Ambrose Shannon explains how CFOs can play a lead role in limiting the future impacts of climate change during what he describes as “the decade of action”. Throughout the summer of 2021, heat waves, wildfires, droughts, and hurricanes served as stark reminders that we should not take our planet for granted. The recently published report from the United Nations’ Intergovernmental Panel on Climate Change (IPCC) has made it very clear that unless immediate and large-scale actions are taken to reduce greenhouse gas emissions, these weather patterns, and the corresponding commercial impacts, will only become more severe. In Ireland, like elsewhere, companies are looking at their own commitments to environmental, social and governance (ESG) objectives (see sidebar) encouraged by both regulatory initiatives and wider societal pressures. For example, the Climate Action and Low Carbon Development (Amendment) Bill 2021 is intended to achieve net-zero carbon by no later than 2050 throughout the entire Irish economy. This entails the introduction of five-year carbon budgets on a rolling 15-year basis. In China and South Korea, where similar measures have been deployed, companies have seen significant impacts on their business models, strategies, and performance. Furthermore, the required Local Authority Climate Action Plans are expected to set out ambitious measures to significantly increase renewable energy production, decrease transport emissions, and reduce the impact of agriculture on the environment. Irish businesses have a critical role in achieving this climate-driven transition. And CFOs can play a pivotal role in areas such as leading strategic reviews, allocating capital investment, securing funding lines, protecting credit ratings and driving sustainable business performance. According to Accenture’s 2021 report, CFO Now – Breakthrough Speed for Breakout Value: 73% of respondents claim that the CFO is best placed to ensure the resilience of the organisation in today’s operating climate; and 68% of CFOs globally are now responsible for ESG monitoring and reporting. And momentum is accelerating. In November, the United Nations Climate Change Conference of the Parties (COP26) will bring world leaders together to accelerate movement toward the goals of the 2015 Paris Agreement. We expect agreement on ambitious goals, meaning that politicians, policymakers, regulators, and investors will need to work together with businesses to deliver on ESG objectives. Failure to act on climate change represents an existential risk to society and the global economy and poses a clear financial risk to businesses themselves. The impetus for business to act is time-sensitive and will likely be driven by four key factors: Governments setting legally binding emission reductions and net-zero targets; Investors and financiers wanting to understand climate-related financial risks and long-term business model viability; Employees placing increased importance on the ESG values and actions of their employer; and Customers placing ever more importance on the sustainability of the products they consume – with many seeking “champion brands”.  For business to meet these demands, CFOs and executives need to create and operationalise a comprehensive ESG strategy. Key considerations Regulators have for some time now warned about the threat that climate change poses to the stability of the financial system. Mark Carney, formerly Governor of the Bank of England, is leading a World Economic Forum (WEF) initiative to explore the risk posed to global financial systems associated with the energy transition. According to the Bank of England, as much as $20 trillion of assets could be at risk from climate change alone. The progress of delivery against ESG transition plans varies greatly from sector to sector and geography to geography. A report by Arabesque S-Ray found that just 25% of public companies worldwide are on track to deliver on their ESG-related commitments. Our research and work in this space suggest that CFOs and the wider finance team are uniquely positioned to guide their organisations in the following ways: Assessing the ESG impact on existing business models. CFOs can play a crucial role in assessing and measuring the potential impacts of ESG on current business operations. For example, identifying and modelling risks could include scenarios on the P&L impacts of a 1.5-degree world, the impacts of a higher carbon tax on profitability, the introduction of subsidies, or pricing signals to parts of the supply chain. Highlighting risks associated with ownership of certain assets. It is rational to expect the valuations of certain assets on the balance sheet to fluctuate as we progress through the transition towards net-zero. For example, we have seen large write-downs in valuations among many of the global oil majors. On the other hand, it is equally rational to expect certain asset classes to rise in value, such as those parts of the economy that support the electrification or home insulation agendas. Either way, CFOs will want to avoid holding stranded assets and will need to make more material bets on a more frequent basis over the coming decade. Identifying where investment will be needed to transition to a sustainable economy. Ireland’s transition to a more sustainable future is expected to have a wide-reaching impact on key sectors of the economy. For example, Ibec’s report, Building a Low-Carbon Economy, suggests that Ireland’s electricity and transport systems will need to reduce emissions from 1990 levels by up to 92% by 2050 and that buildings and factories will need to reduce emissions by up to 99%. Decarbonisation needs to go hand-in-hand with technological innovation, and CFOs will play a key role in identifying where investment is needed to ensure that business outcomes are achieved in a way that is economically and environmentally sustainable. Responding to investor demands and attracting investment. In the US, one-third of the $50 trillion of assets under professional management is invested in ESG strategies, according to research by the NewClimate Institute. ESG considerations are increasingly being adopted in assessing the sustainability and risk