Market Examples and Implications
While the concept of strategic management accounting is a relatively logical and straightforward one to understand, and idea that has begun to take root that appears to embody many of the same concepts as strategic management accounting. This methodology, circling back to a concept introduced and analyzed previously within this text, is integrated financial reporting. Underlying this concept is the idea that organizations must be able to integrate a broader array of information to make optimal decisions. As with any conceptual framework or idea, it is important to analyze case study examples, real-world demonstrations of the model to ensure validity, and assess whether or not the conceptual model is logical and ready for broader implementation. Fortunately, this can be utilized for an argument and persuasive case for strategic management accounting, and there are numerous examples of integrated financial reporting in the marketplace. This chapter focuses on both the organizations that have implemented integrated financial reporting and the ramifications/results that have resulted from this implementation. Integrated reporting has been adopted by a variety of organizations in a number of industries in which the data set and information that are available for analysis can be applied. What follows is a focused case study on several of these organizations, the results achieved by these organizations, as well as an analysis of how strategic management accounting is linked both to integrated and stakeholder reporting. Additionally, demonstrating that many of the concepts embedded within strategic management accounting are already in use in the marketplace can assist a future argument as well as assuage doubts and concerns voiced by management leaders.
Before delving directly into some examples of organizations that have adopted and are utilizing integrated financial reporting, it is important to recognize that this phenomenon does not exist in a vacuum. Particularly in the aftermath of the financial crisis, the reality for many organizations has shifted from focusing exclusively on financial shareholders to a mindset that embraces a much broader set of stakeholders. Organizations that accept and proactively approach this new business paradigm appear to be the same organizations best positioned for success. Drilling specifically into the ways in which organizations can, and have, adapted to this new paradigm on a structural level, one distinct concept stands out as worthy of further analysis. Benefit corporations, or b-corps, represent both a new way of doing business and an entrenchment of the increasing socially oriented nature of stakeholders.
Summarizing at a high level, one of the most important distinctions between benefit corporations and traditional corporate structures is the way in which sustainability and other nontraditional business goals are integrated within the broader organizational structure. How this is done, from corporations that range from the crowd-funding platform Kickstarter, to Ben and Jerry’s, is that such objectives are enshrined within the corporate charter and included in the fiduciary responsibilities of the board of directors. Embedding such goals might, at first glance, appear to be a relatively superficial change to corporate verbiage without other longterm effects or ramifications, but that would be an incomplete analysis of this trend. In essence, by embedding qualitative and other nontraditional items within the corporate structure and hierarchy, the organization provides a critical layer of support and structure for such ideas to take root and flourish.
Examining this trend through a slightly different lens assists in revealing the significance of such a change. By linking qualitative goals and objectives, which often include sustainability metrics and improved governance goals, the board of directors provides incentives and justification for the organization to operate in a stakeholder-centric fashion. Embedding such objectives and goals into the operational framework of the organization provides justifiable business reasoning as to why a company would pursue goals and initiatives that might not, at first glance, benefit shareholders. Embracing a more stakeholder-oriented approach to business and management at large is a shift that is occurring regardless of how an individual manager may feel about it. Being proactive and building such a mindset into the organization can only assist in making the organization more competitive and relevant.
Sustainability, Governance, and the Importance of Structure
Sustainability, in various forms, has existed as a component of the business and greater management conversation for several decades, but it is only during the last decade or so that sustainability has moved to the forefront of business decision making. Tesla appears to exemplify the extent to which the conversation surrounding sustainability and various types of renewable energy has evolved, with the entire business model based on battery-powered vehicles. While some may contend that the products manufactured by Tesla are comparable to other offerings of the marketplace, the reality of the situation is that the organization and management team have successfully captured the rising tide of enthusiasm and energy for electric vehicles. Supply chains are yet another area of increasing focus of organizations, but again, in a slightly more nuanced way that had been experienced previously.
Perhaps most notably with Nike and other retail organizations, supply chains were often the focus of examinations of working conditions and employee-focused issues centering on potential exploitation and child labor conditions. After making progress on these issues, however, supply chains that increasingly span the globe and integrate vendors and suppliers from an increasingly large number of countries, the issue of sustainable operations has become increasingly important. Sustainability and operating in a sustainable manner have been encouraged and supported in developed markets for some time, but the financial realities of operating in such a way cannot be left unexamined. In short, the up-front costs of installing equipment and training personnel to operate and continuously manage the business in a sustainable manner can be extensive. Understanding these factors and building out these costs, which include both organizational costs and various externalities, is an important step in full rationalizing and embedding sustainability within the decision-making hierarchy of an organization.
Sustainability
This is not possible, however, without a proper framework and structure for this type of information. Otherwise, it is far too easy for these types of information to become lost in the shuffle and the day-to-day deluge of information. Providing this type of information, which can impact the organization in both short and long term, with a proper framework facilitates the flow of this data from operations to senior decision makers. Additionally, by involving the usage of an organizational framework, several benefits are readily apparent. First, and perhaps most important, are the support and buy-in from senior management and organizational leadership conveyed by the fact that an issue such as sustainability is now integrated into the decision-making framework. Second, by building such issues into how the leadership of the organization makes decisions, the issues involved are repositioned to center stage and evaluated in familiar constructs such as reports, variance analyses, and conference calls.
