I first met Tom Stewart in 1998 when I was involved in bringing him to Australia to speak about intellectual capital to the local business and finance community. We became friends and we kept in touch while he moved on from his role at Fortune magazine to become editor-in-chief of Harvard Business Review, and then to become Chief Marketing and Knowledge Officer at Booz & Co.
Tom came to Sydney a few weeks ago to do the keynote at the CPA Congress, and I was asked by the CPA Australia magazine In the Black to speak to Tom for the magazine. Here is the article.
In Conversation: Value Judgement
Tom Stewart discusses the new imperatives in corporate finance with Ross Dawson
Tom Stewart, keynote speaker at CPA Australia’s Congress in October, has a challenge for financial executives. “You are the executive in charge of knowing value,” he says. However, as he rightly points out, only part of an organisation’s value is captured in financial accounting.
The field of ‘intellectual capital’ proclaims that for many companies the most valuable productive assets are intangibles such as knowledge and business processes, and these need to be measured and managed better. The idea is far from new. Indeed, Tom Stewart was there from the outset, when his 1991 ‘Brain Power’ cover story for Fortune magazine first introduced the issue to a broad business audience.
The implications are broad-reaching. Institutional investors are increasingly asking companies for non-financial data. Audit firms see new revenue streams in intangibles reporting. Financial executives must learn new reporting techniques. Until recently the uptake of intangibles reporting has been slow, but the pace is picking up.
Over the last years the production of sustainability reports has been added to the to-do list for many overburdened corporate staff. As Stewart points out, intangibles accounting and sustainability reporting are “two sides of the same coin”.
In the early days of the intellectual capital movement, I wondered whether it would be regulators, investors or corporations who would drive the shift to intangibles reporting. Regulators haven’t come to the party, and Stewart says he’s not surprised by the lack of movement in the regulatory environment. Today it’s clear that non-financial reporting will be driven by the market.
Sustainability and carbon impact reporting are in fact providing the wedge that is pushing intangibles reporting forward. The increasing concern for the environment and social issues expressed by many consumers, investors and voters, their voices augmented by social media, are finally forcing greater disclosure on many non-financial issues.
As Stewart notes, carbon impact reporting requires gathering data along the length of the supply chain. The task for financial executives suddenly becomes far more complex. This is a fundamental shift, in which companies implicitly recognise they have an impact and responsibility beyond their own boundaries.
One of the other key issues for financial managers is in managing costs effectively, an issue most are well familiar with since ploughing through the depths of a business cycle. Drawing on his experience as Editor-in-Chief of Harvard Business Review and currently as Chief Marketing and Knowledge Officer of top-tier strategy firm Booz & Co, Stewart sees that many conventional approaches to cost management are short-sighted and can cause long-term damage to the company.
“Management generally thinks about costs in too simplistic a manner,” says Stewart. “You can make cuts across the board, across all operations and departments. You know it’s not the right way but it’s always done. Everyone does it.”
A related approach that Stewart highlights as misguided is the benchmarking of costs. “The assumption behind cost benchmarking is that the companies are strategically the same. But if they have distinct strategies then they should have different cost bases.”
Any thought shows this is obvious, but the fact remains that it is very hard to implement more refined approaches to cost management. One reason is that functional executives chafe against constraints. As Stewart says, “everyone wants to build empires,” which means that there is constant upward pressure on expenses, irrespective of their value.
Which brings us to the critical role of financial managers in strategy implementation. Their role is to ensure that all expenses are truly aligned with the long-term strategy of the organization.
“A great financial executive is not just a bad cop,” says Stewart. “He or she keeps the whole organisation honest,” by understanding the strategic core of the company and how that relates to specific business activities.
The reality is that most top executives don’t see financial managers as playing that key strategic role. The challenge for the profession is as much in communicating the importance of value management as in performing it.
The issues Stewart raises are critical for financial managers. The challenge – and opportunity – is to go beyond measuring finances to measuring value. You could argue that value is simply a predecessor to financial outcomes, which are all that matter. However that approach falls short in a number of ways.
When customers and investors say that value resides in environmental and social impact, it does. And as business strategy moves faster in a dynamic world, linking strategy and execution with effective measurement becomes a key driver of performance. Financial executives are set to play a leading role in creating the successful organisations of the future.
Ross Dawson is globally recognised as a leading business futurist, strategy advisor, and best-selling author. He is Chairman of the Advanced Human Technologies group of companies.