Forma # 1.ai - ICAB [PDF]

October - December 2011

ECONOMIC OUTLOOK

October - December 2011

CONTENTS EDITORIAL BOARD Chairman Akhter Matin Chaudhury FCA Editor

ISSN 1993-3649

Editorial President’s Desk

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ARTICLES State of the Capital Market and Recent Policy Initiative

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Members

- Al Maruf Khan FCA

Md. Abdus Salam FCA Akhtar Sohel Kasem FCA Azizur Rashid FCA Masih Malik Chowdhury FCA M. Farhad Hussain FCA Md. Humayun Kabir FCA Md. