The Journey Within

Appearing in Sunlight Press magazine, October 2019

 

The White Book

By Han Kang, translated by Deborah Smith

Random, $12, 160 pages, ISBN 9780525573067

 

If you want a novel with a clear, three-act narrative and an all’s-well conclusion, then this book by Korean writer Han Kang is not for you. In fact, it does not even look like a novel, written in short and seemingly unconnected snatches of prose. It is more like an extended meditation on life and death, on what might have been and on what once was. And that is enough. More than enough.

White book coverIt is unknown how much of The White Book is autobiographical but it feels as if a good part of it is drawn from lived experience. Han has no lack of courage as a writer, in that she was willing to make such a departure from her previous book, The Vegetarian, which won the Booker International prize in 2016. That novel – actually three connected novellas – followed the increasing detachment of a woman from the real world when she announces she will no longer eat meat, and then eventually stops eating altogether. Significantly, we never really find out why: the three novellas are (effectively) centred on her husband, her brother-in-law, and her sister.

But we know that she is on a journey that leads to the most innermost part of the soul – something we find again in The White Book, and an idea that underlies much of the dynamism of the current Korean literary scene. The narrator of the book is in search of herself through an examination of the past, reflecting the way that South Korea is itself looking for a way forward (a theme, interestingly, often taken up by Han’s novelist father, Han Seung-won). It is a culture looking for the elusive balance between past and future, retaining what is most valuable without a trace of bleary-eyed nostalgia. The path has not yet been found but there is a sense that it will be, eventually.

Make no mistake: making one’s own fate is not an easy process, just as The White Book is not an easy read, despite its apparent brevity. It requires a certain level of engagement, and the reader has to be willing to follow the twists and turns of the narrative. The story that weaves in and out of the book centres on the premature birth and death, after only two hours, of a baby that would have been Han’s older sister (eonni is the Korean term). Han imagines the heartrending scene of the mother holding the newborn close and begging: “Don’t die. Please don’t die.”

But the universe decided otherwise, and the tiny corpse is taken into the forest for burial. The white swaddling cloth became a funeral shroud. It is this image that leads Han to examine the white things that punctuate her life: rice, pills, salt, waves, a bird on the wing, an empty page where text should be. And snow, a connection that leads Han to reflect on “the city” where she lives for a while, a place where snow disguises and then reveals the past. It is Warsaw (although never identified by name), a city which, like Seoul, has been repeatedly destroyed and rebuilt, a cycle in which Han sees an image of her departed, un-named eonni and herself.

For she eventually comes to realise that if the baby had lived then she, Han, would probably not have been born. It is a duality, a balance, that provides Han with a comfort, with a sense that things worked out as they were supposed to, as they were fated to. In the book’s final passage, Han bids her ethereal sibling farewell: “Within that white, all of those white things, I will breathe in the final breath that you released.”

There is a toughness in Han, a sense of resilience and a willingness to peel back layers to find the core of being. This book could easily have become a mawkish plea for sympathy but the restrained, poetic writing provides a sense of moving from mourning to acceptance, a completed circle. It is a limited emotional pallet but the right one. It is no surprise to learn that the book took a long time to write and almost as long a time to translate.

The White Book is not for everyone but those who accept it on its own terms will find that it offers beauty, poignancy and resonance, a knowledge of what is lost and what is gained, and how one becomes the other.

Han Kang

Advertisements

Quo vadis?

Appearing in Australian Spectator, 5 October 2019

 

Justice on Trial: The Kavanaugh Confirmation and the Future of the Supreme Court

By Mollie Hemingway and Carrie Severino

Regnery Publishing, A$57, 376 pages

 

How did it come to this? When did the constitutional right of the US Senate to “advise and consent” on Supreme Court nominees become a mission to ‘search and destroy’ individuals by any means? Hemingway and Severino, both connected to conservative legal groups, provide a carefully researched and highly detailed account of the battle over the confirmation of Brett Kavanaugh. After reading it one cannot help but be amazed at how the liberal left, which once held itself out as the exemplar of due process and reasoned argument, has become mired in its own self-righteousness and venom.

The Kavanaugh nomination was particularly important to the left because it might lead to the reversal of the Roe vs Wade decision, as it involved the replacement of a liberal judge with a conservative one. To the activist warriors the protection of Roe vs Wade is an end that justifies any means. When added to their hatred of Donald Trump, the result is a lack of any moral compass and the loss of any sense of legal procedure.