of investment decisions. At the same time, investors and pension funds are applying pressure on companies to provide products and services aligned with the UN’s Sustainable Development Goals (SDGs). Turning ESG commitments into action. Credibility is not a new concept to finance but is vital in the ESG space. As a profession, we can help our organisations avoid even the suggestion of ‘greenwashing’. Credibility is enabled by robust transition plans with regular and transparent disclosures on progress against them. Some CFOs are investing now to create enterprise-wide data provisioning and analytics solutions for ESG. This will enable them to model multiple commercial scenarios and inform the optimal pace and sequence of the pivot. Conclusion While executing a successful ESG pivot depends upon a strategy that is unique to the qualities and context of the organisation, there are a few best practices you can leverage: Conduct a materiality assessment. These sometimes behind-the-scenes assessments are a data-driven, holistic view of ESG risks and opportunities to identify gaps and prioritise the issues of focus against business and stakeholder importance. Build an effective communication method for the company’s ESG commitments and progress. This typically takes the form of a disclosure with a newly crafted framework and reporting metrics for standalone ESG disclosures, leveraging industry-leading practices. Formalise ESG governance. Stakeholders must be identified as explicitly responsible for new associated ESG activities. The company needs to craft a defined governance model and roadmap for execution, mobilising internal resources and data for ongoing assessment and reporting. These three steps have helped organisations successfully navigate and focus an ESG pivot and capture the associated resiliency and revenue potential. This is the decade of action to dramatically limit the future impacts of climate change – time is of the essence, and the time to act is now. Ambrose Shannon is a Managing Director at Accenture and CFO and Enterprise Value Lead for Ireland and the UK.

Each year, the Irish Auditing and Accounting Supervisory Authority (IAASA) publishes a paper outlining areas to which entities should give extra attention when preparing their annual financial statements. Maurice Barrett explains the most recent findings. In September, IAASA published its most recent Observations paper, Observations on Selected Financial Reporting Issues – Years Ending On or After 31 December 2021. While directed primarily at the comparatively small number of issuers falling within IAASA’s accounting enforcement remit, the topics covered in the paper are relevant to a wide population of entities. The Observations paper is written primarily from an IFRS perspective. However, most of the topics covered apply equally to entities applying FRSs. To that extent, IAASA encourages the broadest distribution and application of the topics referenced in the Observations paper. Recurring themes There are recurring themes that appear in the Observations paper year after year, the more common of these being: Tailoring of disclosures to the specific circumstances of the entity and avoiding boilerplate disclosures; and Disclosing the significant judgements and sources of estimation uncertainty and changes in the key assumptions underpinning assets, liabilities, income, expenses and cash flows. The objective of financial statements is to provide financial information about the reporting entity that is useful to users of the reports in deciding to provide resources to the entity. That objective is achieved, at least in part, by ensuring that disclosures are tailored to the specific circumstances applying to the entity in the reporting period. The provision of boilerplate information by, for example, repeating large tracts of IFRSs in the accounting policies section of financial statements is unlikely to be seen by users as useful information. Similarly, devoting time to crafting the disclosures around the significant judgements and sources of estimation uncertainty and changes in the key assumptions should result in user-relevant information being given. Judgements and uncertainty vary from entity to entity and over time, sometimes with speed (the COVID-19 pandemic illustrated just how quickly the economic landscape can change and just how flexible and adaptable business models can be). Financial statement disclosures need to be continually examined and adapted to the business environment as circumstances evolve. The disclosures that were appropriate last year may no longer provide users with decision-useful information this year. COVID-19 COVID-19 and the public health measures put in place to contain its spread had different impacts on different sectors of the economy. Similarly, the speed and duration of any recovery are expected to impact various sectors differently. It is important for issuers to clearly explain in the management report both the impact COVID-19 has had on the development and performance of its business and the position of the issuer, and management’s views as to the path to recovery. Depending on the specific circumstances of the issuer, some of the COVID-19 matters that IAASA expects issuers might disclose in their financial statements are: A discussion of the impact of COVID-19 restrictions on the economies or markets in which the issuer operates; The continued impact of COVID-19 restrictions on the entity’s broader financial performance such as raw material price increases, margin reduction, or supply chain constraints; and How financial performance, financial position, and cash flows will likely be impacted by the pandemic and/or the economic recovery. These disclosures should reflect the impact of the pandemic on the recognition, measurement, presentation and disclosures in the financial statements, including impairments (IAS 36), expected credit losses (IFRS 9), going concern (IAS 1) and provisions (IAS 37). Climate change The IASB published Effects of Climate-Related Matters on Financial Statements, highlighting how IFRS require entities to consider climate-related matters when the impact is material to their financial statements. This