Making this transition, from merely qualitative conversations to analyses and presentations, elevates the issue at hand while also embedding these matters into the regular points to be reviewed before making significant decisions. Organizations ranging from Coca-Cola to Proctor & Gamble, and even including service organizations such as Google, place increasing amounts of focus on sustainability viewed as a business strategy. In the context of Google, the linkage to sustainability initiatives presents an interesting example of how sustainable business decisions can generate substantial operating efficiencies even when the core business is not extractive or resource dependent in nature. Specifically, by investing in energy-efficient server farms, renewable energy sources, and financing utility upgrades to facilities, Google (and numerous other service firms) has seen increased productivity and reduced costs related to utilities. Considering that utility costs, particularly electricity in the case of technology firms, can represent a large expense that is not billable to clients, savings achieved in these areas can have an outsized impact on organizational performance.
Governance
Governance, traditionally, has remained the purview of annual discussions during board meetings, and restricted to conversations among members of the board, upper management, and perhaps the handful of shareholders. What was lacking, and this was exposed in several scandals in the 1990s and early 2000s, was a rigorous structure to objectively evaluate and rank both the quality of the board in question and comparative tools to see just how well a specific board ranked, compared to both peer organizations at the market as a whole. Following the collapse of Enron in 2001, and the subsequent breaches of fiduciary duty uncovered during the financial crisis of 2008, the importance of good governance and stewardship of organizational resources became increasingly important. Specifically, the ramifications of poor leadership from the apex of the organization, and how these failings can impact the organization financially, became increasingly apparent and obvious to financial and nonfinancial stakeholders.
Following the fallout, which included government bailouts of financial institutions, an economic recession rivaling the Great Depression for breadth and depth, and increasing mistrust of public markets and organizational leaders, a new focus for stakeholders emerged. Manifested in various forms ranging from increased occurrences of activist campaigns, regulatory scrutiny, and questions from the investment community, it caused organizations to focus more on governance, transparency, and improving lines of communications. Scandals and corporate headlines at organizations such as Volkswagen (VW), Yahoo!, and Viacom during the end of 2015 and during 2016, reinforced the importance of consistent leadership at the highest levels of the organization that is aligned with long-term value creation and stewardship organizational resources.
Organizations such as GMI Ratings exemplify the focus and scrutiny applied to governance as business continues to evolve and become globalized to more interconnected levels. Analyzing and understanding the ramifications of managerial decisions, and choices in both domestic and international markets are a fiduciary responsibility of the board, management, and any individual involved in the planning and strategic orientation of the organization. Specifically, the interactions between an organization and its internal and external partners, suppliers, and vendors forms the basis of corporate governance, which in turn assists in understanding the feasibility of suggested longer term planning initiatives. The organizations mentioned previously suffered from a host of issues, but an underlying cause of the manifestation of such problems could reasonably be assigned to poor governance, poor communication, and a lack of oversight over operations and strategic planning.
Prior to the analysis and in-depth drilldown into the specific issues of those organizations listed previously (VW, Yahoo!, and Viacom), it is important to link back and truly analyze the connection among governance, strategy, and the underlying data that drive decision making. As introduced previously corporate governance, in essence, concerns the strategic decision making and interactions among the organization, internal stakeholders, and external stakeholders. In short, corporate governance is how the organization deals with challenges and opportunities that are driving both the competitive environment and the institution itself. In order to plan and strategize accordingly, however, the information that is presented to the management team must (1) contain both qualitative and quantitative information and (2) be presented and disseminated in such a manner that is useful and comparable for current decisions and comparing current scenarios to previous options.
Yahoo!
Yahoo! represents an almost classic example of what can befall an organization that fails to plan and strategize accordingly in reaction to changing market conditions. Yahoo!, once the leading search engine and web portal in the world, had fallen upon difficult circumstances in the face of increased competition from organizations such as Google and Facebook. In addition, as Internet usage and interaction moved from desktop computers and laptops to mobile devices (including both tablets and smartphones), there was a new problem of declining revenues and profits on a per-click basis. As profits declined and market share shrank, Yahoo!’s board sought the expertise of outside experts to help jump-start growth and help the organization retake market share and profitability. Ultimately, the organization was acquired by Verizon in 2016, for $4.8 billion, a far cry from the company’s one-time valuation of over $140 billion. Compounding this publicly available information and opinion with an additional layer of complication, the ownership percentage of Alibaba, the e-commerce giant, partially masked the growing and systemic problems at Yahoo!.
Yahoo!, from a corporate governance point of view, consisted of three primary areas of operation, some of which are based in the United States, and other valuable properties located overseas. Specifically, Yahoo! Japan and the ownership stake in Alibaba provided the organization with a stream of revenue, income, and an improved valuation than the organization would otherwise have obtained. An analysis conducted with the benefit of hindsight, clearly, should always be observed with a proverbial grain of salt, but the following issues and ideas are still valid and could very well be applied to other organizations. In the end, during the first quarter of 2016, the board and senior management of Yahoo! chose to explore strategic options for the organization, that is, attempt to sell the core business. The inauspicious end for a one-time Internet powerhouse is a clear demonstration of how poor management and strategic planning can negatively impact an organization. It is also important to keep in mind, that, as these analyses conducted on Yahoo! on the other organization selected for an examination have demonstrated, there are also organizations that have succeeded in this environment.
