is arguably more optimistic but,
Unitas Wholesale, says forecasting boils the questions,” he says. in turn, allows the rest of the business to
down to interpretation of data. Levine acknowledges that punchy have their expectations appropriately
“Fundamentally, honesty is the forecast briefings – especially where managed while maintaining a reputation
best policy, but honesty is interpreted there are sales teams involved – can help for having good judgement that is based
in different ways by different people,” people focus on a particular goal and on facts.”
he says. get them working towards it. Hicks says the CFO’s role is ultimately
Most FDs and CFOs are truthful, he Motivating people to go out and to deliver the maximum valuation of their
points out – it is just a question of how achieve more is a good thing, he points business and interpret numbers in real
much of the truth they share. “That’s out, but it is also important that forecasts time from across the organisation – and
where the interpretation comes in,” are achievable. ensure there is no room for
Thewlis explains. “You have to make a set “There is a fine balance between misinterpretation or manipulation.
of forecasts based on a set of overforecasting and encouragement. Distilling these figures into “one
assumptions and those forecasts are true You’ve got to look at the business single version of the truth” is essential
in relation to those assumptions. But how circumstances,” he explains. for strategy forecasts and actual
accurate are the assumptions?” growth – as is having the right
Thewlis’s approach is to talk to technology to make this complex
everyone involved in the specific areas task as simple as possible.
of the business he is scrutinising. “You “It’s these honest and optimistic CFOs
don’t make up your own stories or come who can challenge the business and
to your own conclusions without talking “Honest and optimistic drive financial models that maximise
KLAUS MEINHARDT, EVA BEE/IKON
to people that are closer to the coalface. growth that will earn the greatest
“And then you overlay your CFOs, who can challenge respect, trust and reputation as a
understanding of the finances onto
the assumptions that other people
the business and drive spearhead leader of the organisation
and board.”
might have and you might interpret financial models that Following a successful career as a
those assumptions.”
Part of the FD’s and CFO’s skillset is to
maximise growth, will retail and ecommerce analyst, working
for companies including Goldman Sachs,
detect bullsh*t when they hear it, he earn the greatest respect” Panmure Gordon and Poundland, Philip
ICAEW.COM/BAM 13FORECASTING
CASE STUDY: DISTINCTION DOORS
Vickie Brown has been finance
director at Distinction Doors in
Tankersley, South Yorkshire,
since August 2014.
The company, which
supplies more than 7,000
glass reinforced plastic
composite doors every week,
made a pre-tax profit of £1.4m
on £40.6m turnover in the year
to the end of December 2017.
Brown says it is important
that FDs and CFOs understand
the context of the forecast,
who the audience is – whether
internal or external – and their
risk strategy. “For example, it
would be appropriate for an
owner-managed SME who is
“You might be 100% The key is not to work in isolation, says
Thewlis, because anybody can crunch
very reliant on cash flow to
produce a worst-case-scenario
accurate this time but numbers. ”Actually connecting it to forecast that can then be
you’ve got to get into reality and what’s going on in the
business is key, and talking to the
used to mitigate any potential
cash constraints in advance,”
a habit of explaining people who actually do the work she says.
how the forecasts have because they should know better than
you,” he says.
In contrast, a board looking
for inward investment might
been built” Rick Smith, managing director of be more keen to put together
Forbes Burton, which has worked with a more optimistic outlook.
numerous financial directors and She says the one thing she
Dorgan established his own investor management team members to help can guarantee with a budget is
relations’ advisory service in 2018. grow business, says: “Honesty is always that the actual result will be
“There are lots of things happening the best policy for financial directors. different. “As long as you
that could go right or wrong – lots of The most recent case of Patisserie understand and can explain
moving parts in any company and you Valerie is testament to this approach and the reasons why the actual
have to try and manage expectations highlights how an allegedly dishonest performance is different, that
and manage your own growth profiles,” approach can cause potential problems should be acceptable.”
says Dorgan. “If you forecast 20% growth to snowball.” However, she adds that
and then there’s 25% growth, that’s It is understandable that an FD without buy-in from the senior
good. There’s no point forecasting 30% will want to remain in favour with leadership team and
growth because you want to hold the company’s board of directors. management team it is highly
something back for a rainy day.” However, Smith says honesty should unlikely that the forecasted
form an integral part of an FD’s ethos, result will be achieved.