Justice on Trial coverSenior Democrats like Dianne Feinstein announced minutes after his nomination was made public that she would vote against anyone put forward by Trump regardless of their qualifications. Most of the other Senate Democrats said the same, making one wonder about the point of the whole business. But this left them a few votes short. The strategy was to attack Kavanaugh’s personality and background to swing some moderate Republicans over.

Kavanaugh had been warned by the White House that it was going to be tough, and it says much about the man’s character that he never considered not accepting the nomination. Right from the start, there were claims that he had assaulted or raped women, usually pushed along by the Democrats on Judiciary Committee. The claims quickly collapsed when the FBI investigated; the claimants often seemed astonished that there was any investigation at all. Activist lawyer Michael Avennatti brought forward a woman called Julie Swetnick who claimed that Kavanaugh, when at university, had been part of a plot to drug and gang-rape women. It fell apart when she admitted that she had no solid evidence for any such thing, and had a long history of making spurious charges.

The White House was thinking that the confirmation was going to proceed according to plan when Feinstein introduced another claimant. It was all secretive; Feinstein willingly broke the committee rules by withholding details until the last moment. When the claimant, Christine Blasey Ford, eventually appeared before the committee she said that Kavanaugh had sexually assaulted her at a party when they were in high school, leaving her permanently traumatised. Hemingway and Severino note that her social media presence had been scrubbed to remove any evidence of her militant anti-Trump views.

Her account was impressive, as a media performance, but cracks soon began to appear. She was fuzzy on when it occurred: she first said the late 1980s, but that did not work because by then Kavanaugh had moved away. She eventually settled on 1982, which would have made her 15. She could not say where the party was, how she got there, or how she got home. The real killer to her story, however, was that the friends she said with her at the time had no recollection of either the party or the assault.

Neither did her account of trauma ring true. She said she was afraid to fly, but in fact she often flew to other countries to surf.

None of this mattered to the anti-Kavanaugh forces, who said quite blatantly that Kavanaugh was guilty until he could prove himself innocent (although it is unlikely that any amount of proof would have been enough). Kavanaugh, for his part, could not remember ever meeting Ford, although he admitted that, yes, in high school and university he sometimes attended parties and he sometimes drank beer.

Depositions from women in Kavanaugh’s life saying that he had always treated them with respect were ignored. A common pattern was that activist women would say that they had been assaulted, and therefore Kavanaugh should be held responsible for all assaults. A confirmation vote for Kavanaugh, they shrieked, was a vote in support of rape and misogyny. Even the fact that Kavanaugh coached a junior basketball team was raised as evidence of likely paedophilia.

When Kavanaugh spoke before the committee, he avoided attacking Ford personally. He said that she had probably been assaulted and had mistakenly conflated the experience with him. It was a generous view, given what he was being accused of. Nevertheless, he carefully debunked her allegations as well as all the others against him, and emphasised that his judicial philosophy sat squarely within the mainstream.

It ended where it began, with a confirmation vote largely along party lines (one senator of each side switched). The left claimed victory, saying that any vote Kavanaugh made was now fatally tainted. Their media allies agreed, but when he was sworn in several Supreme Court judges, including liberals Ginsburg and Kagan, made a point of attending.

The left also said that any other potential conservative nominees would now be afraid to accept a nomination but Hemingway and Severino are sceptical. Judges tend to be tough characters, they say, and a Supreme Court position is the professional pinnacle. Nevertheless, the viciousness of the attacks on Kavanaugh indicate the depth of the divides in US society, as well as the issue of who can be trusted to communicate the truth. Certainly, the mainstream media came out of the whole affair with their collective reputation badly diminished.

Justice on Trial is not a light read, with a large cast and overlapping timelines. But it should be read by anyone with an interest in US politics. It is not a happy story but it is an important one.

Teams, valuation, and tax traps

Appearing in In The Black, October 2019

 

The Australian Tax Pitfalls of Administering an Estate with International Connections

By Ian Raspin

BNR Partners, 80 pages, $25

Estate Tax PitfallsNearly half of all Australians were either born overseas or had at least one parent born overseas. The figure is increasing, with growing numbers coming from Asian countries. For finance professionals working in the estate administration area this diversity raises a host of tax issues, especially as legal liabilities can pass to the executor.

Raspin, a senior CPA and director of the specialist firm BNR Partners, knows everything there is to know about this area, and in this short, useful book he writes with the clarity of the well-organised expert. He explains residency definitions and the basics of estate taxation, and then moves onto issues regarding foreign-based assets (with a separate chapter on real estate, where some special rules apply). There can be problems when the deceased person had assets or property that was generating income which was not declared in Australia. Raspin, using a detailed case study, explains that the best course is to negotiate a settlement with the ATO. He also looks at CGT issues and includes a useful appendix on double-taxation agreements.

