Ten things to do for boards and firms

Understand the portfolio of risks arising as a result of the current situation

The current turmoil in global markets presents Boards and those charged with governance with the critical challenge of understanding how the current situation affects their company’s risk profile. 

Focus on the key risks posed by the crisis – from liquidity, access to capital, working capital management, and cash flow to compliance with debt covenants to hedging against interest rate, currency, and commodity price volatility – and ensure that management is effectively addressing these risks.

Assess the company’s exposure to third parties in financial distress

Ensure that management is monitoring the impact of the crisis on the company’s key customers, suppliers, insurers, partners, banks, counterparties and other parties that may be experiencing financial difficulty.  An up-to-date inventory of the company’s exposure to third parties that may experience distress is essential.

Reassess the company’s vulnerability to business interruption, and its crisis readiness
As illustrated by the earthquake in Japan, floods in Thailand and other systemic disruptions over the past 24 months, the global interconnectedness of businesses, markets, and risks pose challenges for virtually every company.  Ensure that management is considering a broad spectrum of “what-if” scenarios – from supply chain breakdowns and the financial health of vendors to geopolitical issues, natural disasters, and cyber threats.  Is the company’s crisis response plan robust and ready to go? Is the plan actively tested and updated as needed?

Focus on the company’s plans to grow and innovate

Growth, strategy, and innovation will be front-and-centre as companies search for top-line growth and look forward, beyond the currently depressed environment. A key challenge will be monitoring and calibrating growth plans to appropriately balance risk and reward. Does a lack of innovation pose a threat to the company? Make sure risk, reward and strategy are discussed together – each hinges on the other.

Also, know your own and your team capabilities and strengths.  Not all business ventures are “your cup of tea” i.e. suitable for the company.   Avoid herd mentality i.e. entering into a new business ventures on the basis that everyone else is doing it.

Focus on related party transactions and borrowings/advances

Beware of related party transactions that are lopsided, window dressing or which may result in resources being shifted to other companies or businesses controlled by directors or other shareholders of the company. Ensure that related party transactions and borrowings or advances are properly reviewed and approved.

Firms need to ask: are the related party transactions being made in the best interest of the company and all shareholders,  are they properly vetted and approved by the Board of Management or representatives of shareholders who are not involved in those transactions, does the Board have an independent member who is not afraid of reprisal for questioning the appropriateness of those transactions and does the company have a whistle blowing program for individuals to highlight/report suspected irregularities?

Understand the company’s significant tax risks and how they are being managed and modeled. Consider opportunities for tax efficiency Management needs to be cognizant of recent changes to the tax regime and the potential impact on both the company and key personnel.  Tax penalties for incorrect self assessment filings are 0.05 per cent, per day (or 18 per cent, per annum) in Vietnam.

In addition, tax authorities are ratcheting-up their enforcement and collection efforts and sharing information with a view to increasing the effectiveness of their tax audits and minimising tax collection leakages.

Accordingly, management should understand the areas of potential exposures and risks and how they are being managed.  In addition, are transactions structured and undertaken in a tax efficient manner? Are there any legitimate opportunities for tax savings? Who is involved in reviewing the tax structure and tax arrangements of the company?

Take a hard look at opportunities to improve Board effectiveness

Count on increased expectations for good governance and effective oversight, and focus squarely on opportunities to improve. Pay attention to the basics—like having the right mix of experience and skill sets, independence and leadership, understanding of the company’s strategy and financial risks, and the adequacy of support for the Board. If you don’t get the basics right, your ability to ask the right questions and challenge management is severely limited.

Help the company and management prepare for change

With the financial crisis and globalization changing the world in dramatic ways (a less-leveraged economy, a restructured banking sector, potentially more regulation and shareholder activism on issues like related party transactions, new business models driven by technology, globalization, and competition—and more), step back and consider what the emerging business environment will look like. Does management understand how this new environment will impact the company’s risk profile, and the viability of its strategy and business model?

Improving customer experience to drive profitable growth

A proven adage is that it costs many times more to acquire a new customer than to retain an existing one. However, not all customers are the same as each customer have different sets of expectations.  By gaining insights on needs, preferences and behaviours, a customer’s experience can be enhanced at ALL touch points with the company.  Consider at each touch point that a customer has with the company, what processes, standards, services or facilities need to be improved or introduced in order to meet customer expectations.

Look beyond the numbers when reviewing corporate reports

Narrative reporting (such as a business review) and quarterly results releases can pose difficult issues because they contain important information which often does not come from the financial reporting systems, is not audited, and is not addressed by normal internal controls processes. 

Ensuring management have processes in place to make sure there is consistency between narrative reporting and the financial statements/information can promote a better assessment of performance and prevent unwelcome attention from regulators or stakeholders.

Board members and those charged with governance can, in these challenging times, play an important role in supporting and overseeing what management is doing to steer an appropriate course and the actions management is taking to preserve and growth shareholder and stakeholder value.  Boards need to be actively engaged, they need to consider the types of issues outlined above and they need to contribute positively to the success of the business.

The views expressed by the author here do not necessarily represent the views and opinions of KPMG. To learn more about KPMG’s services visit www.kpmg.com.vn.  If you would like one of KPMG professionals to contact you, please contact them at 04 3946 1600 (Hanoi) or 08 3821 9266 (HCMC) or email to them at kpmghanoi@kpmg.com.vn or kpmghcmc@kpmg.com.vn.