educational material complements an article that IASB member, Nick Anderson, wrote on this subject in 2019. The IASB paper and the related educational material are available on the IASB website. The educational material contains a non-exhaustive list of examples of when entities may need to consider climate-related matters in their financial reporting. It aims to support the consistent application of IFRS, but it does not add to or change the requirements in the standards. The list of examples provides guidance on how issuers might consider the effects of climate-related matters when applying IFRS, including IAS 1, IAS 2, IAS 12, IAS 16, IAS 38, IAS 36, IAS 37, IFRS 7, IFRS 9, IFRS 13 and IFRS 17. Entities, recognising that investors are increasingly demanding ESG (environmental, social and governance) information, should consider this educational material when assessing the impacts of climate change and risks in their financial statements. This is particularly relevant in the areas of judgements, provisions and measurement of assets (asset lives and recoverable amounts). Impairment Impairment continues to be an area of focus in IAASA’s financial statement examinations and is a recurring theme in our annual Observations paper. IAASA challenged issuers where no impairment testing was performed, yet impairment indicators in the context of COVID-19 restrictions (travel restrictions, non-essential activities closed) were in place; the decline in certain issuers’ revenues, profits and operational activities; and issuers operating at less than normal capacity. IAASA concluded that these happenings were indicators of impairment, and these issuers should have carried out an impairment review. Accordingly, IAASA required such issuers to perform an impairment review in accordance with IAS 36. Management, directors and audit committees must ensure that impairment reviews are performed when indicators of impairment are identified to ensure that an asset or cash-generating unit (CGU) is carried at not more than its recoverable amount. IAASA will continue to challenge issuers on IAS 36-related topics, including: Whether or not CGUs have been tested for impairment at an appropriate level; The discount rate used to measure the recoverable amount and whether or not that rate has been appropriately set; The determination of the key assumptions used, the long-term growth rates used and the disclosure of sensitivities; and Whether or not all key assumptions are realistic and consistent with other information in the financial statements. While the depth and duration of the impact of COVID-19 restrictions and the trajectory of any recovery remain uncertain, there are signs that restrictions are being eased and the Irish vaccination programme is enabling a re-opening of society. Consequently, relief and supports will be unwound over time and the longer-term impacts on expected credit losses will become apparent. IAASA reminds entities to continue to consider ESMA’s public statement Accounting Implications of the COVID-19 Outbreak on the Calculation of Expected Credit Losses in Accordance with IFRS 9. IAASA expects financial institutions to distinguish between measures and reliefs that impact the credit risk of financial instruments over the expected life of financial assets and those that address the temporary liquidity constraints of borrowers and apply IFRS 9 accordingly in preparing their financial statements. Fair values COVID-19 restrictions continue to pose challenges to fair valuation measurement (including the fair valuation of non-financial assets and liabilities) for many entities. The impacts of the pandemic are likely to result in changes to the valuation methodologies used, as well as to fair valuation assumptions. Entities should continue to consider: Changes in valuation techniques; Independent valuation reports and pre- or post-COVID-19 fair value assumptions and transactions; and COVID-19 expanded fair value disclosures – sensitivity. IAASA has noted certain issuers recognising deferred contingent liabilities arising from past acquisitions. It observes that volatility in the expected future EBITDA, forecast cash flows, and/or risk-adjusted discount rate(s) due to COVID-19, Brexit and economic disruption may result in volatility in the fair value measurement of deferred contingent liabilities. IAASA expects issuers to ensure deferred contingent liabilities are measured in accordance with the requirements of IFRS 13 and disclosed in line with the requirements of IFRS 13.93(d). Alternative performance measures ESMA’s Guidelines on Alternative Performance Measures (APM) have been in force since 2016. These APM guidelines are supplemented by a series of questions and answers, which provide guidance on the practical application of the APM guidelines. IAASA continues to examine issuers’ use of APMs and continues to identify shortcomings in the application of, and non-compliance with, the requirements of the APM guidelines, including instances where issuers: Present APMs with more prominence and emphasis or authority than measures directly stemming from the IFRS-based financial statements; Fail to provide reconciliations for all APMs presented; Use incorrect labels to describe APMs (e.g. the expression ‘EBITDA’ is used rather than ‘Adjusted EBITDA’); Fail to define an APM or fail to set out the basis of the calculation applied, including details of any material hypotheses or assumptions used; Fail to explain the use of APMs; and Fail to present prior period comparative amounts for APMs. Conclusion I believe that, to use a saying of our times, “we’re all in this together” and that preparers, management, audit committees, directors, auditors and regulators all can, and generally do, work together to achieve high-quality financial reports. IAASA’s assessment is that the quality of the financial reports it examines is generally high and compares favourably with European issuers. It is hoped that our Observations paper will in some way contribute to that continued high quality. Maurice Barrett FCA is Senior Financial Reporting Manager at the Irish Auditing & Accounting Supervisory Authority. IAASA’s Observations paper is available at www.iaasa.ie.

