SLID on sustainability and governance for non-bank finance companies

Thursday, 18 July 2013 00:00 - - {{hitsCtrl.values.hits}}

The Sri Lanka Institute of Directors (SLID), shifting its focus from the general scope of corporate governance to a more specific area, organised a Power Evening targeting the finance sector of the country which featured the International Consultant and Group Managing Director of the Charles Massingham Consulting Group, Professor Massingham. Massingham delivered an insightful presentation on the topic of ‘Sustainability and Governance for Non-Bank Finance Companies’ whilst the opening remarks were delivered by none other than Central Bank Governor Nivard Cabraal. US$ 4,000+ by 2016 The Governor focused on the long term goal of the country, moving towards a per capita income of US$ 4,000+ by the year 2016 and proceeded to expand on the role of finance companies in achieving this target. The non-bank financial institutions (whose assets had grown from Rs. 113 billion in 2006 to Rs. 646 billion as of March 2013), had a significant reach to key sectors of the economy that at times could not be reached even by banks. Many of today’s successful conglomerates were the recipients of loans from such institutes. Speaking on the areas for improvement for these companies he referred to the economic imbalance that may result with credit expansion taking place too fast, even at the risk of asset quality, making it of utmost importance that growth was ensured within reasonable limits. Pointing to other factors such as trends in global trade practices, destabilised political conditions, strict competition from other finance companies and banks, insurance companies and pension funds and even adverse weather conditions, Cabraal felt that the role of the Central Bank became even more limited to that of an advisory and regulatory body on matters such as risk management, internal controls, ensuring proper discussion and good corporate governance practices. He ended his brief remarks by emphasising the importance of sustainability and governance above all for all institutions, and invited those present to pay closer attention to the Central Bank road map for development, as well as to the new instruments introduced recently. Sustainability Taking over from the Governor, Prof. Massingham initially focused on sustainability from a corporate perspective rather than an industry sector perspective before bringing both together to form an ‘intervention strategy’. He emphasised on the importance of a strategic approach from each individual institution apart from the sole reliance on the road map set up by the Central Bank in reaching sustainability. He pointed to countries such as Korea, Taiwan, Singapore, Malaysia, Thailand and the Philippines where the finance sector companies were in his opinion in their maturity and in decline as opposed to countries such as Sri Lanka and Nepal where he believed there existed constant growth. “So why do we find that some countries that have emerged and developed are now potentially in their demise?” he questioned. Opining that the main reason for this was the lack of sustainable development as opposed to ‘mere development’ he continued to focus on matters such as a simple framework to raise corporate profiles as well as essential routes and conditions which were required for growth and desired outcomes along with the need for change and intervention by all involved in this important sector. The whole idea of sustainability stems from one word: ‘readiness’. Are we ready to take on the challenge for sustainability and governance? The simple framework proposed by Prof. Massingham begins with “looking at the tensions between ambition and ability and formulating a system by which a ‘win win’ situation is created for both the ‘seasoned as well as the new players’ in the sector. The finance sector of this country has grown from about 16 to 47 companies along with the leasing companies which showcases a huge growth over the last few years. But what of the levels of risk taken to reach that growth?” he queried. The answer to creating a ‘win win’ future comes down to three aspects with regard to the organisation which is: “the top management, customer facing staff and segmented customers.” Within the tensions between these entities lies the competitive identity which needs to be realised and developed. Perception Speaking on other matters such as that of self perception, he questioned as to what was being done with regard to this in terms of the industry sector as well as the stakeholder. “How do we go about doing this? We can’t tell people ‘we are better than what you we think we are’. People need to feel and know that we have arrived, where we are and that we will continue in that way” he stressed. “As perception leads to affinity, people who are customers and stake holders will have an affinity to an institution based on their perception and on the personality of the sector. This perception must be built through the general behaviour of the institution and its internal and external interaction with customers and other members in the sector,” he continued. Referring to the range of products and services across the local sector, Prof. Massingham felt that a large percentage of businesses were focused on a very narrow product range, thus exemplifying the need to broaden the product portfolio and sales base of these companies. Customer value was another area he looked at, stating that the primary basis for the above was based on the functional benefits that were not provided by the banking sector. He further emphasised that these sustainable value based propositions needed to be functional, competitive, product based, well differentiated and even emotionally founded. It is essential to note that at the end of the day it is the people in the company and the manner in which they connect with the customers and the quality of the customer experience that will increase the company’s visibility and credibility. This would be ultimately achieved by the strategic choices made by the company. Communication Speaking on the main routes of communication within these sectors, he referred to three such routes which were the internal route between the top management and customer facing staff, considered the most important, the interactive route between the customer facing staff and