WHERE IT GOES WRONG ensuring ethical practices are “If you have buy-in to the
Thewlis says forecasts end in tears when consistently maintained. forecast, and you are able to
FDs and CFOs do not explain their “If impropriety is later discovered, ensure that people remain
assumptions. “You might be 100% popularity is likely to take a dive and accountable throughout the
accurate this time but you’ve got to get trust is often hard to retain.” year, you have a much better
into a habit of explaining how the It is also important to remember there chance of success.”
forecasts have been built. Not to the is a big difference between optimistic Brown warns against FDs
point of putting everyone to sleep – forecasting and being disingenuous, he and CFOs allowing themselves
you’ve got to make it understandable to warns. “A financial director can present to be manipulated into
non-financial people.” an optimistic forecast as long as there producing a forecast that
That’s where they can go wrong, he are facts and statistics to back up the gives a certain result. “Don’t
explains. You can’t just assume that board figures. However, it is also advisable to allow yourself to be convinced
members have read and understood a offer an alternative scenario to the to create a forecast that you
forecast, and there are no questions board – presenting information that think is unachievable just
because they fully endorse it. ”The odd covers all aspects and outcomes to to keep stakeholders
question just helps you realise whether the board will help maintain integrity temporarily satisfied.”
they’ve understood it or not,” he advises. and creditability.”
14 FEBRUARY 2019 BUSINESS & MANAGEMENTWorking in partnership with
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It’s not just passengers who experience the highs and lows of flying, as aviation
W
e may not all enjoy the hustle of an So exactly what issues – apart from mysterious
airport or the turbulence of being drones – are on their agenda?
35,000 feet up, but aviation makes According to the latest Airlines Financial Monitor
it easier for us to enjoy some from the International Air Transport Association
much-needed holiday sun or attend an important (IATA), airlines are experiencing a squeeze on
business meeting. We take flying so much for profit margins from higher input costs as well as a
granted that when planes are grounded it decline in free cash flow.
unleashes a huge level of frustration. Oil prices are higher and premium cabin
This was evident in December when an illegal prices, which IATA states have “provided a useful
drone flown over Gatwick Airport led to three buffer for airline financial performance over the
days of flight delays and cancellations affecting past year”, have seen “downward pressure on
150,000 passengers. economy yields”.
Such events also quicken the heart rate of Revenues remain volatile. The annual growth in
airline chief financial officers. Cancelled flights hit industry-wide revenue passenger kilometres
revenues, reputation and future demand. (RPKs) accelerated to 6.3% in October 2018, up
Passengers are also entitled to compensation from a weather-affected 5.5% in September.
running into the hundreds of pounds if the CFOs also must deal with volatile crude oil and
delay is the airline’s fault, such as late crews or jet fuel prices. They have trended upwards in
technical issues. recent years but increased supply from Saudi
“An airline CFO needs to be very good at risk Arabia and Russia has sent prices lower recently.
management, governance and control,” says Air freight is performing well with available
Robert Palmer, adviser to fast-growing regional freight tonne kilometres (AFTKs) rising by 5.4%
airlines. He was previously interim CFO at year-on-year in October. Another area of
CityJet and group finance director at Monarch consideration for CFOs is labour costs, with IATA
Group. “Trying to identify all the risks and ensure stating that wages will increase by 2.1% in 2019.
you have a plan in place is important, as there is These key issues are also reflected in the most
always a crisis in the airline industry.” recent statements from CFOs of UK airlines.