You don’t have to listen very carefully to hear the rattle of bandwagons being boarded as governments, quangos and interest groups issue their calls to action on behalf of Planet Earth, writes Dr Brian Keegan. It is over 20 years since the Kyoto Protocol was signed. With hindsight, the aspirations back then were relatively modest, amounting to little more than a commitment by governments to reduce carbon output. That hasn’t got us very far, as highlighted by the report over the summer from the Intergovernmental Panel on Climate Change (IPCC). There is no one to blame except us when it comes to increases in planetary temperature. The political difficulty with the climate crisis is akin to the political difficulty facing many countries in relation to pensions. Everybody knows there is a problem, but the crisis is happening too slowly for urgent remedies to be acceptable. It is painful to increase the retirement age (an approach currently under examination in Ireland and the UK) or add to the tax burden. Both or either option would correct the ratio of pension beneficiaries to pension funders. Yet, there will be no immediate political benefit. The political dilemma is the same when it comes to decisions over climate policy. We have fixed climate problems before. Forty years ago, the big environmental concern was the hole in the ozone layer. Changes in industrial policy resulted in the virtual banning of chlorofluorocarbons in refrigeration and other industries to help repair it. But where is the political dividend for those who took these actions? This is the nub of the problem for both the Kyoto Protocol and, more recently, the 2016 Paris Accord. Both initiatives depended primarily on government action, but government action on its own isn’t sufficient. A similar fate awaits the Irish Government’s Climate Action Act and the British Government’s Climate Action Act of 2019. It is all very well setting legally binding emissions targets – net-zero by 2050 in both cases – but people still have to travel, work, eat, and stay warm. Even when governments mandated the curtailment of normal life, as was the case with successive lockdowns in the past 18 months across the world, the impact on global carbon emissions fell short of the 7% reduction per annum promoted as necessary by the UN. Preparations for the next international gathering on climate change, known as COP26, are being finalised for November 2021 in Glasgow. However, while all this activity and wordsmithery is happening, the real progress on climate change may be taking place elsewhere. There is evidence that private sector financing for non-sustainable business activity could dry up. Speaking to a TASC think-tank event recently, the chief executive of AIB, Colin Hunt, put the matter succinctly: “Companies that don’t take this seriously won’t be around to talk about it in ten years’ time”. He is echoing a sentiment that seems increasingly prevalent in the investment community and is supported by academic research. Of course, all this comment could be mere virtue signalling and a form of greenwashing in itself. Nevertheless, it does seem that environmental investment considerations are genuinely more prevalent. It follows that environmental, social and governance (ESG) reporting will come more to the fore, even without government prompting. The chief executive of the International Accounting Standards Board has suggested that if ESG reporting for investors is correct, by addressing investor concerns, we will also address broader societal concerns. Government carbon targets might indeed be met, but by private investment strategies rather than climate legislation. Dr Brian Keegan is Director of Advocacy & Voice at Chartered Accountants Ireland.

