Archive for February 2017

Why corruption risk should be taken into account when evaluating new markets

Why corruption risk should be taken into account when evaluating new markets

Analysing corruption risk should be a key factor in businesses’ research into a new market. Involvement in corruption, whether direct or via a third party, poses reputational risks as well as risk of prosecution under legislation such as the UK Bribery Act or US Foreign and Corrupt Practices Act (FCPA).

Corruption remains widespread in many countries, and the latest edition of the corruption perceptions index from Transparency International suggests that the problem worsened in more markets than improved in 2016.

The index measures perception of corruption as it relates to a country’s institutions and the decision-making of its public officials. The scale runs from 0 (highly corrupt) to 100 (very clean). Countries scoring less than 50 are considered to have a serious corruption problem. The global average score was 43, and more than two-thirds of the 176 countries and territories in the index scored less than 50.

Topping the transparency list were Denmark and New Zealand, each scoring 90. These were followed by Finland (89), Sweden (88), and Switzerland (86). The authors of the report observe that the countries at the top share characteristics of open government, press freedom, civil liberties, and independent judicial systems. Singapore came in seventh place, scoring 84, UK shared the tenth ranking, with a score of 81, and the US ranked 18th, with a score of 74.

Corruption Perception Index

Source: Transparency International.

Brazil, India, and China share 79th place, each with a score of 40. There does appear to be an appetite for tackling corruption in these countries. “China and Brazil are prosecuting very widely at the moment,” said Peter van Veen, Business Integrity Programme Director at Transparency International. “In India there is clearly a move to tackle what is a deep-rooted and quite widespread problem.”

But Russia, ranked 131st with a score of 29, is going in the opposite direction, observed van Veen. “[The situation] has got worse pretty much every year since we started the index.”

Evaluating new markets

When considering a new venture, “businesses should do their homework and prepare adequately,” van Veen said. “Quite some effort is required to ensure that you are not part of a corrupt system.” Due diligence is essential, even when a particular country is considered low-risk in terms of bribery.

For instance, companies should look at the risks that might be inherited in a specific transaction or business line.

“Businesses should really focus on third parties such as distributors, agents, local partners, and intermediaries because they are often the biggest risk to the supply chain and to the company in terms of getting caught up in bribery,” suggested van Veen.

His research into cases pursued under the FCPA suggests that the majority of companies that received fines for bribery involved a third party paying the bribe. “Be wary that you are not being asked to do things that actually constitute a bribe,” he said.

Van Veen noted that corruption is not evenly spread across a country. “In areas seeking to encourage inward investment, the authorities are likely to be a lot less tolerant of this kind of behaviour because it’s bad for business,” he said.

Is the opportunity worth the risk?

“There are very few places in the world where you cannot do business without paying a bribe if you put the effort in,” van Veen said. But in some locations, the opportunity many not be worth the effort. “In those situations you need to ask yourself if you really want to be there as a business.”

High levels of bribery and corruption often go hand in hand with other issues which make a destination less attractive or practical. “If you feel you cannot do business without paying bribes, there are often issues around staff safety, for example.”

“The cost of corruption gets transferred through into consumer prices and real estate,” he said, increasing the cost of doing business for locals and expatriates alike.

For instance, Angola ranks 164th on the transparency index, with a score of 18 in 2016. Its capital, Luanda, was ranked the second most expensive city in the world for expats in Mercer’s 2016 Cost of Living Survey.

Related CGMA Magazine content

Why employers should help workers improve their financial health

Why employers should help workers improve their financial health

Money worries come in all shapes and sizes. For some, it’s a result of a low-paying job or a job loss. For others, there is debt from student loans or medical bills. Some people experience financial stress when a child is born or when retirement is on the horizon and the money to fund retirement is tied up in a volatile stock market.

That stress can lead to a lack of focus and a lack of performance at work, particularly when organisations themselves are under pressure to cut costs.

Some companies are taking a more active role in trying to alleviate that stress, even if some of the stress was caused by the company making changes to benefits. A greater advisory role can help workers be more prepared for financial tremors and help the business run more smoothly.

