Trends in finance and corporate governance in South Asia

Arif Mirza, Head of Policy, MENASA Region of ACCA was invited to present at the Certified Management Accountant’s (CMA) Conference 2015 held in Colombo recently. Mirza is a respected and versatile leader, with specialist knowledge and 

experience in international accounting across Asia and Europe. He has operated ACCA’s third largest 

business market in terms of customer base in a highly complex and risky region; and is currently leading the policy agenda for ACCA across the Middle East, North Africa and South Asia. He is also a non-executive director of FINCA Microfinance Bank Ltd., the Institute of Capital Markets and Technical Advisor on the IFAC Professional Accountancy Organisation Development Committee. Mirza was recently appointed on the Editorial Board of ACCA’s Accountancy Futures international journal 

as well.  Following are excerpts from the media interview:

By Kiyoshi J Berman

Q: What do you think are the major trends in 2015 that shape the infrastructure financing market, especially in the South Asian region?

A: In the South Asian region we see a trend towards investing in infrastructure. From Pakistan, Sri Lanka, India and Bangladesh there is a huge need to invest in infrastructure like roads, communication systems, transport systems, railway and busses. We do see potentially a lot of investment here. But the challenge is governments don’t have enough resources, so they have to rely upon donor agencies to fund that. Even the donor agencies find it difficult because the demand is not in millions but in trillions of dollars. The thing is, how can we get the private sector and public sector to work together? 

For instance, the BRICS countries (Brazil, Russia, India, China and South Africa) recently got together to open up an infrastructure investment bank. They are pulling in resources to base up to a $ 100 billion that would then be used to finance infrastructure projects in South Asia as well. I think there is a good appetite for infrastructure investment here. But then, the accountancy side of it applies once you have got the money. You need to have good financial management over that money so that it meets its expectations.

Q: What are the significant policy issues that need to be addressed if sustainable growth of a corporation is to be achieved? 

A: When one mentions the word ‘sustainability’ automatically you think it’s not only about financial return of investment. No doubt that’s very important for those who invested financially. But these days, in the 21st century it’s about Profits, People and Planet. So one has to see that the environment is looked after and one has to see that people and societies are managed. A lot of investment is also related to maintaining reputation, so there has to be an adequate amount spent on insuring environmental protection so that societies and communities are protected as well; and of course, for the sake of future generations. So it cannot always be about great return on financial capital. There has to be return, maintaining bio diversity and communities. That is where business is heading. 

Q: Do you think the increased presence of capital controls is associated with negative effects on business investment?

A: Well, there is always a dilemma between increasing regulations and compliance in order to protect stakeholders that are shareholders, members of the public and investors. Regulators want to see businesses survive because businesses provide us with products and services and they also provide economic returns in terms of taxation and planet opportunities. But they will only survive and grow if there is some mechanism in place. So there is a dilemma for governments. They want to regulate to ensure businesses grow and survive. 

However, in the business’s point of view, it means more spending on financial functions, internal audit and incurring such expenses. So there is a dilemma for companies. On the whole, societies have to strike the right balance between regulation compliance and the freedom to operate and grow, to enhance businesses. 

Q: What are the effects of the transition of world economic activities towards emerging markets? 

A: There are a couple of things going on with emerging markets. Demographical changes are one thing. In Europe, there are falling birth rates so their populations are ageing which means the younger community is getting smaller and are having to work a great deal to provide for the older populations. Whereas in emerging markets, there is what you call a youth dividend where there are millions of young people. In Asia there are close to 3 billion. Provided that this community is highly trained and skilled, they would drive the global economy. The global economy still needs trained workforce. This is increasingly going to come from countries like Sri Lanka, India, and Pakistan, provided they are highly skilled whether it’s in engineering, accountancy, law or IT and software. 

The other is wealth creation. There is a huge divide in South Asia. The middle classes within South Asia will begin to grow provided they train their young individuals and there is redistribution of income. Income and its quality is really what’s going to hold us back. As long as everybody can get a share of the wealth creation then they will have the spending power to ensure the economies are growing here as well. 

I have been coming to Sri Lanka for the last 10 years and I can see the difference in the infrastructures, the real estate has grown and people are spending more. But what you need to make sure is that everybody is getting a share of that wealth to grow the middle classes. 

Q: Can you comment on the performance of Sri Lankan and South Asian capital markets?  

A: One of the strong points about the economies in South Asia is that the capital markets are increasingly outperforming other markets. The reasons for that are because economies are growing, demand is growing, and lots of foreign direct investments are coming in. 

Now that capital markets in Sri Lanka are regulated with Codes of Corporate Governance and you have many young people who are turning into finance professionals; they ought to support accountability, transparency and promote probity within finance. 