How Improved Governance Might Have Helped Yahoo!
Assessing Yahoo! from a higher level governance perspective, it would seem logical to analyze the organization from a global and strategic viewpoint. Drilling down specifically to how that would be possible and conducted, one possibility would be to dissect the various business lines of the organization, identify the primary drivers of revenues and expenses for these business lines, and conduct a competitor assessment. For instance, the operations and relationship between Yahoo! and Yahoo! Japan, which came under increased scrutiny, appear to be heavily angled and favored toward Yahoo!. The initial set-up and investment by Yahoo! into the operations and infrastructure of Yahoo! Japan have been far exceeded by the royalties paid by Yahoo! Japan to Yahoo! proper. Put another way, after the initial investment and set-up of operations, the corporate parent has a nonexistent role in operations. This represented a prime opportunity for previous levels of management to reestablish ties, deepen connections, and expand into the high-growth economies in Southeast Asia.
Alibaba represents a unique situation that simultaneously provided quite a bit of benefit to the organization’s increased valuations while, unfortunately, also providing a smoke screen that helped to obscure the declining performance of core operations and the core business. Purchased in 2005 by the co-founder of Yahoo!, Jerry Yang, the stake in Alibaba become increasingly valuable as the Chinese firm began to grow along with the Chinese e-commerce market as a whole, and it considered an initial public offering (IPO). The looming IPO of the organization in 2014 generated quite a large amount of speculation that Alibaba, the larger and faster growing firm, would pressure the organization to make more strategic and future-oriented decisions concerning operations and execution. Especially after the IPO of Alibaba, pressure mounted on the organization and the management team to enact changes, improve product offerings, and help reclaim some of the profitability that had been eroded over prior years. As has been documented extensively in the media and market coverage, the turnaround efforts initiated by Marissa Meyer and others were ultimately unsuccessful.
Accounting and Governance—Yahoo!
The issues at Yahoo! extend far beyond what any one reporting template or process could address, but it is absolutely correct to state that improved governance methodologies and management could have assisted in better addressing the multitude of issues that negatively affected the organization. Management accountants, and management teams in general, will undoubtedly be analyzing the issues that beset Yahoo!, and the ultimate end result of these issues on the organization. Whether the company is acquired in totality, or split off into separate entities such as the bifurcation briefly mentioned earlier into Yahoo!, Yahoo! Japan, and the remaining ownership stake in Alibaba, the end result in the same. Owing to years of mismanagement, poor stewardship of intellectual property and other assets, and unresponsiveness to competitive forces, a once-dominant company was reduced to selling itself on the open market.
Governance, returning to the underlying purpose of the term, is to manage the interactions between the board and the management team, as well as to manage and improve the interactions within the organization and the relationships that the organization has with outside parties. In a business landscape that is increasingly stakeholder-oriented, it is imperative that the corporate governance process at an institution be robust, and complemented by quantitative analyses and metrics to help users extract and understand what information related to the corporate governance competencies of the organization means for the organization. Specifically, Yahoo! would have been well served, it appears, to approach the analysis and management of its relatively far-flung operations under the corporate umbrella on a region-specific basis. Clearly, markets are different in different parts of the world, and relationships with advertisers, vendors, and developers differ from market to market. It is essential to analyze the quantitative effect of these different markets and conduct a thorough SWOT analysis (strengths, weaknesses, opportunities, and threats) of both Yahoo! itself and the competition.
Subsequent to this initial analysis of the organization in the marketplace, an analysis of the market itself, complete with segmentation of mobile, desktop, search, banner advertising, and algorithmic advertising would be prepared and presented by the accounting function. Drilling down into these various segments of the market provides the organization with the capability to quantify and objectively track several factors. First, any changes or trends in the market as a whole would be readily evident from this sort of analysis. Second, the relative position of Yahoo! versus the competition would become clearer, and have a quantifiable basis for discussion and review. This positional analysis would allow the management team to, relatively simply, assess the following two items, including whether to remain in certain product/service lines and how to position the company so that the offerings of the organization are unique and desirable. Third, and perhaps most importantly, the communication of this information to the management team and senior-level decision makers would allow more proactive decisions to be made in the face of these changing market conditions.
Of course, the reality is that merely having the information described previously is insufficient for an organization seeking to make decisions based on this type of information, and this is where the intersection of governance and quantitative data becomes important. Communicating this information, from the internal accounting and financial professionals tasked with preparing the data, to the senior makers, is a critical step. Presenting this, and other, information, in a format that is realistic and useful is often equally as important as the data analytics itself. While the graphical and presentation tools utilized may vary depending on the organization and the specific personnel, several key points should be taken into account.