16 FEBRUARY 2019 BUSINESS & MANAGEMENTCOVER STORY
CFOs navigate unique challenges themselves, says David Craik
5.4%
COUNTING THE COSTS Milne said the airline has increased the amount of
In easyJet’s latest annual report, CFO Andrew owned aircraft following the return of end-of-lease
Findlay outlined the airline’s main financial aircraft and negotiated the extension of leases on Rise in available freight
measures such as profit and revenue per seat, other aircraft on reduced payment terms. tonne kilometres
year on year as of
numbers of seats flown and load factors. Costs It operates a policy of managing fuel price October 2018
were taken from third-party industrial action, volatility by entering into derivative contracts
air traffic control restrictions and adverse representing a portion of its aviation fuel
2.1%
weather conditions. It also reported charges for requirements a minimum of 12 months forward
the sale and leaseback of aircraft and increase from the current date. It is also required to
in ground handling costs and maintenance supply purchase carbon allowances for all flights How much the
chain contracts. departing from and arriving into the EU in order to International Air Transport
Association believes
Findlay highlighted a rise in crew costs after offset its carbon footprint. It manages its exposure wages will increase by
agreed inflationary increases in pay and employee by purchasing carbon emissions allowances
bonuses and higher retention over winter to through a forward purchase programme.
“build for peak summer growth”. Palmer states that key risks for an airline CFO
Cost benefits came from upgrading easyJet’s include fuel price volatility, foreign exchange and
fleet to larger and more efficient aircraft. interest rates. “Most of the fuel and maintenance
At IAG, CFO Enrique Dupuy highlighted tackling are purchased in US dollars,” he states. “Airlines
rising fuel commodity levels in its most recent don’t accrue the same amount in dollar revenue,
results through hedging on price and transaction so they are rarely in alignment and exposed to
exposures. It also noted higher handling and currency swings. Interest rates are another risk
catering costs and landing fees, and has launched because you have a number of long-term assets
bond issues to fund aircraft deliveries. such as planes on lease finance deals.”
Flybe recently launched a strategic review and is With regards to fuel he says CFOs look to
considering a potential sale after a series of profit forward-hedging solutions to aid future budgeting:
warnings caused by the weak pound, high fuel “Think carefully why you are hedging because if
prices and faltering consumer demand. Its CFO Ian you get it wrong and your competitors benefit
ICAEW.COM/BAM 17“You need to be aware of
the very strong seasonal
fluctuations in the sector.
You need to have decent
cash flow systems in place
to manage this”
maintenance. They are extremely material
assumptions but if you underestimate or
overestimate the value of your aircraft it might
inflate short-term profits or under-declare.”
So CFOs need to have a firm grasp over their
accounting policies.
“If you lease aircraft for seven to 10 years and
the contract says you need to give the aircraft back
in a certain condition, then you need to work
closely with the engineering team to ensure you
meet the contract,” he says.
“Leasing is the most popular option the less
capital you have. You don’t have to worry about
the residual value as you are not carrying that risk
on your balance sheet. Owned aircraft will be on
the balance sheet and in times when the industry
is in trouble it might be easier to get rid of them.
“But owned gives you more flexibility and you
can sell them on the marketplace quickly and
55%
Estimated UK passenger
from lower prices then you will struggle.”
What of fluctuating passenger demand? “The
demand curves don’t work the same way each
upgrade to better and more cost-efficient models.
It is often best to have a mix of owned and leased
if your capital ratios are not an issue.”
increase by 2035 in year,” Palmer explains. Selling seats is the job of
the event of a soft
Brexit, according to the the commercial function but it is all linked to A FOCUS ON FLEET MANAGEMENT
International Air Transport forward cash flow, so the CFO needs to be on top Duncan Batchelor, aviation partner at Norton Rose
Association
of it. “There may have been limited capacity at the Fulbright, says CFOs are much more focused on
peak summer period one year which leads to fleet management than in the past. “When you
more people booking earlier the following year. don’t get it right it becomes expensive quickly.
£10m
The cost of easyJet’s
You need to consider these demand shifts –
including the state of the economy and consumer
When, where and what is flying?” he states.