This book is best read with two other Raspin books, Taxation of Deceased Estates and CGT on a Deceased’s Residence. Both are currently being updated.

 

Business Valuation: Theory and Practice

By Marco Fazzini

Macmillan, 227 pages

Business valuation lies at the heart of financial management but discussion often turns into a dry analysis of calculation methods. Fazzini, an academic in the valuation area, does not deny the importance of the formal processes but he argues that a true picture requires a broad consideration of the firm as well. For this he suggests an Integrated Valuation Approach, based on methods recommended by the International Valuation Standards Council, to give integrity and consistency to objective components. Fazzini emphasises the importance of looking at the firm’s financial strategy, its growth outlook, and position within its industry.Business Valuation

He does a solid job of explaining how to move between theoretical concepts and practical applications, examining the income-based method, the market-based approach, and the cost approach along the way. There is a chapter dealing with the tricky issues of valuation of intangible assets and a good discussion of when and how to apply adjustments in valuations (including control premiums and lack-of-control discounts).

The book is designed as a textbook but it would also be useful for financial managers who need to brush up on their valuation skills, as well as those working in a company looking to expand globally or considering an IPO.

 

Turning People into Teams: Rituals and Routines That Redesign How We Work 

By David Sherwin and Mary Sherwin

Penguin, 192 pages

There is often an assumption that a group of talented individuals will automatically produce effective team outcomes. Not so, say the Sherwins, who specialise in team training and development. In a good team the whole is greater than the sum of the parts, but getting it to work takes effort and organisation. They suggest a number of rituals – 27 in all – to get the machine humming. It starts by formally identifying the skills each person brings to the table and their area of responsibility. There also needs to be an understanding about the problem to be solved, the available tools, and relevant metrics. Using a timer to ensure that no member dominates discussion can be useful.

But the real value of the book lies in the diagrams and flow-charts that can be used to formalise communication and consensus-building. (The book links to a website from which the templates can be downloaded.) For the team facilitator, this is a way to keep all members moving in the same direction, with feedback mechanisms, progress reports, and conclusion reviews built into the process. The book adds up to a useful package, with an emphasis on getting the job done in the most co-operative and efficient way possible.

Turning People Into Teams

Checking the checkers

Appearing in In The Black magazine, October 2019

Auditing faces an uncertain future

Independent auditing has long been one of the foundation-stones of business but the profession, in Australia and globally, is facing unprecedented challenges – as well as emerging opportunities. No-one can say with certainty where the path is leading but there is a sense that auditing as a profession and a process is under pressure.

Much of the current concern has been driven by events in the UK, after a series of business collapses, most notably the BHS and Carillion failures, following sign-off of the accounts by one of the Big Four audit firms – PwC, KPMG, EY and Deloitte. Regulators are now pushing the firms to clearly separate the audit and non-audit services they provide to clients, even to the extent of splitting off a separate company.

Speaking recently to a UK parliamentary committee, the heads of PwC, KPMG, and EY indicated that they would cease providing non-audit work for large audit clients within a year. PwC UK has been the first to make serious moves in this area, announcing in June that it will have one business to focus on external audits and another to deal with internal audits and issues such as cyber-security and technology risk. It also plans to recruit more than 500 auditors, introduce new training and technology initiatives, and increase the number of specialists in its audit quality control section. This will cost about £30 million a year, which is a good indication of the seriousness of the issues.

“Globally, the UK is leading efforts to improve Auditing 2audit quality and avoid conflicts of interest,” says Professor Ian Gow, Director of the Melbourne Centre for Corporate Governance and Regulation at the University of Melbourne, and co-author of the book The Big Four: The Curious Past and Perilous Future of the Global Accounting Monopoly*. “But in South Africa, India, and Ukraine, there have also been cases of Big Four firms being excluded from audit work due to sloppy practices.”

This raises the question of how auditing is faring in Australia, especially since the Big Four handle audits for over 90 per cent of the companies listed on the ASX. It appears that, generally, the situation does not directly compare with the UK. A survey recently released by the Auditing and Assurance Standards Board, Audit Quality in Australia: The Perspectives of Professional Investors, found that 93 per cent of respondents indicated that they saw audit quality as “average” or “above average”.

Related to this, a Financial Reporting Council survey, Audit Quality in Australia: The Perspectives of Audit Committee Chairs, revealed a high degree of satisfaction with the quality of external auditing, with 92 per cent of respondents rating them “above average” or “excellent”.