Presentations Matter
First, the presentation tools and graphics used by the accounting and finance team must highlight the correct information, that is, the data must reflect both the realities of the situation and the quantitative underlying information. This may mean several iterations of the same graph, adjustments to legends, color palettes, and scales in order to convey the information clearly. Presenting information that is confusing, contradictory, or unclear to the end users, or that is in a format not readily understandable to them, can present a major stumbling block to effective utilization of this information. While focusing on such items might seem to be of secondary importance to the data itself, it is important to remember a maxim of analytics and information—many of the end users of such data are not data experts, and not particularly quantitatively inclined. This data and information must be translated from strictly analytic terms to those more appropriate for decision making and organizational planning.
A more proactive and engaged accounting function, working in coordination with information technology, the appropriate levels of management, and communications professionals within the organization can develop a reporting system that can meet the increasing demands of governance. No longer a matter for qualitative conversations conducted annually, stakeholders, including financial shareholders, expect boards to be engaged, proactive, and actively involved in the strategic planning process of the organization. Management can assist in preparing and communicating the information most needed for analyses and decision making, and the key is to not limit this thought pattern to just financial information.
Volkswagen (VW)
VW was heralded as a pioneer in clean diesel technology and was successfully able to capitalize on the increasing utilization of such technology in the United States and the rest of the world, to pull past Toyota as the world’s largest car maker in 2015. This long-coveted goal was celebrated both inside the organization and touted by industry analysts as proof of the durability and success of the product line decisions made by the organization. Toward the end of 2015, VW made headlines across the world yet again, but this instance was not cause for celebration. It was revealed that the clean diesel technology touted frequently by the organization as a key to its success, and serving as a testament to the engineering prowess of the team, was not being reported properly and was, in fact, not nearly as environmentally friendly as it was alleged to be. Massive sales recalls, investigations, and fines levied by U.S. and European regulators resulted in large sales declines, a dramatic drop-off in profitability, and a threat to the continued success of the organization at large.
How Better Governance Could Have Helped
Governance, it is important to keep in mind, is concerned not only with how the organization interacts with external partners, but also with how the organization deals with communication between different areas of the company. In the case of VW, it very quickly becomes clear that there was a fundamental breakdown between operations and management, that is, how certain types of information were to be handled and communicated to upper-level decision makers within the organization. Specifically, it was revealed that although emissions thresholds were met during testing conducted in labs, which served as the basis for environmental compliance and reporting, the conditions in the labs and during the tests did not align with the realities of driving vehicles on the road. In other words, the testing criteria and methodologies used to determine emission levels for reporting to the public and to regulators were conducted in a fraudulent manner.
How this occurred and the lack of management efforts to root this out during the course of operations are a matter that will be debated and analyzed for years to come, but this analysis focuses on the lack of good governance and transparency, and the role it played in the VW emissions scandal. Although a slightly different form of poor governance than was evidenced at Yahoo!, it is clear that the corporate culture, which plays a large role with how organizations build and maintain governance systems and reporting tools, was not enabled to be proactive, assertive, and aggressive. Instead, as investigations continued to show and demonstrate, the corporate culture and governance structure at VW were one of conformity, consensus, and working collectively to arrive at solutions. While this might appear to be an ideal situation that fosters collaboration and minimizes conflict, the reality of the situation is that the individuals and groups tasked with executing corporate governance and managing the strategy of the organization have to be independent and proactive.
This situation, and the resulting scandal that has engulfed VW, continues to negatively impact both current financial results and sales projections moving forward, highlights an extremely important concept as it pertains to corporate governance. Corporate governance, corporate culture, and the ability of the organization to internally channel constructive criticism through appropriate organizational channels are hallmarks of good governance. That said, Anglo-American governance, and the governance structure utilized by many organizations, including VW, in Western Europe are very different. Under the Anglo-American model of governance an emphasis is placed on the number of independent directors that serve on the board, their various specialized competencies, as well as any other involvement the directors may have run in running the business or affiliated organizations.
In Western Europe, including Germany where VW is headquartered (and actually has a company town, Wolfsburg, that includes these global headquarters), corporate governance is approached in a slightly different manner. In the case of the VW, the Germany State of Saxony controls approximately 20 percent of the outstanding shares of the organization, and labor unions are represented by several individual at the board level. This cross set of interested groups creates a situation where the interests of the individual constituencies might not be aligned with each other or the interest of stakeholder groups. An additional complication, introduced by the fact that both the state and labor unions exercise considerable influence at the board level, is the reality that stability of operations and maintaining employment numbers play a much larger role in these types of situations than would occur under an Anglo-American model of governance.
Under these conditions and circumstances, it is especially important for the individuals tasked with corporate governance to be able to analyze and articulate potential issues at an organizational level, and communicate this information to the decision makers. At VW, the primary source in the breakdown in information originated between the engineers and specialists in the labs conducted emissions testing, the immediate layer of management supervising those individuals, and senior-level decision makers. As of 2016, there are numerous investigations ongoing into what individuals knew what pieces of information, and when they were made aware of this data, but the overarching theme is clear. At VW there did not exist a transparent process to communicate operational data related to emissions to the upper levels of management, and there existed, to some extent, pressure to not raise red flags when they were warranted. Put simply, an independent process that was tasked with the clear and unadulterated flow of data throughout the organization would have very possibly exposed these testing inconsistencies earlier in the process, and resulted in a proactive solution to this problem.