He adds that leasing – either wet, where the
EU-based business confidence – and what this means for your prices crew, insurance and maintenance comes with the
with an air operator and forward revenue forecasts. Trying to judge aircraft, or dry – can help CFOs when they want to
certificate in Austria
how your sales are going to go is an art.” scale their fleet up quickly to increase capacity in
He says there needs to be a lot of comparison with the “several years’ lead time”
communication between the CFO and the when ordering a new aircraft.
commercial department to “ensure there is quality “Sale and leaseback can also be a way of
information such as regular sales data available”. generating cash. Airlines can negotiate a good
With regards to the main airline assets – the purchase price with a manufacturer – as you can
aeroplanes – he describes the industry as “very get a better deal buying 50 instead of five – and
capital intensive”. He says: “You are making then sell the aircraft on to a leasing company,” he
estimates about the value and maintenance explains. “You then lease back the planes and
conditions of your aircraft and how that relates amortise the cost of the aircraft. You save on the
to your profit and loss. If your aircraft are owned, depreciation costs.”
then you need to consider residual value and if Batchelor adds that CFOs need to be forensic in
they are a mixture of owned and leased you their capacity forecasting, something which can
need to factor in interest rates and the cost of prove difficult when faced with industry challenges.
18 FEBRUARY 2019 BUSINESS & MANAGEMENTCOVER STORY
“Some routes are susceptible to economic growth,
some can be attacked by your competition
increasing traffic and lowering prices and some THE IMPACT OF BREXIT fly between Britain and Europe
routes may see passenger numbers drop off as but not internally for a set
happened after the recent terrorist attack in Egypt. At present the UK is part of a 12-month period. Other
This can cause huge operational problems.” liberal common aviation conditions included UK airlines
agreement where airlines have the not being able to expand their
SAVING MONEY freedom to fly to and within EU number of routes to Europe or
Cost reductions are another vital concern for countries. It is also part of the signing any bilateral agreements
CFOs. In his time at Monarch, Palmer delivered European Aviation Safety Agency with individual member states.
£30m of cost savings. (EASA) which sets regulation Barry Humphreys, aviation
“One area I looked at was maintenance. A and certification. The UK is keen to consultant, says: “The EU has open
supplier was making too many full aircraft remain in EASA post-Brexit, to and liberal agreements with third
cleans,” Palmer states. “So, we renegotiated the secure an Air Transport Agreement parties such as the US, so if they
contracts and made savings. You also need to be that ensures liberalised aviation are consistent we can expect the
aware of the very strong seasonal fluctuations in access to EU member states. same with the UK. An airline
the sector. In the northern hemisphere you go as However, without an agreement, services agreement between the
hard as possible in the summer with revenues all UK Civil Aviation Authority- UK and EU should not take too
and investment while looking at maintenance issued approvals, certificates and long to secure after Brexit. In the
contracts more during the quieter winters. You licences will cease to be valid in meantime, I doubt that the EU will
need to have decent cash flow systems in place the EU – meaning UK planes won’t stop any UK air services travelling
to manage this.” be able to fly in the EU. internally in Europe because they
A Frost & Sullivan report highlighted revenue The International Air Transport don’t want to disrupt tourism.”
leakage as a major issue for airlines, costing them Association says a soft Brexit will Emma Giddings, aviation
about 3% of revenues. It can come from credit see a 55% increase in UK partner at Norton Rose Fulbright,
card fraud, identity and frequent flyer fraud. passenger numbers by 2035, but adds: “If an EU carrier wishes to
Frost & Sullivan added that revenues received even a hard Brexit will see growth lease an aircraft from a third
post-sale – from flight-related services such as of 45%. Nevertheless, to alleviate country, they have to show they
baggage and seat upgrades – are difficult to tie risk airlines have taken can’t obtain that capacity from
back to the actual passenger revenue from the preventative action. within the EU. The UK will be
airfare. A key solution is to integrate revenue EasyJet has set up – at a cost of treated as a third country although
accounting systems with revenue management about £10m – an EU-based it will be able to lease airlines from
and revenue integrity systems as well as having business with an air operator the EU. There are also questions
more real-time information. certificate (AOC) in Austria. It over pilot and engineering
This is an area of focus for Rob Morgan, hopes that its residence and licences and qualifications – would
CFO of aviation tech firm Vistair, which supplies majority EU ownership status will a UK engineer be allowed to
software to airlines such as Delta, to help keep it within the European maintain an EU aircraft?”