“We were very pleased to see these results but we can never be complacent,” says Matt Graham, Managing Partner, PwC Assurance. “For some time we have felt that the audit quality debate in Australia could be broader, more balanced and aided by increased transparency. This is why we released the country’s first-ever balanced scorecard on audit quality recently. That scorecard showed audit inspection results along with other key measures of audit quality such as internal inspection findings, restatement rates and adjustments to financial statements. We plan to release data like this on an annual basis.”

The corporate regulator supports greater transparency and is considering whether to publish individual firm inspection results in its next public report. ASIC is also continuing work on possible additional audit quality measures to complement inspection findings. Doug Niven, ASIC’s senior executive leader, financial reporting and audit, notes that ASIC’s audit inspection report for the 18 months to 30 June 2018 found that in 24 per cent of the key audit areas that were reviewed auditors did not obtain reasonable assurance that the financial report was free of material misstatement. This is slightly better than the figure of 25 per cent for the 18-month period ended 31 December 2016.

“Sustainable improvement requires a focus on culture and talent in firms,” says Niven. “Our inspection findings suggest that further work and, in some cases, new or revised strategies are needed.”

But he is wary about splitting large accounting firms into audit-only firms, believing that it could adversely affect audit quality.

Graham notes that PwC in Australia has no plans to hive off its audit business (and none of the other big audit firms have signalled intentions to do so). He sees the business and regulatory environments in the UK and Australia as very different, and believes that the discussion in Australia should be more broadly aimed at audit quality, independence, conflicts of interest, and the needs of businesses and their shareholders.

Professor Gow is pleased to see moves like PwC’s scorecard although he wonders where it will lead. He notes that all of the Big Four firms have recently started to reveal new information. “Clearly the incentives to reveal more are stronger if your numbers look better,” he says. “I suspect that this wave of disclosure will prompt some tweaks to the inspection process to make the numbers more meaningful. An issue with the reported numbers is that audits are selected for inspection because they are perceived to be ‘risky’ audits, which makes it difficult to draw general conclusions. But overall it seems to be a healthy conversation to have.”

Focus shift

Discussions on ways to improve audit quality are important but there is an even more crucial question: in the current environment, what is auditing actually for? In an era when Big Data allows for real-time tracking of all of a company’s transactions, does the idea of checking and re-checking historical financial data make sense anymore?

Auditing 1Professional investors and audit committee chairs may be reasonably satisfied with the work of auditors but there are other stakeholders in the mix as well. There is certainly a bloc of investors who are concerned with a company’s non-financial performance as well as the traditional metrics.

While Big Data has the potential to take over many of the mechanical, repetitive tasks associated with auditing it is likely to push the profession into non-financial fields and towards predictions and business analysis.

Matt Graham says: “The industry has to evolve the audit in line with market demands, as well as engaging more effectively with stakeholders along the way. For example, should an audit include new levels of coverage such as fraud, going concern and cybersecurity? Could it provide assurance over non-financial measures such as culture, sustainability and the control environment? Should it look forward as well as back and provide comfort over forecast information?”

In this context it might be noted that the Australian Accounting Standards Board and the Auditing and Assurance Standards Board recently released a Practice Statement, Climate-related and Other Emerging Risks Disclosures: Assessing Financial Statement Materiality. The Practice Statement is not mandatory but it points auditing towards an integration of financial and non-financial data.

A key problem with this is that auditing financial statements is largely about providing assurance that the statements were prepared in accordance with accounting standards. When auditing begins to look at issues such as the environment, fraud and cyber-security there are no widely-accepted standards that can be used to assess and check performance, and even if there were it is not clear that understanding accounting standards provides a basis of relevant expertise.

“The Big Four firms are definitely trying to claim a future stake on auditing things such as sustainability, environmental risks, and even privacy,” says Professor Gow. “But skills-wise it is a real stretch. Auditors still graduate with accounting degrees that focus on standards and the like. The auditor of the future is likely to be someone who is comfortable with advanced data analytics.”

Doug Niven counsels caution about moving too quickly into the non-financial field. “Investors and other users of annual reports may benefit from independent assurance over non-financial information in an operating and financial review, integrated reporting, sustainability reporting and climate change reporting,” he says. “But at present, there are no detailed reporting frameworks to audit against and many of those promoting innovation by companies in non-financial reporting suggest that independent assurance is premature.”