People management has been evolving over the generations, paving the way for productive development conversations that benefit both the organisation and the employee, writes Michelle Halloran. There has been a gradual sea-change in the role of the people manager over the last few decades, but it has taken a global pandemic to catapult us into a new way of working. Now, as we optimistically enter the post-pandemic world, it is time for a radical break with the past, to ditch our outmoded perspectives on people management and take a hard look at the role of the 21st-century people manager. From the top down, organisations must stop pretending that managers with staff reporting to them can perform a fully loaded, 40-hour-a-week job, with a bit of ‘HR soft stuff’ thrown in on the side. Organisations need to start budgeting – in terms of time and money – for the investment required for their people to properly function and perform well in the new world of hybrid working. Old habits die hard Many of us have inherited a view of ‘people management’ involving uniform nine-to-five working hours, little flexibility, a strict dress code, and the expectation of often-unquestioning respect and compliance. Structured, objective performance management and review processes are a relatively new replacement for the once-a-year ‘quick chat’ to be told whether or not you were going to get the much longed-for pay rise. Your boss was typically a white male in his forties or fifties – benevolent when you did well; strict and disciplinarian when you did not. This model of people management has its roots in the traditionalism of the generation born from 1928 to 1944, at a time of economic hardship, when the old class system was still prevalent, and you respected authority unquestioningly. Evolving workforce generations The ‘Baby-Boomer’ generation (born 1945 to 1964) wanted much more from their working lives. They had learned from the experiences of the previous generation, seeing them gain very little in terms of improved quality of work and life in the post-war years, despite their sacrifices. However, while they may have done some hell-raising in their youth, and instigated the beginnings of a more equitable society, by the time they hit their mid-twenties, most were settled down and working even harder than their parents in evolving white-collar roles – you didn’t have to be American to buy into the American Dream. While their style and tone were less formal, and there was a shift in the gender balance at work, they (male and female) continued the patriarchal style of people management. Generation X (born 1965 to 1979) threw down the gauntlet in the area of gender equality, and achieved some real change in terms of family-friendly working hours. They also introduced and implemented performance management in the workforce, a concept driven by increased global business competition, where pay was linked to the achievement of targets, and an employee review was conducted once a year at which an employee’s rating was discussed and explained. Then came Generation Y, or the ‘Millennials’, (born 1980 to 1994). Since 2016, ‘Gen Y’ has comprised the majority of the workforce; therefore, knowing how to lead and motivate them is vital to the success of any people manager. The first ‘digital natives’, with access to vast resources of information and opinion, they do not unquestioningly accept what their boss tells them. With businesses driven hard to compete by rapidly advancing technology and globalisation, Gen Y has to work smarter, harder and faster than any previous generation. To maintain this level of productivity – adapting to unprecedented levels and speed of change – today’s employees need a lot of time, emotional sustenance and practical support from their managers, without which they will feel let down and move on to another employer. The early indications for Generation Z, born after 1994, are that they view being an employee and having their own professional ‘gigs’ on the side as not being mutually exclusive. Understanding how precarious job security can be, they are emerging as self-reliant and flexible but needing at least as much emotional support at work as Gen Y. The 21st-century people manager As a 21st-century people manager, your language and approach needs to move away from performance reviews towards ‘development conversations’, or even, simply, ‘check-ins’. These should be planned and scheduled. The more frequently you, the manager, make these calls, the shorter they will be, as they become part of a running conversation between you and your team member. This is especially important in a hybrid work environment where we cannot avail of ad hoc, informal conversations as we could pre-pandemic.  Allocate roughly a day a week into your schedule to have these employee check-ins. These should be strategic, not tactical conversations, with the emphasis on how the team member feels they are performing and coping with their work. This discussion must sit outside other routine discussions and communications about what needs to get done. In Table 1, I set out a suggested plan for managing development conversations with each of your team members (reporting to you as their line manager), outlining the frequency and purpose of each conversation, and useful questions to ask. (Quarterly and monthly meetings can encompass weekly check-ins as they fall due.) The business case So, you may be asking, if I am going to spend all this time talking to my team members, helping them to perform, how do I get my own job done? I can’t afford to spend a day a week on employee development conversations! Well, you can’t afford not to. There is extensive research on the positive impact of proper employee engagement on profitability and productivity. For example, a comprehensive report published by Gallup in 2017, involving meta-analysis of 339 research studies across 230 organisations in 49 industries and 73 countries, found that business or work units in the top quartile of employee engagement outperformed bottom-quartile units by 10% on customer ratings, 17% in productivity and 21% in profitability. Work units in the top quartile also saw significantly lower staff turnover, theft, absenteeism, and fewer safety incidents and quality defects. Taking as the baseline Gallup’s 21% increase in profitability as a result of higher employee engagement, if one day per week is allocated for people managers to have development conversations with their team members, costing 20% of the organisation’s people managers’ time, the impact on profit will be positive. Further gains and savings are available from increased productivity and customer satisfaction, lower staff turnover and absenteeism, reduced wastage, higher quality adherence, and so on. The business case for allowing people managers time to manage their people is clear. Human nature being what it is, however, such change will be resisted, despite the pressures from the generational transition outlined and the recent acceleration towards complex, individually tailored working arrangements. An organisation could introduce such change through a pilot scheme, evaluating results after 12 months using metrics like internal and external customer satisfaction, team productivity, absentee rates, staff turnover and quality of output. Budgeting time for people management is a change in approach that is long overdue. We have the motive – a more profitable business and a happier place to work – and with the shift towards hybrid working, we now have the opportunity. Michelle Halloran is an independent HR and people management consultant.

