So Close, Yet So Far Away
Of course, there are only so many customer meetings and personal visits a group CFO with multiple sites can handle. So to provide backup to onsite visits, there are often simple steps that can be taken to help both the CFO sitting at head office and local finance managers on the ground gauge governance, asserts Giri Giridhar, in the London-based global business support division of Diageo, the £9 billion ($15.7 billion) U.K.-based drinks company.
In June 2002, having been Diageo’s India finance director for just a few months, Giridhar found himself on his way to Singapore, where he would be the regional finance director of the drinks giant’s new Asia venture region division for the next two years. Spanning Singapore, Malaysia, Indonesia, Philippines, China and Indochina, the business units under his watch were relatively small — accounting for only around 5 percent of the group’s total revenue — but the governance and control issues they could pose were big. “It’s easy for people in HQ to overlook the risks that come up in these emerging markets,” he observes.
As soon as Giridhar set up his base in Singapore, he began making use of his networking skills, meeting with other CFOs, bankers, and tax and accounting advisers from both local and Big Four firms to stay on top of the issues facing individual business units. With the help of his contacts, it became clear that focusing on areas such as financial control and compliance, fraud, tax, repatriation of foreign exchange, and brand asset protection “were critical in these local markets where they don’t necessarily understand the corporate way of working.”
But it was also clear that because his remit was so vast geographically, he’d need to tailor control processes to each country. So for example, in Indonesia, he introduced what he calls “a health check” in order for him to see “quickly and easily that the controls in the farthest corners of the country were working.” Every week, local managers were asked to fill out an email form with 15 questions, “each written in their local languages, asking very basic questions like, ‘Have you counted stocks today?’” he explains. “It gave them a sense of assurance that they’re doing the right thing and it helped me start to see patterns.” He also hired two field accountants, who were responsible for visiting each of the 20 Diageo depots in Indonesia regularly, offering training and other support services.
At ICN, Kutschenreuter found that it was important not only for him to meet with business unit FDs, but also for them to meet each other. “It’s a good way to improve communication and increase the transparency between units,” he says. At least twice a year, he organized meetings for all of ICN’s regional FDs — about 25 in total. Sometimes the meetings involved other executives from HQ, but more often than not, the focus was on benchmarking projects in areas like working capital or Sarbox that each of the units were working on. Presentations, however, weren’t only from the regional FDs whose units were ranked at the top of the benchmarkings — Kutschenreuter also wanted to hear from the low-ranking FDs so that any problems or issues were brought out into the open. “Not everyone liked that, but it got everyone’s attention,” he says.
Beyond the meetings and presentations, however, Steger of IMD wonders whether CFOs are doing enough to address the governance issues of their subsidiaries. Research he recently undertook revealed that 40 percent of 3,000 companies he contacted have failed to change corporate governance practices within their subsidiaries as a result of the latest wave of governance scandals and the arrival of new regulations.
“People really haven’t thought about this as intensively as I would have expected,” he says, adding that most firms could streamline their subsidiaries and reporting structures to make oversight easier; while others should introduce local boards, which report into the group, “to increase accountability.” Without a doubt, he says, “in today’s world, HQs need to be thinking a lot more about their subsidiaries.”