Competition pressure

Another issue relates to competitive pressures. Professor Gow points to his current research showing that audit fees generally increase slightly over time, and then often decline markedly when a new auditor is appointed. This suggests that some audit appointments are based on price.

“This could be a concern,” he says. “I suspect that the Big Four would rather compete on quality. The problem is that audit quality is very difficult to measure, so it is hard to prove that you are adding sufficient value to justify the costs.”

There is also the possibility that competition may come from smaller, more nimble firms that can offer quasi-auditing services in non-financial areas.

So what might the future of auditing look like in Australia? In short, while financial review is likely to remain at the essential core of auditing practice it might cease to be the reliable source of revenue that it has long been for the large firms. Regulators and stakeholders are likely to demand greater division between audit and non-audit functions, although pressure for complete separation is unlikely. Auditing firms will have to go further into non-financial issues, requiring a significant change in corporate culture. At the same time, they will face increasing competition from new entrants, especially in fields such as the environment.

“One is always hesitant when trying to predict the future, as so many past predictions turned out to be wrong,” says Professor Gow. “But one thing is clear: it’s going to be a very different profession from what it is now.”

 

* The Big Four: The Curious Past and Perilous Future of the Global Accounting Monopoly by Stuart Kells and Ian Gow (LaTrobe University Press, 2018). This book won the 2018 Ashurst Australian Business Literature Prize. A copy of the book is available at the CPA Library.

https://www.auasb.gov.au/admin/file/content102/c3/InvestorSurveyReport.pdf [Audit Quality in Australia: The Perspectives of Professional Investors]

http://www.frc.gov.au/documents/publication/audit-quality-in-australia-the-perspectives-of-audit-committee-chairs   [Audit Quality in Australia: The Perspectives of Audit Committee Chairs]

https://download.asic.gov.au/media/4990650/rep607-published-24-january-2019.pdf [ASIC Audit inspection program report for 2017-18]

https://download.asic.gov.au/media/1338902/info184-published-19-August-2013.pdf [ASIC Information Sheet – Audit transparency reports]

https://www.auasb.gov.au/admin/file/content102/c3/AASB_AUASB_Joint_Bulletin_May2019.pdf [Australian Accounting Standards Board and Auditing and Assurance Standards Board Practice Statement]

Teams provide energy boost

Appearing on In The Black Digital website, September 2019

Red Bull carves an unorthodox path

Many companies are not gaining the efficiencies and productivity levels they hope for from their teams, because their focus and resources are not invested in the right places. Even the most advanced tools and systems tend to fail if the underlying processes do not work as designed; and even the best processes will fail if people responsible for them do not perform their work with integrity.

To avoid this common pitfall, energy drink company Red Bull has been taking inspiration from the work they do with elite athletes, and translating these learnings into “traditional” departments, such as Finance in North America.

“We are using proven methods of driving the performance of our teams and to help our colleagues be at their best every day,” says Tomasz Nowakowski, Vice President – Finance, Red Bull Distribution Company. “When we say ‘high-performance teams’ we don’t mean any special kind of structure or membership. Our approach is based on making the existing teams across the organisation as effective, efficient, and focused on achievement, as possible.”

Looking for mindsetTomasz Nowakowski

Everything starts at the recruitment stage. The company looks for what Nowakowski calls a ‘growth mindset’, a concept popularised by Dr Carol Dweck. Technical skills and relevant functional experience are important but right attitude is really the key.

“We look for diversity of thought. New ideas and approaches are crucial for responding to long-term challenges. Where we look for cohesion is around our leadership code and values, which are Professionalism, Responsibility, Passion and Focus,” he says. “We expect that everyone we hire embraces those core values. Authenticity is at the heart of our leadership code, and that facilitates people being more direct with each other.”

Team leaders are encouraged to assume positive intent and not take themselves too seriously. That reduces many misunderstandings and helps the faster resolution of internal conflicts.

Another concept embraced by Nowakowski’s team is Shin Gi Tai, which comes from Eastern philosophy and is followed by many martial arts practitioners. It represents a unity of body, mind and skill.

“I was first introduced to it when we had a training session at Machida Karate Academy in Los Angeles,” he explains. “We learned that having the highest level of skill or the best technique is usually not enough to win consistently. Our body needs to be taken care of well. The competitor must be healthy and adequately conditioned in order to be able to use their skills. In the end it is strong mind and spirit that will drive the fighter to keep pushing and never give up.”

Translating this into the workplace means showing employees how to take care of their health and physical wellbeing. Nowakowski connects this to the strong mind, grit and mindset that the company seeks and expects from its people. These qualities are also fostered through the company’s senior management, who are expected to lead by example.