Brendan McGurgan FCA explains the four facets of Sebastien Tondeur’s Magic Diamond of Performance, which has helped the MCI chief’s company scale at speed and generate annual revenue of over $500 million. Sebastien Tondeur, CEO of MCI, has led the company on an incredible scale-up journey. From a team of 30 operating in his home country of Switzerland, MCI has grown to employ almost 2,500 across 60 cities in 30 countries. Today, the company has revenue of over $500 million. There are, of course, many facets to this success, but I want to focus on the novel way Sebastien manages company performance. The Magic Diamond of Performance, as he calls it, focuses on four areas: Financial success; Employee promoter score (eNPS); Customer promoter score (cNPS); and Sustainability (aligned to purpose). Sebastien argues that you don’t need to measure and manage hundreds of different metrics. Instead, focus on these four areas and you will save time, energy, and resources. You will also remain acutely sensitive to the pulse of the business. Let’s look at each in turn. Financial success Anyone leading a high-growth or scaling organisation understands the importance of financial metrics. As a Chartered Accountant, I am only too familiar with ROCE, ROE, EBITDA, ROI, APT, etc. Put just about any three letters together, and it will likely be an acronym for yet another financial measurement. The question, of course, is which should you focus on? Sebastien cites four, which combine to capture financial performance. This is positioned at the apex of the diamond. Sales growth; Gross profit margin; Net profit margin; and Cash headroom. Sales growth Sales growth indicates the sales team’s ability to increase revenue over a fixed period (current month vs prior month, current quarter vs prior quarter, current month vs same month prior year etc.) It is calculated as follows: As a benchmark, a scaling company has average annualised sales growth of 20% over three years. Gross profit margin Gross profit margin indicates the amount of money remaining in sales after deducting the costs of goods sold. The calculation is as follows: Gross profit margin assesses how efficiently the company generates profit from sales. For example, suppose your gross profit margin is low compared to your peers in your industry. In that case, it may point to inefficiencies in your manufacturing or lost opportunities in terms of realisable sales price vis-à-vis the value you are delivering to your customers. Net profit margin Net profit is arrived at by deducting all company expenses (excluding the cost of goods sold) from gross profit. Net profit margin is the ratio of the net profit that is generated as a percentage of revenue. It indicates how much of the revenue you earn is actual profit. Here is the formula: Net profit margin = net profit/total revenue x 100 Net profit margins vary by business size and industry. As a rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered good, and a 5% margin is considered low. A consistent net profit margin aligned with sales growth is reflective of a successful scale-up. Significant fluctuations in net profit margin while a company is growing is often symptomatic of deficient processes and systems capable of supporting sustainable growth. Cash headroom There is an old saying in business: “sales is vanity, profit is sanity, and cash is reality”. This is very much the case in a scaling business, where cash is the fuel for growth. I led the finance function of a dot-com company through the boom and bust of the early 2000s. It was my first taste of industry, and it provided a lasting and salutary lesson in the importance of cash. It was there that I learned the golden rule: “s/he who has the gold makes the rules”. Cash headroom refers to the difference between a business’s required monthly cash resources and the available cash resources. For example: assume a business must pay out £1,000 per month to cover overheads and expenses. If, after payments from customers, it has £5,000 in the bank, the business has cash headroom of five months. To put it another way, if there are no further customer orders, there is sufficient cash in the bank to cover five months of committed overheads and expenses. In my previous business, we targeted a business KPI of six months’ cash headroom. Anything more would trigger a conversation about where to better deploy the surplus cash. Anything less triggered a deeper look at the reasons why. Are orders declining? Are customer payments late? Have we seen a general increase in costs? Employee net promoter score (eNPS) If people are the most important asset in business, then leadership should protect and nurture that asset. To do this, you need to know how happy your team is and how engaged they are with your business. Good business leaders want their people to bounce into their workplaces, to bring high energy levels and a keen desire to provide amazing service to customers. A good leader wants to provide fulfilling, meaningful, vision-aligned work to the people they employ. One of the world’s leading experts on customer and employee loyalty is Fred Reichheld, the founder of Bain & Company’s loyalty practice. Fred created the Net Promoter System (NPS) in 2003 and since then, it has been used by a range of leading