McGrathNicol Advisory - Our Perspectives

 

“We have been active in helping Boards, CEO’s and senior management through challenging and unusual issues during 2012.”

 

In 2011, global economic conditions deteriorated and became increasingly fragile. Markets exhibited greater volatility as news of world events was digested, with the markets quick to look for bad news in every development.

 

With some prospect that Europe may see off the immediate crisis, risks still remain. There is recognition that even a good outcome will mean subdued European growth (or negative growth) for a considerable period.

 

For our clients, like others in the business world, the European debt crisis and its practical implications continue to weigh on the minds of Directors and senior executives. They recognise that world markets are likely to remain volatile, with low growth and tighter credit markets. Furthermore, the European crisis is not the only issue for Australian business, other contributors to uncertainty we have discussed with Directors and senior executives include:

 

+         the structural changes in our economy, with the shift to mining related industries and the decline in manufacturing and retail;

+         the high Australian dollar;

+         implementation of the carbon tax; and

+         the outlook for our major trading partners, particularly China.

 

These matters have been compounded by increased regulatory scrutiny, with ASIC showing an increased propensity to investigate disclosure related issues. Of course there was the Centro case, which has refocussed Directors’ attention on their obligations.

 

As Directors and senior executives seek to manage their businesses in this environment, our team has been assisting clients on a variety of challenges. There appear to be two reasons why our help is valued by clients:

 

+         Directors are seeking an independent view. In this uncertain environment, Directors value the fact that we can provide advice unencumbered by any preconceptions or relationships.

+         Senior management and executives that we work with value our hands on approach to implementation. Rather than simply providing advice and recommendations, we work alongside management to implement solutions.

 

A snapshot of some of the key themes, our work and issues raised by Directors, follows in this review.

 

Common Themes

 

1  Governance - risk management and delivering on strategy

 

Board members, particularly independent Directors, increasingly sought independent advice to ensure there were appropriate governance, risk management policies and reporting mechanisms in place. This work not only helped Boards to manage risk and meet their continuous disclosure obligations (the usual scope of governance advice), but also to utilise the governance structure to improve the Board’s ability to deliver on strategy and respond in a fast changing environment.

 

Perhaps as a result of the Centro case, we are seeing Boards seek our independent view on matters where they would have previously been satisfied with internal advice, or advice from their auditors. We recently provided the Board of a listed corporate, with an independent view on a complex valuation approach to a significant asset. The value of the asset in question was of such importance to the company, that a change to the valuation methodology would likely have triggered a disclosure matter.

 

We have also assisted the Board and senior management of a large listed corporate to understand the full extent of unexpected performance issues which arose in its operating subsidiaries.

 

2  Business fundamentals - focussing on what matters

 

Boards and senior executives are focussing on the quality of the information that they are receiving. Increasingly, better run Boards and senior executives are seeking reports from management that are clear, concise, relevant and within a timeframe that allows the Board to consider and take action. Rather than reports on historical performance of the business, Boards are looking to management for analysis and for focus on critical business issues.

 

We have seen a high level of interest from both Boards and executives in our “Dashboard” style reporting approach, involving identifying the key business issues and developing reporting methods and practices to assist with delivery of the business plan.

 

3  Internal growth opportunities - cash is still king

 

With lower economic growth, executives and senior management are increasingly looking to internal improvement opportunities. We have experienced high levels of interest in our work in cash and working capital management, and cost optimisation as Boards look to maintain growth in Earnings Per Share (in a difficult environment).

 

We have conducted working capital reviews to assist management to identify potential sources of cash and develop procedures and policies to optimise the working capital cycle. Some of this focus by management is clearly a response to the lower market growth opportunities they face.

 

We have assisted one of our clients operating a contracting business to free up over $100 million of cash from working capital.

 

4  Responding to expectations of tighter credit

 

Senior executives and their Boards are recognising the need to be well prepared to refinance their maturing debt or in preparation for a contemplated major transaction. They are making sure that relationships are maintained with a range of financiers and are tightening their core operations and tidying balance sheets well in advance of any need to approach the capital markets.

 

We assisted a large, listed, well run and well capitalised business to identify and articulate the relationship between cash and profit – in a business that involved complex profit and loss accounting. Management and the Board wanted to make sure that they could demonstrate that they had their finger on the pulse of all aspects of the organisation.

 

5  Making acquisitions seamless

 

Even in this uncertain environment, acquisitions are still being made, but management and Directors are under greater pressure to ensure that the acquisition is seamless and quickly integrated. We have been called on to assist in the project management and post-merger integration of complex businesses, integrating the reporting and ensuring day one processes are well planned and executed. Companies rely on our experience in taking control of businesses in a diverse range of industries.

 

Outlook

 

“The environment will continue to present challenges for Boards and management in 2012.”

 

There is every reason to expect Boards and senior executives will continue to face a variety of challenges throughout 2012 and beyond:

 

+         volatile markets;

+         uncertain economic direction;

+         structural change in the Australian economy;

+         sector specific issues, particularly in retail and manufacturing (with knock on impacts on property);

+         tighter credit markets;

+         cautious equity markets;

+         increased regulation; and

+         continuing regulatory scrutiny.

 

With a continued focus on economic challenges, risk and regulation, we expect that 2012 will see our ongoing involvement in providing Boards, CEO’s and senior management with independent advice with the following themes:

 

+         Corporate governance – providing Boards with independent advice on the effectiveness of governance processes, risk management, disclosure and help to improve performance.

+         Cash and working capital management – working with management to increase cashflow and free up cash. This is achieved by implementing practical and effective procedures to forecast, track, save and generate cash to leave the business with tools to sustain the improvement.

+         Dash board reporting – providing support to Boards and senior management in designing and implementing concise and effective reporting tools to assist in the quick identification of trends and issues.

+         Transaction enhancement – providing support to management in buying or selling a business or asset. Our assistance will include pre-transaction performance improvement, due diligence, project management including post acquisition integration and value realisation.

+         Independent business reviews – we work with Boards, CEO’s and CFO’s to independently test business and strategic plans, forecasts, capex plans and funding plans.