Dealing with adversity

Of course, there are always unexpected setbacks. The issue is how the organisation and its people respond to them.

There is an important concept Nowakowski learned from one of world’s leading experts in this field, Dr Eric Potterat, called ‘adversity tolerance tactics’. Human beings often respond to setbacks or highly stressful situations with our primal ‘fight or flight’ mechanism. This makes them lose conscious control over their performance.

Everyone has a way of dealing with adversity but there is no single method that can guarantee that people can continue performing at a high level after a major reversal. Nowakowski says: “I learned from Potterat that high-performing teams, such as special forces and professional sports teams, tend to use sets of multiple tactics. These range from pre- performance and post-performance routines, meditation, and visualisation, to more advanced tools such as compartmentalisation and a very high degree of self-awareness.”

He believes that by knowing, combining and understanding these tactics, people can begin to incorporate them into their personal battles, which will improve performance, step by step.

Results on the board

Nowakowski believes that the company’s approach to team-building underpins the speed with which it has been able to take over energy drink sales and distribution in a new markets in the US.

“Many of our expansions would not be remotely possible in the timeline they happened in if our teams did not operate with growth mindset. It’s almost in our DNA right now,” he emphasises.

“Red Bull is not just a consumer packaged goods company but a powerful brand involved in the media world and in various global sports, including football, Formula 1, Moto GP, World Rally Championship and many others. The brand is our asset, and it has been our teams and the culture we have developed that have driven it forward.”

 

Good budgeting leads to bold plans

Appearing on In The Black Digital website, September 2019

New thinking for budgeting

It was Churchill who said that the future is just one damn thing after another. Anyone in business who has the job of looking ahead knows how true this is, but there are methods that can provide a road-map of the path ahead and help finance professionals avoid the dead-ends and pot-holes.

Prabhu SivabalanThe place to start, according to Dr Prabhu Sivabalan, a Professor of Accounting and Associate Dean – External Engagement, at the UTS Business School, is to re-think the process of budgeting. He believes that most organisations struggle with budgeting because the future is always hard to predict, and managers generally do not want to make firm, on-the record forecasts.

“There are two intrinsic weaknesses,” he says. “First, there is the inherent difficulty in predicting how the real world will impact the organisation in the future. Second, there is the issue of getting managers and employees to engage with this process in an authentic way. Usually, it is a bit of both.”

Quantifying goals

The most common form of budgeting in Australia is the annual budget, usually structured in a traditional way and broken down through divisions, business units and even teams. Monthly and quarterly rolling budgets are often used alongside annual budgets in larger organisations.

By and large, a budget is the expected financial quantification of a company’s goals, hopefully based on a considered reflection of an organisation’s circumstances. It is then used as a tool to hold managers accountable for a level of performance. In being used to evaluate performance, however, it sets off a chain of incentives that lowers its utility for planning and resource allocation.

“The main weakness is the unyielding focus that managers and staff have on over-specifying the use of a budget as a performance evaluation device, while missing its value as a planning and management device,” says Professor Sivabalan. “These are related, but by over-emphasising the evaluation we ruin planning. Emphasise planning, and you reduce the negativity associated to evaluation.”

Telling employees at any level that their performance assessment, including bonuses, will be judged on an adherence to a set of numbers can induce pressure. If targets are too difficult, they naturally discourage creativity and innovation. But the same budget that constrains can also enable. If a looser, more generous R&D budget is given, for example, it emboldens the creativity of staff.

Getting ahead of the curve

“It is just human nature to stay with the safe and the known if you are rewarded for doing so,” Professor Sivabalan notes. “What we need is a wider range of performance incentives to take the pressure off budgets as the sole determinant of performance evaluation. My research shows that a lot of companies have a range of financial and non-financial KPIs but they do not actually walk the walk when bonus determination time arrives. Inevitably, staff are rewarded if they hit a financial number, with a cursory acknowledgement of their non-financial outcomes.”

At the same time the organisation’s executive team needs to be able to look at the larger picture on the forecasting side. This means developing an understanding of trends within the industry and the broader economy, emerging technologies, and social issues so that the longer term objectives of the organisation is met, and not only its annual profit target. Resources can then be allocated through the budget process to those areas of the organisation most likely to face challenges, or to where there are opportunities to get ahead of the curve.

This can be disruptive, compared to the steady-as-it-goes mentality often associated with traditional budgeting.