manage operational documents, safety reporting, Common Aviation Area. Ireland’s Parts manufacturers will also
risk management, benchmarking, analytics and Ryanair has been granted a UK face challenges in a no-deal Brexit
audit/compliance. AOC to secure UK access after from increased customs delays
“Companies want to get their planes into the Brexit, as has Hungary’s Wizz Air. and tariff barriers. Firms such as
sky with as little delay and as much efficiency as Just before Christmas there was Rolls-Royce are reportedly in talks
possible,” he states. “We can help reduce their a hint that these bases might not with manufacturer Airbus to use
cost base and improve performance.” be needed. In its own no-deal planes to deliver its engines to
He mentions one client case study where plans, the EU stated that UK- final assembly sites on the
safety reporting increased by 71%, audit findings owned airlines would be able to Continent and avoid sea ports.
decreased by a quarter and insurance
premiums fell 3% a year after demonstrating that
safety had improved. There was also a 50%
reduction in de-icing charges after safety reports
showed it was taking place too early before
take-off in Scandinavia.
“We help airlines with a number of global
bases collate performance data more efficiently,”
Morgan says, “getting information into the right
hands at the right time.”
He also extolls the virtues of one CFO working
with another. “We work very closely to work out
what value we can unlock. It is a partnership,
building a relationship and looking for those
CFOs who want to make a difference and
GETTY
improve profits,” Morgan explains.
ICAEW.COM/BAM 19HOW HIGH IS TOO HIGH?
If there’s one thing that is sure to capture the public’s imagination,
it is how much people in positions of power get paid for doing
their job, says Pádraig Floyd
£75m
The annual pay of Persimmon Homes
CEO, Jeff Fairburn, before he was ousted
20 FEBRUARY 2019 BUSINESS & MANAGEMENTEXECUTIVE PAY GAP
Three in five people work
an average of four hours
unpaid overtime per week.
That’s 24 days per year –
and it takes its toll
Who determines what and that there needed to be greater
While sportsmen and celebrities are alignment between shareholders and
often admired for pulling down multi- excessive executive pay is? the directors running the organisation.
million-pound deals, captains of industry Regulatory limitations or “The argument said there is a need to
are treated more severely. Often labelled encourage agents – the directors – to
as fat cats, their remuneration tends to even pay caps are not work on behalf of the shareholders
attract more attention – and vitriol. popular. They are likely to and the way to do this is to incentivise
A number of recent cases have put them,” says Bender.
chief executive pay back under the operate as a disincentive In 1995, The Greenbury Report said
spotlight. Renault chairman Carlos Ghosn that UK pay had to be justified in
was sacked from his role as chair of relation to performance, and
Japanese car maker Nissan over alleged introduced disclosure in order to
wrongdoing concerning his reward of Journalists over his £2.6m pay in 2017. discourage excessive pay levels.
package. The internal inquiry turned into The award was seen as excessive as the Over time, this became a
a criminal investigation and Ghosn FT’s operating profit for that year was just substantial link with performance, but
remains in custody in Tokyo facing several £4m. Many staff had seen little or no was removed in the last iteration of
charges relating to under-reporting his increase in their pay over a number of the corporate governance code
pay and financial misconduct. years and the union was also seeking to because it had “backfired horribly”,
Though Ghosn’s situation is extreme, address the gender pay gap. Despite Bender explains. “It was removed
he is not the only boss under scrutiny. In Ridding returning £510,000, the chapel because they realised it didn’t work.