It is important to stress that better quantification of data, or more reporting on existing data problems and situations, would not have offered a proactive solution to the multiple issues that befell VW. With well over 100,000 employees worldwide, and decades-long track record of innovation, engineering success, and product dominance, the organization was not and is not lacking business expertise. At VW especially, and most probably at similar-sized organizations, there is a lack of transparency and open dialogue about potential pitfalls that face the company. Stated another way, the reality is that failure is, all too often, not a viable option for many organizations, and information that may stand in the way of organizational goals may very well be massaged or otherwise modified to make it appear less damaging. Accounting professionals, well versed in preparing and communicating quantitative data that may or may not tie back to expectations but that is an accurate reflection of reality, are positioned to help develop the systems and reporting templates to make such communication more effective and probable within an organization.
Takeaways
The news and headlines related to governance, however, are not only comprised of organizations that are failing to execute proactively on governance and sustainability, which is examined in more detail in the coming section. Organizations that have successfully embedded good governance into operational and reporting practices accrue benefits that include, but are not limited to, improved stakeholder relations, better communication with financial markets and financial regulators, enhanced transparency with regard to decision making, and a more objective resource allocation policy. In a business landscape where financial capital is still, even in the face of increased liquidity from central banks, a limited resource, allocating resources to the more lucrative and cost-efficient goals is a practical application of fiduciary duty. Management accountants, already involved in several aspects of the data-generation process necessary to develop and maintain high-quality governance practices, are uniquely well situated to take advantage of increasing demands for organizational transparency and a reinvigorated focus on the long-term stewardship of organizational capital. As is examined in the following, the connections among good governance, sustainability initiatives, and organizational performance are quantifiable, growing in scope, and increasingly important to financial results.
Sustainability
Sustainability is often derided as merely a buzzword used to justify expenditures that otherwise do not make financial sense or generate returns sufficiently high enough to overcome hurdle rates and benchmarks. All too often, unfortunately, there is an element of truth to these claims, and over the last several decades, numerous sustainability- and environmentally oriented initiatives and programs have subsequently been exposed as financially unwise decisions that were rife with corruption and unsustainable business practices. That is beginning to change, however, as the technology and processes have begun to keep pace with market expectations and stakeholder demands for more sustainable enterprises. Sustainability and sustainable operations do not have to necessarily always be linked directly to cost centers, and nonrevenue-generating activities. Rather, these activities and initiatives can be used to improve operational efficiency and drive bottom-line results.
Adidas, the global footwear and apparel manufacturer, is an almost ideal example of an organization that would stand to benefit from increased sustainability, energy efficiency, and more productive operations. Specifically, and especially in light of increased scrutiny of both global trade and import/export agreements between different nations, ensuring that supply chains and partner organizations are operating sustainably and ethically is no longer truly an optional consideration. Retail and footwear manufacturing and distribution are a resource- and capital-intensive endeavor that requires close coordination among operations, finance, marketing, and upper management to be executed correctly, fulfill financial expectations, and satisfy customer requirements. Such a condition is virtually ideal for the implementation of sustainability support and coupled with financial decision making.
Traditionally, one of the obstacles encountered by professionals seeking to make sustainably and environmentally oriented operations an important aspect of business decision making is the reality that it can be a challenge to quantify the financial returns of such initiatives. In order to be assessed correctly, and to not fall prey to various greenwashing concepts and ideas, it is important for the organization to acknowledge the following realities. First, in order to achieve true sustainability savings and lasting effects on the organization, it is necessary to invest (spend) the requisite amounts of money to put into place the required equipment and systems. Doing so is not always an easy argument to sell to senior decision makers, especially in the face of increasing pressure from shareholders to achieve quarterly earnings growth, increase dividend payouts to shareholders, all while remaining within operational and financial compliance. The simple fact of the matter is that sustainability and operating sustainably require up-front investments.
Second, and arguably the more important aspect of the conversation, is the necessity of being able to quantify and track the performance of sustainability dollars over time. Put another way, the investments made into sustainable development and sustainability must be able to be directly mapped to quantifiable improvements. Regardless of whether the focus of the specific initiative is energy efficiency, waste reduction, recycling, or limiting the use of other natural resources in the production process, the end goal is the same. Like any other investment decision or choice undertaken by the organization, the justification must be able to be supported financially, as well as from a more comprehensive point of view. Every organization is unique, obviously, but the concept of hurdle rates, internal rates of return, and other internal benchmarks are common across industries and organization. Adidas is one such organization, and has taken a unique approach to assist senior management with evaluating and sustaining investments in environmentally oriented operations. In essence, and as analyzed in more detail in the coming section, the organization has taken traditional financial evaluative tools, metrics, and ideas, and applied them directly to capital invested in sustainability initiatives.
Adidas
Adidas took a unique approach to integrating sustainability into core operations, and also provided financial analysis an embedded position within the decision-making process. The Environmental Defense Fund, which Adidas expanded on and grew into a self-sufficient business operation, began as a program in 2008 that recruited MBA students and provided a week of training that, in essence, provided the students with the ability to talk about sustainability and sustainability initiatives in a way that will make logical sense to financial decision makers. Chronicled in Bloomberg Businessweek, one of the students enrolled in this program was placed in an internship at the global headquarters of Adidas. A year later, the employee was hired there full-time and tasked with applying what she had learned and analyzed during her prior time at the firm to identify energy consumption and save the organization money.