All this is having an impact. So capital markets is not about being able to go up and down, it’s about how smooth they are and how much they depend upon fundamentals like good corporate reporting. If all the companies are achieving excellence in corporate reporting whether it is financial reporting or integrated reporting, it will not only give investors information about financial capital but also about other non financial capital. That allows investors to make more educated decisions, be more patient with their capital, understand the business model better, and understand risks better. 

For capital markets to achieve those things there should be great dealership, directors in place who are compliant and understand the Code of Corporate Governance, there should be boards that are diverse which means equal opportunities for women at that top level. Diverse workforces and great regulation could provide dividends to future investors in the capital markets in Sri Lanka. 

Q: What are the major concerns of corporate governance and the need for greater corporate accountability? 

A: If you think back to 2008 when the global financial crisis happened, it was because of the failure of ethics and leadership at the top level. Enron and Worldcom were two major companies that dominated a large part of capital markets. Because of the failure of governance at the very top, these companies collapsed. This sent shockwaves throughout the markets across the world. This happened due to the fact that a lot of corporate leaders were thinking short term so that they could get quick returns without necessarily thinking about long term consequences. 

After these companies collapsed, a lot of self analysis was done by auditors and the accounting community. As a result, in the US they came up with the Sarbanes-Oxley Act to better management controls. So wherever in the world there are American interest companies or companies that do business with America, they have to comply with Sarbanes-Oxley. That gave rise to generations of codes of audit oversight. 

Creating audit oversight was important. Sri Lanka is one of the few countries in South Asia that has a professional oversight board, to ensure quality audits especially on public interest companies. It protects the public from deviations in share price and ensures that company directors are putting in robust mechanisms of control. 

Q: Can you comment on the code of Best Practices of Corporate Governance and its significance to organisations? 

A: Sri Lanka and many other countries within South Asia have now adopted the Code of Corporate Governance. In Sri Lanka the securities exchange has put that in place. It ensures that the behaviour of the board of directors cascades down the hierarchy of the organisation. It puts in best practices such as having a board with a majority of independent non-executive directors which is one of the few ways we ensure independence in opinion. This also means the role of the Chief Executive and Chairman of the board should be segregated to two different individuals. The other thing is diversity on board because the more diverse the board is, the more you can mitigate risk and get a more diverse opinion. If you have a male dominated board or those from the same school or same education background then you increase the chance of group thinking. So one of the best practices now is having more women on boards and having audit committees. 

Audit committees that are reporting into the board should be manned by the majority of non-executive directors led by an independent chair to provide transparency. These are some of the best practices of Corporate Governance. When you start at the top and set the tone right at the top that will determine the long term success of the organisation.

Q: Can you comment on the role you played in significantly increasing the customer base in ACCA Pakistan during 1997 to 2009?

A: In Pakistan there was a demand for young professionals. The economy at that stage was growing significantly even though now on average it’s growing at about 3.5% GDP per annum, there was a time when it was growing at 7-8%. So the demand for ACCA professionals outstretched the supply. So when we came in, we ensured that opportunity to close the gap between demand and supply would be met in the public interest. 

Economies, especially in South Asia need young professionals to ensure greater transparency, better public and private financial management and better accountability. That’s why when ACCA came in; they saw an important gap in the economy. There were young people wanting to invest in a future career that not only satisfies the short run but also the long run with mobility and economic opportunities abroad. So when they come back, they would invest those skills back into the economy of their country. Overall, I would say countries which have a huge youth dividend can benefit from professional training. 

Q: What distinguishes ACCA qualifications from other accounting qualifications and what would be your advice to ACCA graduates in Sri Lanka who are currently seeking job opportunities? 

A: One of the differences about ACCA is that it’s one of the few professional accountancy qualifications that offer options to young people. If you want to have a career in auditing you can choose auditing papers, likewise if you want a career in management or taxation you can choose those papers. It allows you to create your own options and then choose a career that is relevant to you. 

Also, we have to understand that the world of accounting has become rather commoditised. Most of the processes are automated now, so with the press of a button you can get a computer to do that. Now what do accountants do with their time? Now they have to dedicate more of their time to partnering up with businesses functions such as marketing, production and management. They have to provide that kind of partnering value adding service. Further, they have to learn leadership skills and team working skills. Now most CFOs go on to become CEOs. So no longer can an accountant just sit and enter numbers in isolation. They cannot be introverted anymore, they have to work with people, talk to media and internally to different groups and work with teams. 

Now at ACCA, we are investing and making sure, when our people come into the workplace they can engage with different parties, different managers to get their performance experience requirements. We’re investing in interpersonal and non-financial skills as well because it’s important in today’s work environment.