A report by the Chartered Institute of Personnel Development (CIPD) offers reasons companies should take a greater interest in employee financial wellbeing, as well as steps organisations can take. One-quarter of UK employees in the report said that financial problems have affected their performance at work. Some said it has created illness or sleep difficulty – not exactly precursors to a productive day at the office.

UK workers aren’t the only ones with money concerns. Almost half of Americans (48%) said they would not have enough money for a major purchase or repair, according to a 2015 survey by Gallup. Additionally, 60% of all workers in the survey said they were cutting back on spending, which suggests awareness of the need to save more.

For employers, improving workers’ financial wellbeing doesn’t have to mean reconfiguring budgets. Companies should focus on building a business case for ensuring workers are financially well.

“Action on financial wellbeing does not have to be costly, does not necessarily involve giving a pay increase, and does not necessarily imply a whole strategy or programme of work,” the report said.

For example, an organisation may determine that a relatively low percentage of its workers take full advantage of benefits, or that workers don’t fully understand the full rewards package, the report said. Reminding employees about benefits available, such as child-care vouchers or discounted gym memberships, can help reduce workers’ financial stress.

“On a continuing basis, [organisations] should make employees aware of the benefits they can access that will help them keep more of the money they have in front of them,” said Jeanette Makings, head of financial education at Close Brothers, a wealth- and investment-management firm. Close Brothers provided case studies that were part of the CIPD report.

Makings said that ongoing communication about benefits is given to new hires but can be forgotten for existing workers. The same is true of new benefit offerings versus recurring ones.

“Sometimes, when you arrange a new benefit, there’s this big hurrah,” she said. “But it’s about ongoing communication, not necessarily just out of [human resources].”

Makings said organisations should focus on three groups who are the most at risk for financial woes:

  • People approaching retirement.
  • People who could face a large and unexpected tax bill because of changes to pension laws.
  • People who struggle day to day because of debt.

The first group needs more help now than it did in the past, as the burden of saving for retirement has switched from employers to employees.

In the UK, for instance, the number of private-sector workers enrolled in defined benefit pension schemes declined steadily from 2007 to 2015, according to the Office for National Statistics. At the same time, more employees were enrolled in defined contribution plans. Membership in defined contribution plans among UK private-sector workers increased nearly 333% between 2007 and 2015, while membership in defined benefit schemes decreased 41%.

Defined benefit pensions factor in length of service and salary at the time of retirement, and the amount of pension to be received is easier to forecast. The amount of defined contribution pension plans is variable, because such plans rely on a variety of sources, which can include the employee’s own money, employer contributions, mutual funds, and other investments.

“Typically, with defined benefit schemes, much of the decision-making lies with the employer,” Makings said. “That decision-making has shifted to the employee.”

Employers can help with referrals to a financial adviser, paying for workers to attend seminars, or matching struggling workers with debt counsellors or charities. No matter the company, Makings said, employees are bound to worry about money, and employers should take an interest in keeping those workers from being fatigued or ill because of their finances.

“Whilst it’s always been a part of their agenda, there’s an increased focus on it now,” Makings said. Companies “can see the value in it for their individual employees, but they can also see the value in it for their own bottom line.”

 

Source : GCMA

10 strategies to successfully integrate a deal

10 strategies to successfully integrate a deal

10 strategies to successfully integrate a deal

Pip Spibey, ACMA, CGMA, has spent much of the past year integrating an acquisition that UK-based Travelport made to develop new digital services and mobile capabilities for the travel industry.

In June 2016, Travelport, a technology platform that enables travel agencies, corporations, and travel providers to search, share, buy, and sell travel bookings, acquired an additional 40% of Locomote, an Australian start-up that helps companies manage business travel worldwide from any device. The investment increased Travelport’s stake in Locomote to 96%, according to filings with the US Securities and Exchange Commission.

Spibey, Travelport Locomote’s CFO, said she didn’t expect any integration surprises following the deal. The two companies had worked closely together since 2014, when Travelport bought a 49% share in Locomote. All the legal and financial due diligence was completed. And Spibey had been finance director, financial planning and analysis, for Travelport’s European and global accounts for more than nine years before she headed Travelport Locomote’s finance function.

What she learned in the past year, however, is that the vast differences between a start-up and a large corporation should never be underestimated. “Everything is different, and as an embodied corporate employee for my entire [work] life, I underestimated the difference,” she said.

It’s a situation more CFOs might find themselves in this year. A Deloitte survey on global trends in mergers and acquisitions, which polled about 1,000 corporate executives and private-equity investors in September, suggests that M&A activities are likely to increase in 2017.

Three out of four respondents expected their M&A activity to increase, with 23% anticipating a significant increase in deal volume. Industry convergence, particularly companies buying technology assets, is projected to be a key driver of the rise in overall deal activity.

It stands to reason that divestitures are also expected to increase. Of the respondents Deloitte polled, 73% expected to sell units or assets over the next 12 months, up from 48% six months earlier.

Large divestitures that Fortune 500 companies announced in December and January were signs of the rising tide.

Just before Christmas, Walgreens Boots Alliance and Rite Aid said 865 Rite Aid stores will be sold for $950 million, and Anheuser-Busch InBev announced plans to sell its majority stake in Coca-Cola Beverages Africa, Africa’s largest soft drink bottler, for $3.15 billion. Sears Holdings started the new year with news that it is divesting its Craftsman power tool brand for $900 million.

Deloitte survey respondents were optimistic about deal flow in 2017 partly because they felt factors that could thwart M&A activity had diminished in importance.

Twenty-seven per cent said global market uncertainty could derail a deal their company may pursue, down from 32% six months earlier. Other top concerns were the interest rate environment (17% of respondents), down from 21% six months earlier, and anti-trust issues (7% of respondents), down from 12% six months earlier.

Survey respondents considered Britain’s vote to leave the EU an M&A driver. Forty-six per cent expected Brexit to accelerate deal-making in the UK, and 48% anticipated more deal activity in Europe.

Lessons learned integrating an overseas acquisition

As CFO, Spibey oversaw the operational integration of Locomote, which the finance function headed. A detailed document, which included finance, legal, HR, and IT requirements, assigned every task to a sponsor and a completer from each company, Spibey said. Challenges and solutions were identified in biweekly reviews to make sure all tasks were completed.

“[The integration] had to be done with as little disruption to the business as possible,” she said. “We also tried to make sure Locomote employees didn’t perceive that we were dampening the culture they had built and come to cherish.”

Most important for her as a CFO trying to integrate the acquisition was to listen and not rely too much on previous experiences to solve challenges; to avoid damaging what made the start-up special; and to remain flexible, she said. “Don’t get stuck in the corporate mindset that this is how we have always done it, so that is how it should be done.”

For example, as head of finance, she decided to change her ways. With her team, she reviewed all processes, picked them apart into bite-size chunks, and then put them back together in the way that best served Travelport Locomote.

Also important is regular communication with employees about what is happening during the integration period, Spibey added.

Top 10 integration mistakes

Even the best planned deal causes disruption during integration, said Scott Whitaker, a US partner with Global PMI Partners, a management consultancy based in Belgium. Here’s what Whitaker, author of the Mergers & Acquisitions Integration Handbook, suggested to avoid the ten most common integration mistakes:

  • Start planning the integration 60 to 90 days ahead of the target close of the deal. Plans should include an integration strategy to help prioritise workstreams; complete operational, cultural, and risk assessments; and secure access to due-diligence documents.
  • Ensure the company’s operating strategy and integration strategy are aligned.
  • Prioritise workstreams to deliver the most business value. Assigning specific business benefit values helps prioritise workstreams. Reporting to senior management about the integration should focus on high-priority workstreams.
  • Have integration managers and leaders report on progress and problems to at least one senior executive to ensure consistent focus and accountability.
  • Create a communication plan that includes frequent updates for all stakeholders, communication drafts for senior executives, and an FAQ log that can be updated weekly and shared with affected employees.
  • Manage programmes to achieve synergies – by stress-testing targets, confirming costs, and making synergy-related workstreams a high priority.
  • Properly resource integration activities. This may require securing external resources to offload special projects.
  • Develop a formal end-state transition process with anticipated timing and clarified roles and responsibilities, and document deadlines and deliverables with tasks that aren’t completed.
  • Clarify the business strategy and operating principles of the post-integration company as soon as possible.
  • Collect feedback from all stakeholders to continually optimise the integration process.

Source : GCMA