Meshing together financial analysis with sustainability-oriented goals led to Adidas investing $750,000 in sustainability projects that were projected to earn returns of at least 20 percent. After achieving these initial successes, the organization, to date, has invested $5.5 million in sustainability projects that average an internal rate of return of 33 percent. Additionally, the organization now allocates between $2 and $3 million annually specifically for these initiatives, which is a direct result of the ability of the organization to financially quantify the results of sustainably operating the business. The success at Adidas is important for two primary reasons as in terms of a more strategic accounting function. First, the direct connection among financial analysis, operational improvements, and management buy-in represents an encouraging sign for accountants seeking a more proactive role. The fact that Adidas, after seeing the quantitative results, was willing to invest millions of dollars in sustainability initiatives proposed by a financial team member is a real-world demonstration of the possibilities of a more proactive finance and accounting function. Second, and interestingly, Adidas is appearing to be implementing a venture capital model within the organization that focuses on specific projects and desired outcomes. By funding only specific projects, with limited scopes, and demanding that these projects meet certain hurdle rates as measured quantitatively by the organization, Adidas utilizes a model known as corporate venturing (CV).
Strategic Bets and Strategic Management Accounting
Organizations and management teams are and expected, by both financial and nonfinancial stakeholders, to be able to respond to and address the following market reality. Data and information are available more rapidly and in larger quantities than ever before, but this means that in addition to being able to analyze and integrate said information, organizations must be able to test new ideas. Obviously, new ideas, product lines, and service offerings require capital and other internal resources to be invested up-front with uncertainty as it pertains to returns and improvements to the organization. That said, there are methods used with increasing frequency at a larger number of organizations, which enable corporations to experiment, test out, and otherwise hedge strategic initiatives. Such a situation is almost ideal for a more strategic accounting function to weigh, analyze, and report on the various options available to the management team.
Corporate Venturing
CV, referenced previously with the example of Adidas, and other types of nontraditional methods of investing are increasingly popular among corporations seeking to experiment with new, innovative, or riskier-than-average product of service lines. CV, drilling down to the specifics, can take one of several forms, but the essence of the concept does not change. A parent organization funds specific projects or ideas within an organization, monitors these investments, and manages the results much as a portfolio manager would. A key benefit to such a model is that it allows the organization to place limited amounts of capital to work on a project that might not be core to the business, but still leverage the resources and personnel of the larger entity. Additionally, by using such a model to promote and experiment with new and innovative ideas, it allows the organization to take risks with capital and resources that do not put the entire organization at risk.
While historically utilized to fund start-up initiatives at large organizations, specifically within the pharmaceutical and technology fields, the concept of CV has become increasingly accepted and widely used. Additionally, benefits of leveraging such a model or setting up a venture capital-like branch of the organization (such as Google Ventures) include limited risks as noted previously, and several others. The ability to learn and improve from the activities and ideas developed and marketed in the spin-off-like entity created via the CV structure is an important benefit. Far from being an ancillary benefit, continuous learning, experimentation, and refining of ideas and concepts are a key aspect of remaining competitive and relevant in an increasingly competitive global economy.
Temporary Organizations
The phrase “temporary organizations” must seem like an oxymoron upon first review. Temporary employees and consultants are usually brought on board to fill in gaps within the existing employee pool, and not initiate new and experimental initiatives. Also, certainly worthy of mention is the fact that temporary employees and consultants are almost always more expensive on an hourly or pro-rated salary basis than existing employees. Acknowledging these realities, there are still significant benefits and upside potential to setting up a temporary organization, or leveraging consultants to run an innovation shop or otherwise titled sub organization focused exclusively on new ideas. Ideally, the temporary organization is managed by employees of the organization with appropriate levels of subject matter expertise and experience to run such an operation. Other than these individuals, however, the majority of people working on the idea or concept that is the focus of the temporary organization should be external. One of the most obvious benefits to this approach is the flexibility provided to the organization. If the endeavor does not succeed, it is straightforward and relatively inexpensive to roll up operations and reassign the internal employees to other needs and areas of focus within the organization.
Looking at this option through the lens of a more strategic accounting function yields several interesting insights that can and should be applied to such initiatives. Specifically, the management team and leadership of the organization must be able to assess the financial viability of different ideas and concepts without risking the organization itself. Temporary organizations are one vehicle with which this can be accomplished. Scaling a temporary organization is a multifaceted process, which requires both a quantitative and qualitative assessment process. For instance, the phasing in of full-time employees and personnel from the organization combined with the necessary training of these individuals by the temporary staff running the operation necessitates that this transition be mapped out, tracked, and managed from both a human capital and financial perspective. Embedded management accountants empowered to address such issues provide real-time analytics and information that should be directly linked to the financial impact that such an idea would have on an organization.