“It requires bold leadership, a special kind of executive,” Professor Sivabalan says. “You can’t blame most C-suite executives for not taking this on. You initially rock the boat when you incentivise staff based on factors other than budget adherence.”

Choosing metrics

Forecasting methods are sure to vary across industry sectors and the team responsible for looking ahead has to choose the right metrics and the most appropriate time-frame. Financial institutions, for example, will need to look at future interest rates and the economic framework with a long horizon. In the retail sector, forecasts are better made on a weekly or monthly basis. But the fundamental principles of taking a broad view, considering a range of data, and acknowledging uncertainty are universal.

Professor Sivabalan notes that there are some software tools that can help with forecasting but they are no substitute for a strategic mind.

“No software explains uncertainty,” he says. “We have all the technology we need. What is in short supply is a willingness to embrace uncertainty. When you determine budget numbers at the start of a period, you know they’re likely to be wrong. If you are able to accept this and work with it, you’re ready to start thinking about smarter ways of benefitting from a budget.”

Professor Sivabalan argues for a pragmatic, planning-based perspective.

“We need to turn budgeting into a forward-looking process where managers adapt to uncertainty when it arises, and not game around it before a period starts by arguing for easy numbers so they get a larger bonus later.”

Fast boat from China

Appearing in In The Black magazine, September 2019

 

Chinese giants like Haier, Tencent, Baidu and Alibaba are now counted as global players, welding technological innovation to marketing know-how and entrepreneurial drive. But the size and rapid growth of these pioneers can obscure the emergence of thousands of smaller companies developing in China’s commercial hothouse. They are supported by a dynamic venture capital sector and an expanding domestic market. New research shows that all of them look, or will soon look, to overseas markets, and many of them are successfully competing against multinational firms operating in China.

“This new generation is looking beyond boundaries and cultivating a disruptive mindset,” says Professor Mark Greeven, one of the authors of a comprehensive study* into Chinese business innovators. “If one Alibaba can shock international stock markets and disrupt traditional industries we can only imagine what tens of thousands of under-the-radar tech-based entrepreneurs will do.”

To see the ground-level picture Professor Greeven and his colleagues interviewed hundreds of executives, entrepreneurs, and investors in China, and studied more than 200 companies. Beyond the established giants they identified three sets of Chinese innovators: hidden champions, tech underdogs, and change makers. Each represents a different set of challenges for competitors.China book

Hidden Champions

Usually, ‘hidden champions’ are midsize innovators in niche markets. Professor Greeven classifies them as having annual revenue of less than US$5 billion – very significant to Australian companies but not that much in Chinese terms. Their strategy is based on long-term growth driven by R&D investments to expand within their niche or into closely related areas.

The research identified more than 200 hidden champions in sectors ranging from machinery and chemicals to materials and electronics.

A company that illustrates this group is Hikvision, which was launched in 2002 with an innovative video compressor card for computers based on MPEG-4 technology; it has followed up with a stream of products in the field, often releasing several new products or upgrades in a year. Nearly half of the company’s employees work in R&D and about eight per cent of revenues are invested in the area.

The company began a global expansion program several years ago and is already a leading player in this field of technology. It has developed partnerships with Western companies, to the point that half of its revenues now come from outside China.

“A surprising feature is how quickly hidden champions can grow,” Professor Greeven says. “Many became domestic and global market leaders in about a decade. It is dangerous for multinational companies to underestimate the speed and flexibility with which these new competitors can emerge, make decisions and expand.”

Change Makers

While hidden champions seek to dominate an industry niche ‘change makers’ aim for the mass market, seeking benefits from digital disruption and often taking advantage of China’s high level of mobile Internet use.

These companies are able to find start-up funding from China’s large venture capital market. Toutiao, a media platform which uses AI to provide customised news through mobile phones, was supported by more than US$3 billion in venture capital after it was founded in 2012. In July 2018, the company had more than 120 million daily active users and was valued at more than US$11 billion.

There is certainly no shortage of young people wanting to start a digital-based business in China, whether in media and information, ride-hailing, finance or retail. Professor Greeven notes that the online food-ordering service Ele.me was founded in 2008 by two students from Shanghai Jiaotong University who, the story goes, got hungry while playing video games one night. By 2015, the company’s revenue had passed US$1 billion.Greeven #1

An outstanding feature of this group is that it shapes digital technology to fit consumer demand, not the other way around. Their success, especially among younger demographics, has meant that all business-to-consumer companies operating in China are now expected to have on-demand and mobile capacities.