companies such as Apple Retail, Philips, Charles Schwab, Allianz, American Express and Intuit to generate extraordinary results. In essence, Fred’s work laid bare the link between loyalty and profits. eNPS measures employees’ willingness to recommend the organisation to others as a great place to work. It indicates engagement levels, motivation, and intent to remain with the company. It also uncovers the likes and dislikes of employees as they pertain to the company. How do you calculate it? The genius of eNPS lies in its simplicity. In an era of survey fatigue, it provides an incredibly easy and efficient way to survey employees. First, they are asked one quantitative-based question: “How much would you recommend working here to a friend or colleague?” The employee uses an 11-point scale from zero (not at all likely) to ten (extremely likely). Follow this up with an open-ended question: “Why do you feel this way?” Those who score between zero and six are detractors. They are unhappy, disengaged, and could be looking for roles elsewhere. Those who score seven or eight are passives. They don’t love working for you, but nor are they entirely disengaged. Those who score nine or ten are promoters. They love their work and won’t hesitate to tell everyone. The eNPS score for a period – typically a month – is calculated by subtracting the percentage of detractors from promoters, omitting the passives from the calculation. The score is then displayed as a number rather than a percentage. eNPS: a worked example There are ten employee responses in ‘Improve Your Workplace Inc.’: 3, 4, 5, 6, 8, 8, 8, 9, 10, 10. This equates to: • Four detractors (3, 4, 5, 6) = 40% • Three passives (8, 8, 8) • Three promoters (9, 10, 10) = 30% The calculation: 30% – 40% = -10 What is a good score? Jennifer Willy, Editor at Etia.com, says that anything above zero is generally acceptable: “Different companies and organisations have different standards and benchmarks to measure their performances. But generally, a score between 10 and 30 is considered good while anything near 50 is excellent.” Why is eNPS important? A State of the Global Workforce report published by Gallup in 2017 showed that 85% of employees worldwide are either not engaged with their work or are actively disengaged. Disengaged staff are less productive and are more likely to make mistakes. Worse, negative attitudes can contaminate an otherwise positive workplace culture. Conversely, employees engaged in their work are more productive and tend to positively influence their teammates. Consequently, employee retention rates will improve, and your team will produce better results for your clients. To put it simply, happy staff means happy clients. Customer net promoter score (cNPS) Successful scalers are obsessive about delivering value to customers. They are consciously tuned into why they do what they do and how that impacts their customers’ lives or businesses. Assessing the customer’s engagement with you is critical. It helps guide and inform loyalty initiatives and overall brand-building, and it forms the third area of focus in the Magic Diamond of Performance. How do you calculate it? cNPS is calculated the same way as eNPS. It is defined as the willingness of customers to recommend a company’s products or services to others. Like eNPS, customers are asked a single question: to rate on an 11-point scale (zero to ten) the likelihood of recommending the company or brand to a friend or colleague. Based on their rating, customers are classified into three categories: detractors, passives, and promoters. As with eNPS, cNPS is found by subtracting the percentage of detractors from the percentage of promoters. The result will be a number between -100 and +100. A cNPS score above zero is considered good, as it indicates that your audience is more loyal than not, and anything above 20 is considered favourable. Bain & Co., which pioneered this methodology, suggest that above 50 is excellent and above 80 is world-class. These are general guidelines, however. A good cNPS will depend on the industry and country in which the business operates. Sustainability (aligned to purpose) MCI’s purpose is as simple as it is profound: “when people come together, magic happens”. This purpose permeates every part of the business and is the slide-rule for all decisions. The company may have pivoted several times in its evolution, but that core purpose – bringing people together to build communities and create experiences – has remained. Sebastien explains that with growth came a consciousness of the company’s impact on the world. As MCI’s reach became global, it began to understand that it could accelerate change and promote a more sustainable and inclusive society. Anchored by its purpose, the company’s goal is to encourage an active culture of care and responsibility, backed up by concrete actions. This forms the last area of focus in the Magic Diamond of Performance. Why is sustainability important? A view common in SMEs is that sustainability issues are for governments and larger corporates, as smaller entities are simply too busy wrestling with the day-to-day demands of the business. Sebastien, however, sees sustainability as an enabler of company growth. “I don’t think we have a single under-25-year-old