Flexible Factories
The idea of modular manufacturing and flexible production capabilities are not new concepts. Emerging market manufacturers, around the globe, have leveraged the idea of flexible production and scalability to undercut established producers and capture market share. Drilling deeper, however, reveals the scale of flexible production and truly temporary production facilities. Chinese organizations have been well known to spring up factories in rapid fashion and disassemble such facilities when they have outlived their usefulness. This analysis, however, focuses on the application of this concept and idea to the services side of organizations with both start-up enterprises and established organizations can benefit from understanding what exactly is meant by temporary facilities and capacity. The ability to scale product and service offerings, while not losing quality or supply chain coordination, is an essential managerial skill in a global business environment.
Transitioning such insights into shared services is a relatively straightforward concept to understand, but there are several critical areas that should be of focus when developing an action plan or quantitative analysis. First, the increasing utilization of technology in nearly every aspect of business and management practice has resulted in efficiencies and improvements throughout organizations. That said, there still remain relatively large opportunities for management accountants to better embed and integrate technology and technological advances into current processes and communications of information. Applying this to the idea of scaling production, from a services perspective, is a task well suited for a more proactive and strategic management accounting function. First, the available tools and technology must be reasonably assessed, that is, what are the options that are realistically applicable to the shared services in question? Second, what are the potential costs and benefits of implementing certain process improvement initiatives? Additionally, what will the organization receive from the investment in technology, training, and on boarding that will undoubtedly follow the adoption of innovative ideas? Lastly, and most importantly, how will the benefits of process improvement be articulated and communicated to other members of the organization and stakeholder community?
Strategic Bets and SMA
The ability to not only understand but implement various hedging strategies within the management framework of organizational decision making is an important part of the flexibility essential for organizational success in a globalized environment. Strategy continues to evolve and increasingly contain information and elements previously reserved for senior-level decision making. Analytics, real-time information, and the integration of such analytics and dashboards into management is a requirement rather than an option that must be considered and embedded within the accounting functional. Management accountants and other financial professionals must be able to not only analyze such information, but also be able to articulate not only the data itself but also the ramifications of such information to the organization.
Important and imperative to the preparation and distribution of data to senior-level decision makers is the art of making data relevant and understandable to the end users. Organizations are in possession of ever-increasing quantities of information, about both organizational performance and customer requirements, but the information must be prepared, analyzed, and distributed in a manner that ensures that (1) the information is useful to decision makers and that (2) it is able to be interpreted and used to assist in the decision-making process. Of particular importance to the consideration of strategic bets, initiatives, and other endeavors undertaken by the organization, it is important that data be analyzed, not only compared to the alternatives under consideration by the entity, but also the comparable market initiatives currently underway by competitors. The linkage and connection among strategic bets, current management techniques, and a more strategic accounting function is relatively straightforward and concise to understand and analyze.
First, and perhaps most important to the convergence of strategic management accounting and strategic decision making, is the need for information that is generated and analyzed from multiple sources, that is, the underpinning of the multiple capital model that is a cornerstone of integrated financial reporting. When planning a new strategic initiative or evaluating the veracity of said information and initiative, it is imperative that management have the most accurate and relevant data to effectively evaluate the option. Delivering information from operations to the management decision matrix and team is an important aspect of strategic hedging, operations, and making decisions in a highly competitive marketplace. Second, in order to gather and effectively deliver this data to the management team to assist with analysis and evaluation, the accounting function must coordinate with, and work with other functional areas. Creating and maintaining the connections and relationships are important and essential to both promoting the value that the accounting function can bring to an organization as well as assisting the company make the best decision.
Delivering Strategic Information
Increasing the validity of the decision-making process and the probability that the decision undertaken will be successful requires the embedding of quantitative data and statistics into the qualitative discussion and framework that drives decision making. Specifically, as it pertains in terms of the possible investments and initiatives considered by the entity, it is important that the information presented is done so in such a manner that is useful to the end users and decision makers it is delivered to. Circling to a topic previously discussed and analyzed, it is apparent to professionals working in industry, academics, and accounting professionals employed in an attestation role that the information delivered is only a part of the value-added process of the profession. Ensuring that the information and data presented is applicable to the specific end users of the information is a critical part of the information delivery process. That said, only a portion of the information transmission process pertains to the information itself. Ensuring that the way in which data is presented is relevant to the users of the information is equally as important.
Drilling down specifically into the various subsets of users likely to receive information from the accounting and finance function, the logical first place to initiate an analysis is the medium of communication. E-mail, PowerPoint presentations, written reports, screen casts, and video recordings, as well as remote presentations broadcasted via Skype, Webex, or other such applications provide managerial professionals with the ability to meet, discuss, and make decisions from virtually anywhere. This flexibility, however, is not without drawbacks, and it is arguably more important than ever before for information to be understandable without lengthy explanation or qualifications. If the data presented or distributed prior to the meeting is not easily understood, this miscommunication can be amplified due to the lack of interpersonal communication. This highlights an important aspect demonstrating the connection among strategic decision making, strategic management accounting, and how management accounting professionals can deliver value to the decision-making process.
Templates and reporting frameworks can prove invaluable shortcuts and facilitate the rapid preparation and analysis of financial information, but there are certain factors that must be kept in mind when preparing such templates. First, the template and information included must be able to be replicated for every reporting timeline, regardless of who is preparing the actual report. Drilling down specifically, what this means for the management accounting function is that certain information must be prioritized, that is, not every piece of operational or financial data can be contained within a report. Additionally, the information included must be obtainable in such a way that is replicable on a recurring basis, that is, the process by which the data is extracted from sub-ledgers or other systems must be repeatable.
