This has a very real impact on the work of boards as they guide the businesses they lead through this period of orchestrated chaos.
Globalisation is making businesses increasingly interconnected and in turn businesses’ value chains now extend further. This means that businesses have to consider a wider range of factors in their planning.
Alongside globalisation, technological advancement is fundamentally changing the landscape in which businesses operate.. McKinsey has recently identified 12 technologies which could have a potential impact of $14-33 trillion per year in 2025 in terms of potential value created. With greater technology also comes the demand for greater transparency. Investors and stakeholders now expect to hear more about business performance.
As more factors come into play in the business landscape, boards need to take note of this pace of change and consider possible future outcomes, planning effectively for the future. However, evidence suggests that boards are getting bogged down with information that focuses purely on the past, such as quarterly reports and audit reviews.
Recent events prove that past performance is no guarantee of future prosperity, yet a recent survey from McKinsey states that, “directors still spend the bulk of their time on quarterly reports, audit reviews…instead of on matters crucial to the future prosperity and direction of the business.”
So where should boards’ focus now lie? Whilst the board’s oversight of an organisation’s finance function and annual reports is crucial, this function is often criticised for its historical focus. The recent mandatory introduction of a strategic report within the annual report emphasises the importance of looking beyond the numbers to evaluate business strength.
It is clear that for businesses it is no longer just a numbers game. Boards must also provide effective oversight of the company’s strategy, performance and risk.
First, boards will increasingly find that non-financial information drives business decision. The more complex and volatile business environment provides a challenge to the traditional accounting model. What is needed is a new type of information, based on predictive analytics and external and non-financial information covering both past and future.
Non-financial information, whilst central to forward planning, provides no right or wrong answers – unlike financial accounts. Boards will increasingly be faced with a range of possible outcomes which their business then has to prepare for. This should be represented in the business model, which is central to the resilience of a business, and takes into account risk vs. reward. Understanding the business model helps boards to identify weaknesses and articulate risk.
Supermarkets for example are having to rethink traditional models of big out of town stores and respond to internet business, as well as customers seeking low-cost discounters. This shows that boards need to understand the basis on which their organisation is making money and how that is shifting.
This all culminates in the need for boards to think outside the box and be prepared to address factors that at first sight may seem completely unrelated to their businesses’ operations.
Second, in this era of technological change, we are seeing a wider shift towards a data-driven era of business. The use of Big Data in particular is now becoming a competitive necessity. It is being combined in new ways, within and across industries to provide new insights. Supermarkets have already harnessed this function to their advantage, using data to gain customer insight and tailor the customer’s shopping experience to their individual needs.
Big Data presents an opportunity for business but also an intimidating challenge. It is crucial that boards have access to the right information from Big Data to help inform decisions and spot potential pitfalls to inform long-term strategies. Boards need to ensure the information their organisation provides is communicated clearly and in a timely manner.
In an age of technological advancement and high speed innovation, boards must broaden their focus beyond the balance sheets in order to meet the constant challenge of balancing opportunity, costs, value and risks. Good management accounting practices are critical to boards, enabling them to effect the right change, at the right time.
The role of the board in helping businesses avoid a narrow-minded path with a hazy view of the risks ahead is more important now than ever.
Charles Tilley, Chief Executive of the Chartered Institute of Management Accountants (CIMA), which has just finished consulting on a new set of Global Management Accounting Principles.
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