2018, the now ex-CEO of Persimmon passed a vote of no confidence in the All it led to was more and more layers
Homes, Jeff Fairburn, was vague enough CEO in November 2018. of complexity.”
about his £75m pay – including a £47m To attract and reward good
bonus awarded in 2017 – to spark a WHAT’S GONE WRONG? candidates, the traditional salary
media storm that made his position at CEO reward has been going up ever became salary and bonus, and then
the house builder untenable. since the mid 1970s, says Ruth Bender, salary, bonus and a long-term
Last summer, John Ridding, chief reader in corporate financial strategy at component. Within that structure
executive of the FT, was censured by the Cranfield University. Academics at the there were all kinds of different
FT Group’s chapel of the National Union time suggested CEOs were underpaid conditions and targets.
ICAEW.COM/BAM 21WHERE ARE WE NOW? By 2017 the average Standard & Poor 500 CEO was paid 361 times that of an average worker, according to pay ratios compiled by US trade union body AFL-CIO. Data from the Economic Policy Institute that targets the top 350 US companies shows the ratio as reaching 312.7 in 2017 (see box out). But the ratios are not so everywhere. AFL-CIO data from 2011-2012 shows that while the US pay ratio was already at 350:1, Switzerland and Germany were around the 150:1 mark, with the UK at around 85:1 above Japan (60:1) and Denmark (50:1). The reason that certain Western economies – predominantly the US, UK and Germany – have higher pay ratios is down to a difference in culture, says Umar Boodoo, an assistant professor at Warwick Business School. “In Japan – and also to a degree in Scandinavia – there’s a culture where senior executives are concerned how they will show their face if they are being paid too much,” says Boodoo. “It runs against the co-operative ethos, but that is different here and the US. The culture encouraging higher pay has been ingrained for decades and so is very difficult to change.” THE HIGHEST PRICE But just who determines what excessive executive pay is? Regulatory limitations or even pay caps are not popular. They including employees, on pay matters are likely to operate as a disincentive “I’m very much in favour have been dropped, though pay ratios and in reality would be difficult to of the long-term share must be published and justified. enforce. Unlike Japan or Scandinavia, no Boards in some sectors are also company in the UK or US would apply a value being an important looking at placing caps on board cap unless mandated by regulation, as it ingredient of the makeup, directors’ pay in the light of increased would leave them at a disadvantage litigation from shareholders. And though against other companies competing for as it is more difficult to say on pay votes are only advisory, the best talent. manipulate” boards are increasingly taking note of In the case of listed companies, it is unrest over pay levels. the shareholders who are going to be In 2018, the average say on pay vote in the arbiters of value. However, despite a the US received 90% support. However, considerable amount of activism around Though CEO pay continues to in recent years, some boards have levels of CEO pay, shareholders are only increase faster than that of ordinary agreed to review pay policies on the likely to be gunning for the CEO over workers, there are signs that there is a basis of a strong showing, even when pay when things are going badly. growing awareness of the dangers of they receive a healthy majority. “Shareholders are not one paying a CEO more than the The most recent concession to homogeneous group and are quite shareholders consider appropriate. shareholders was made by Royal Dutch diverse in terms of their objectives,” says In the US, 52 Russell 3000 companies Shell in November. The energy company, head of corporate governance at the failed to receive a majority support in say lobbied by a number of shareholder Institute of Directors, Roger Barker. on pay votes in 2018, an increase of 53% groups, led by environmental forum “Although this is gaining more on the previous year. In almost 70% of Follow This, agreed to tie future prominence and a record number of cases, this was the first time these executive pay to carbon emission targets activists’ campaigns are under way in companies had faced such disapproval. instead of pure financial metrics. It is the Europe, most are demanding actions The EU is considering extending say first climate-change-related say on pay to generate short-term shareholder on pay. However, in the UK the reforms vote, but is likely to be repeated at other value creation.” to extend the influence of stakeholders, general meetings in 2019. 22 FEBRUARY 2019 BUSINESS & MANAGEMENT
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