candidate that hasn’t asked us about the sustainability programme. I don’t even think it’s an option for any business. You just have to have an answer when the question is asked.” Sebastien is not alone in this view. Marga Hoek, author of The Trillion Dollar Shift, puts it like this: “Business for good is good for business”. What do you measure? Sebastien’s mantra is “think big, start small, scale fast”. It’s all about learning as you go. MCI used the UN Sustainable Development Goals (SDGs) to guide their sustainability initiatives, picking a small number of the entire 17 to make a start. “We give a lot to the community as a business – doing volunteer work, helping kids, working on cleaning projects… and then, over time, we became more sophisticated. Now, we have a large community of what we call sustainability leaders. They cover a range of areas – environmental, social, diversity, inclusion. Belonging is a big topic right now. I give them a budget, I give them approval, and I rely on them to give me recommendations. They communicate to the company and engage the people.” MCI’s sustainability journey, which started with a single small step, has become a hugely impactful sustainability strategy based on four SDG-aligned pillars: people, planet, profit and governance. For example, under the ‘planet’ pillar, the company successfully reduced its carbon footprint by 20% in 2020. And as Sebastien points out, the most sustainable companies are the least wasteful. Waste is tangible in some industries, but how do you reduce waste in a knowledge-based company? In my previous business, we put our pre-sales function under the microscope and found that only 7% of sales leads converted into sales orders at our worst. That’s 93% wasted effort in customer calls, follow-ups, budget quotations, design drawings etc. So we zeroed in on our customer conversion ratio and, over time, increased our conversion rate to 20% – not by generating new leads, but by becoming more efficient in processing the leads we already had. Have fun with this aspect of the Magic Diamond of Performance. You don’t need headline-grabbing initiatives or noble sustainability targets, not at the start at least. Instead, look for an area of your business where you generate waste and aim to reduce it. In so doing, you will leverage your people’s time and creativity. In time, this process will compound to greater employee engagement and productivity, customer advocacy, and an improved bottom line. Conclusion Sarah Kennedy is Vice-President of Global Marketing at Adobe Experience Cloud. She says: “The companies that will excel long-term are the ones that know it’s not just about shareholder value… it’s also about focusing on the customer and employee experience, and how those, in turn, contribute to society”. If you’ve found yourself drowning in the vast sea of performance measurement options, then the Magic Diamond of Performance could be the lifeboat you and your business need. Brendan McGurgan FCA is Co-Founder of Simple Scaling, a company dedicated to inspiring, connecting and enabling ambitious leaders of SMEs to scale with purpose.

As ever, this is a busy time of year when the Institute commences its CPD programme for the autumn and we unveil our programme of events and conferences. The business environment has continued to change substantially in the last year, and we have formulated this programme of events, courses and specialist qualifications with a keen eye on equipping members to leverage that change in their professional lives. We have engaged closely with our members to ensure we are addressing your needs in our new programme. I look forward to your feedback. After a lengthy period of virtual engagement necessitated by the pandemic, we surveyed our members in recent weeks to hear your preferences on engagement in the coming months. It is clear from your feedback that a shift has taken place when it comes to events. We see an appetite to attend larger conferences, awards ceremonies, and social events in person, but it is also clear that the virtual option will remain a preferred one for many when it comes to CPD courses, briefings, and other smaller-format meetings. This feedback will inform our planning in the months ahead. As we move out of the shadow of COVID-19, another crisis will dominate this coming quarter – the climate crisis. COP26, which will take place in November, will drive this focus. Accountants’ skills and expertise strongly position them to help businesses adapt to meeting the sustainability challenge. The evolution of the CFO role in recent times is proof of this, but sustainability expertise is equally becoming critical among accountants at every level. The Institute will maintain its focus on equipping members for this task. Finally, I would like to direct your attention to our recently published position paper, The Next Financial Year, which details policy measures the Institute is calling for in the months ahead. Informed by extensive engagement with members in business, practice, and the public sector, it focuses on improving government policy for businesses on the island of Ireland without demanding additional exchequer funding or support. I look forward to engaging with you all in the coming weeks and months. Barry Dempsey Chief Executive