“These companies can come out of nowhere, continually engaging with users through social media to adapt products and, as necessary, revamp their business models,” explains Professor Greeven. “Unlike corporations with legacy products and business models to maintain, change makers are entirely user-centered. Rather than pushing an existing product line they are willing to venture beyond the industry’s boundaries if they see opportunities there.”

Tech Underdogs

The third category, ‘tech underdogs’, are small and midsize enterprises, usually science- or technology-based, with revenue of less than US$60 million. Professor Greeven and his colleagues identified tens of thousands of these companies across a wide range of emerging-tech fields. The research identified more than 150 companies with significant intellectual property in photovoltaic technology, for example, and 80 health care ventures utilising various forms of AI.

“Many of these companies were founded by people returning to China from overseas, having studied at elite universities in the US or Europe,” notes Professor Greeven. “Unlike innovators in Silicon Valley, Chinese entrepreneurs work collectively to innovate and push technology and market boundaries. Although many of the ventures do not survive, some become viable competitors and even market leaders. The large number of players in any given category in China increases the chances that at least one will be able to break through.”

There have been a number of cases of Chinese companies in this category partnering with Western firms as a growth strategy. One example is Weihua Solar collaborating with German chemical company Merck, with Merck agreeing to supply advanced materials and patented information to supplement Weihua Solar’s internal R&D efforts. This partnership eventually led to the development of a solar cell that is light, flexible, and more efficient than any of its competitors.

But tech underdogs have also proved to be entirely capable of developing advanced technology on their own. The companies are targeting increasingly sophisticated fields, including genetics, cloud technology, next-gen AI, and advanced materials. Royole, a Shenzhen-based start-up, is an innovator in superthin screens and flexible displays, and has introduced the world’s first bendable smartphone, which can be folded like a wallet.

According to Professor Greeven, for non-Chinese competitors the sheer number of ventures in this category is a problem, especially as even successful ones have little media presence.

“It makes it difficult for multinationals to know which local companies represent a threat and which do not,” he says. “Compared with their Chinese counterparts, multinationals based outside China tend to have fewer connections with local companies and investors. As a result, they are not part of the conversation about emerging threats. For the tech underdogs, that lack of visibility can be an advantage that enables them to catch established competitors off-guard when entering new markets.”

Challenges ahead

While Chinese firms in each category have shown remarkable capacity for innovation, the research suggests that structural weaknesses persist.

For the ‘hidden champions’, the danger is that they will themselves be subject to technological disruption. As they become more successful their public profile will grow, which will bring more competition. They are particularly aware of the possibility of new markets entrants from India and south-east Asia, leveraging their own large domestic markets as a springboard for regional and global markets.

The ‘change makers’ face the problem of creating sustainable competitive advantage in a market of fast-moving trends. They are also aware that regulatory changes in China could undercut their business model, and that regulatory systems in other countries could impede expansion.

For the ‘tech underdogs’, there is the problem of commercialising niche technology. Because so much is invested on a single product, failure to launch means there are few, if any, alternatives.

Ways to compete

Based on their research, Professor Greeven and his colleagues have a series of recommendations for companies wanting to compete in China or are concerned about Chinese competition at home.

  1. Expect the unexpected. A Western company might be aware of the main Chinese competitors but there are likely to be others who are keeping a low profile or have not yet made the decision to go global. A good move is to improve knowledge of industry developments within China to include threats that are not immediately obvious, and to assess their strengths and weakness.
  2. Look for collaborative opportunities. Many Western companies have built good partnership relationships with Chinese firms, usually through subsidiaries. Those companies that have been willing to give Chinese subsidiaries more local autonomy than they might offer those in other countries have generally been more successful. Partnership with or investment in a Chinese firm can also help to identify emerging threats and opportunities.
  3. Realise the threat. Companies that have been in a market leadership position for a long time can easily become complacent. They need to continually strengthen their home base, ensure investment in innovation, and focus on their core strengths.

 

“The best advice for Western companies is to understand the challenges China’s innovators pose and consciously develop counter-measures,” says Professor Greeven. “Compete on their strengths, study the way China’s competitors do business, and rethink assumptions about how to innovate successfully.”

 

* Pioneers, Hidden Champions, Change Makers, and Underdogs: Lessons From China’s Innovators (MIT Press, 2019) by Mark Greeven, George Yip and Wei Wei.

Mark Greeven is professor of innovation and strategy at IMD, a business school in Lausanne, Switzerland and Singapore. George Yip is emeritus professor of marketing and strategy at Imperial College Business School in London. Wei Wei is CEO of GSL Innovation, a consulting firm in Shanghai.