segmented customers and the external route between the top management and segmented customers. The internal route consisted of aspects such as the vision, mission and positioning which were considered critical in this regard but which were seldom effective. Likening this to a ‘smoking kills’ warning on a cigarette packet, he went on to point out their ineffectiveness and inaction stressing that its effectiveness increases by embedding these with a view towards sustainability, and referred to as a part of the strategic planning process and ongoing reference and review. This could be achieved from shared co-values such as the need for ethics, compliance, responsibility and governance which needed to be built over time. He also referred to other aspects of the internal route such as the need of a system for opportunity auditing, value bonding and value networking and investing in talent development and management. Other aspects such as the financial metrics, operation efficiency, maintaining a performance based culture with a positive company mindset and effective leadership were also considered under internal routes. External routes consisted of factors such as effective marketing business differentiation, the ability to penetrate new market space, develop new products, being able to segment and target new customer groups and investing in channels for the future, networking, ease of contact and eventually the industry based alliances and internationalisation. The interactive route between the customer staff and the segmented customer on the other hand consisted of customer centricity which was regarded as very important and others such as operational processes which were customer based ethical practices and values, the maintenance of consistent customer service levels and responsiveness. Growth requirements He next looked at the growth requirements within mandated governance practices, pointing out that profitable growth can only come through entrepreneurship and building economic value. Ambitions such as reaching a 100 billion GDP by 2016 was important but it needed to be converted to the contributions by sector and figures. The growth requirements therefore could be categorised into ‘knowing how much and how soon’ which was directly linked to sustainability and knowing your growth drivers which were the people inside the organisation who needed to be given recognition and growth leadership strategies. Other factors of growth requirements included knowing one’s customer, segmentation of ‘growth’ customers, good customer relationship and being able to quantify results. The current product portfolio within the finance industry in this country consisted mainly of items such as the hire purchase and leasing of motor vehicles, micro credits, leasing of machinery and equipment, loans for land purchase and education, which were achieved through fixed deposits, saving deposits and bank loans which in comparison with those of other countries revealed that many areas were still untouched by the local sector such as new pathways especially in the SME sector through venture capital, informal equity financing, factoring invoice discounting, asset base financing and even financial intermediation through capital markets. There is massive growth taking place currently in Indonesia, in pensions, insurance, and affiliations with commercial banks. Are we doing this? Does it put us into an even more competitive position than we are in currently? These are just some of the suggestions put forward. The routes to growth may well be beyond what we are currently engaged in. Need for change He stated that the desired outcome of thinking about these new moves could be identified as achieving corporate identity, new business results and significant contribution to the national economic ambition. This ultimately spoke of the need for change at organisational level and governance, ethics and compliance being engrained into the organisation. The need for change was felt in all three departments of internal, external and interactive levels. “Internally, it is brought down to the individual level and then team based accountability together with good organisational leadership. Interactively, the interpersonal dialogue and consensus between one’s self and one’s customer group improves levels of engagement. The solution speed in turnaround time helps the path towards customer attention through better and improved levels of customer experience management. In doing so we build sound relationships with our customer groups and with the external members of our business community,” he stated. Intervention methodology Prof. Massingham concluded his presentation by referring to an intervention methodology at industry and corporate level which involved a seven step process referred to as the ‘Soft Systems Methodology’. “It needs to start off by confirming the issues, challenges and problem themes of those people who are involved at sector level and organisational level. This method is based on looking at the big picture and getting all the elements inside that to understand where the tensions lie and where the enablement can be made for the future, and from there produce a statement for the future which is known as ‘The Root Definition’ that outlines the transformations that are needed to secure brand equity and identity and ensures well segmented customer loyalty. In doing so we could raise the profile of the industry sector,” he added. This statement which may take the format of a mission statement could be much more detailed and could assist in the development of a conceptual framework to re-evaluate the business model and the business processes to deliver a sustainable customer experience. Such a customer experience will then enable the company to look at the changes that are needed to secure a regulated market space and will become the bedrock upon which a strategy road map could be built for the industry as well as for its members which can ideally be endorsed and supported by the Central Bank and its governance teams. In following this road map Prof. Massingham noted that each company will then be required to achieve the necessary implementation by way of a project based approach which will be the overall contribution to the economic future of Sri Lanka. This Power Evening was sponsored by RAM Ratings Lanka Ltd. and Dialog Axiata.