In addition to ensuring that the way in which data extract is sustainable, it is also important for management accounting professionals to ensure that the data quality, when extracted, is usable. If the data, when exported, requires a large amount of manual effort or cleaning, the usefulness of the information itself is questionable. In these situations, it may be applicable to work backward in conjunction with the functional areas tasked with operations or with the preparation of reports in order to develop alternative methods to extract information from the various systems used by the organization. In doing so, there are several benefits that are attained. First, working relationships between different functional areas are improved as increased familiarity with requirements and workplace dynamics develop. Second, and building on the first benefit, is the reality that reaching out and engaging with other functional areas in and of itself represents a more strategic and proactive role for the accounting function. Assembling reports and analyses is only one component of data analytics and synthesis, however, and the remaining portion can be where many management accounting professionals have a more difficult time integrating into workplace initiatives, that is, presenting the information.
Presenting Strategic Information
PowerPoint presentations, while virtually universal, are also almost universally disparaged for the qualities they do not bring to the conversation. Bland presentations loaded with text and narrative do not make for an engaging and proactive experience for any party involved. Neither presenter nor listener is apt to be overly interested in the findings unless the information is delivered in an engaging way that is relevant to the audience members. It is always important to remember that, in order to generate buy-in and interest for your proposal or idea (regardless of specific functional area), the information presented must have relevance for the end users. If the audience views the presentation, but does not understand the ramifications of the data, then the data contained within the presentation will not be leveraged. It does not matter whether or not the data is valid or quantitatively accurate. If there is no hook to engage audience members, the impact will be diluted.
The first component of delivering an effective presentation is to understand the appropriate vector to utilize for the specific audience at hand. For example, if the presentation is delivered via a streaming or web-hosting program, it should be tested first to make sure that it transmits well over the streaming service. Also, after conducting a visual test of the presentation itself, the hardware and software interface should be tested. Drilling down into the specifics of what such a test would entail, it simply means to run a practice presentation to make sure that the speakers, monitors, screens, and any other accessories are functioning correctly. Additionally, at this point in time, it is important to listen and watch for any lags in the audio or visual transmission. While such lags are an inconvenience, if the presenter is aware of them beforehand, there are workarounds that can be developed (such as pauses and time for questions) to mitigate the awkward effect of lags on communication.
Second, and returning to the presentation content itself, the following question must be embedded within and successfully addressed by the conclusion of the presentation or analysis, which is where do we go from here? The information, analytics, and presentation of the data set to the audience must include some sort of conclusion, recommendation, or otherwise advice that summarizes the ramifications of the data for the end users. Failing to integrate this aspect into the presentation may, in effect, render the presentation effective in its entirety. Akin to developing a product or service offering, it is always important to integrate the needs and requirements of end users when developing and distributing information to internal and external decision makers. Remembering that the true value of the accounting function is to transform operational data into financial information, and that many of the recipients of such reports are not financial experts are two facts that must be built into the development and further refining of any report, template, or source of information.
Bringing It All Together
A more proactive and strategic accounting role clearly is emerging as less entirely an academic conversation and increasingly a market-driven reality. Initiatives undertaken by the marketplace, including both for-profit entities and not-for-profit groups, illustrate this point and highlight the growing importance of organizations to quantify and report on different types of data. GMI Ratings, a third-party entity that focuses not only on ranking organizations corporate governance practices, but also includes additional metrics to measure human capital, environmental initiatives, and other areas is one example. The Sustainability Accounting Standards Board (SASB), and the frameworks developed by the organization that are already in use by some organizations for Securities and Exchange Commission (SEC) reporting, is yet another example of how increasing amounts of organizational data are quantified and reported both internally and externally.
In order to capitalize on the trends in the marketplace, and in scholarly research and discussion, it is imperative that accounting professionals understand both the role of the accounting function and the market dynamics moving forward. Using critical thinking, thinking outside of the traditional box of financial statement analysis, and leveraging advances in technology to make doing so simpler, accounting professionals have a wide range of professional options to select from. In essence, the multitude of options and variety of career paths available to management accounting professionals mirrors the evolving nature of business and the market as a whole.
However, in order to effectively and proactively engage with these changes occurring within the profession, it is not enough to merely be aware of these changes; it is necessary for accounting professionals to embrace and acquire skills to address these changes. Continuous education, required by accounting licenses and certifications, is an excellent place to start learning new skills and refining existing ones, but more is required to fully evolve and develop into the role of data stewards and experts who are in demand. Drilling specifically into the skill sets required for these new and developing roles requires a tiered approach. Clearly, quantitative analysis and other data-centric competencies must be developed and explored to leverage the increasing reliance and utilization of data in the decision-making process. Second, and arguably more important for academics and practitioners seeking to lead this process forward, is the reality that critical thinking and a broader perspective are required. These new skill sets and competencies lead directly to, and build on, the utilization of integrated financial reporting, nontraditional reporting in a broader perspective, and the future role of accountancy moving forward into the 21st century.