Business leadership amid global economic downturn

Presenter: Alex Malley, president CPA Australia
Location: Business Leader’s Forum Sydney, Australia
Date: 20 October 2008

Distinguished guests.

Good morning everyone and welcome to what I’m sure will be a day of illuminating discussion and learning.

We find ourselves here today for a discussion on issues of business leadership, strategy and financial management.

It’s hard to recall a previous time when global events have demanded so loudly that the corporate world, and governments, show their credentials in these three critical areas.

The events that have transpired on world financial markets over the past weeks have seen many fundamental assumptions of how the world economy operates turned upside down.

Some of the largest financial institutions have either teetered on the brink of collapse or have actually fallen.

Many of the survivors have managed to do so only thanks to unprecedented government financial commitments.

The ultimate causes of the seismic recent events will be the subject of enquiry for a long time to come I suspect, but we can readily identify a few obvious culprits.

One is the development of a range of financial instruments of increasing complexity to enable repackaging and on-selling of mortgages as collateralised debt obligations at ready profit.

This was made worse by the fact that most of the people who were given these sub-prime loans had provided little or no indication of their ability to repay them.

And so it seems that a series of dangerous addictions took hold right down the line.

An addiction to easy credit from the many households who could scarcely afford it.

An addiction to quick profits through the various financial institutions who would on-sell these debts.

All the way to Wall Street and inevitably from there to other parts of the global finance markets, where quick and substantial short term profits blinded many to the fundamental dangers of this approach.

I’m simplifying a very complex chain of events I know, but what I would stress is that these issues go right to the heart of doing business and doing it well.

What’s brought us to this point can be traced to a combination of factors.

A lack of corporate governance structures and processes.

Failure to instil a culture of compliance and ethics and these in turn nurturing a culture of greed and hunger for quick profit.

None of these are scenarios are predisposed to a detailed and clear-minded assessment of risk and obligation let me assure you.

But ultimately all of these factors could essentially be distilled down to a lack of leadership.

And what is needed now is strong and visionary leadership to pull our global financial and economic system back from the brink.

Leadership, from business and government, is critical in restoring confidence in the global financial system and to minimise the fallout to what’s commonly known as the ‘real’ economy.

The challenges that confront us as business leaders embarking on this task are many and varied.

As president of one of the world’s largest accounting bodies, with members who operate at senior levels in the corporate and government sectors across the globe, I have a keen appreciation of the size of the task ahead.

It is the accounting profession after all which will operate at the coalface as the corporate and regulatory sectors work to repair the damage.

As I mentioned before, issues of corporate governance, as they relate to assessment of risk, executive remuneration and other affected areas will need to be resolved and resolved effectively if mistakes are not to be repeated.

The role of boards will be critical. It is with them that ultimate responsibility for an organisation’s activities lie.

Regulators have a role but it is incumbent on a board to impose a culture of risk assessment, compliance and ethical behaviour on an organisation.

Flowing on from this is the crucial aspect of how to most accurately report a business’s performance and circumstance.

The valuation of the various stricken financial assets that are littering the financial markets has been a subject of some contention.

Opinions vary on whether these assets should be valued at the price they would currently fetch, more commonly know as ‘mark-to-market’, or whether the cost should be amortised, effectively insulating the asset from further loss in value.

The latter approach is standard practice in America. Other jurisdictions, the European Union and Australia included, mindful of their companies being caught at a competitive disadvantage, are rapidly following suit, leading to an easing of fair value requirements.

These actions reflect genuine and concerted attempts by governments, regulators and business to best deal with an extraordinarily difficult set of circumstances.

It is crucial to get capital, the lifeblood of the world economy, flowing again. At present, the grip of fear and uncertainty has virtually frozen this flow solid.

But while exceptional circumstances call for exceptional measures, I would reinforce the importance of maintaining accounting standards that ensure accuracy and transparency.

It was precisely the lack of these qualities that helped bring on the present situation, so it should make the business world doubly vigilant in ensuring an approach which makes rigour a priority.

I believe the fair value, or mark-to-market measure, most clearly reflects economic reality and at present a firm grasp on reality is what’s needed to move forward.

Business and political leaders must maintain a close watch on the effects of this easing of particular standards and move quickly if necessary to ensure that this pragmatism does not pitch us back down the same slippery slope.

And moving forward begs the obvious question; What comes next?

Inevitably we’ve now reached the stage where the financial market turmoil has bled out to the broader economy, leading to a more general global economic downturn.

Already we’ve seen the credit crunch cause a drop in demand and consumer spending, adversely affecting businesses of all sizes.

As it takes further hold we need to think deeply about ways to insulate against the worst case effects of tougher economic conditions.

This is not about being negative or unhelpfully downbeat.

It’s about taking pre-emptive action.

It’s about showing leadership.

We’ve reached a stage where a combination of clarity of mind and strength of imagination is what’s needed.

We need to come up with new ideas and identify new markets and ways of doing business.

As a case in point CPA Australia has identified Australia’s trade in professional services as one way of turning back the tide of economic downturn.

Emerging markets, predominantly in Asia, are growing sources of demand for Australian expertise in professional services; and by this I mean the accounting, finance and legal professions.

Services exports contributed $48 billion or 22 per cent of Australia’s overall export figures in 2007 and this aspect has often been overlooked in favour of the commodities boom of recent years.

However there is a growing emphasis on strategic business thinking, governance and ethical issues, all inherent strengths in the Australian accounting and finance professions, as opposed to the traditional bean counting function.

These high level strategic business skills will be relevant in the present climate where foreign capital investment is at a premium.

The ability to be analytical, conceptual and to practice strong business ethics are hallmarks of the Australian accounting profession and its educational institutions.

And it is the presence of these skills in any prospective market that provides the certainty which underpins capital investment.

As such accountants are as critical to driving foreign investment as are roads, rails and other key infrastructure.

It’s important in the present circumstances that we take a global view. If we needed any reminding, these events have certainly shown just how interconnected world financial and economic markets are.

Business leaders must be acutely aware of the growing political push for a redesign of the global regulatory architecture.

If this is to occur the corporate world must play a central role in formulating its shape and its scope.

The issues I’ve raised, governance, ethics, rigour in financial reporting and the importance of a regional and global perspective, are all integral to good business leadership, strategy and ensuring financial stability.

There are a many lessons to be learned from what we’re presently experiencing.

To revisit an earlier point, some previously unshakeable beliefs have now been well and truly shaken.

While it creates an environment conducive to new ways of thinking it also highlights the continuing importance of transparency, rigour and ethics, qualities which in the business world cannot be subjects to the whims of fad.

I thank you for your time.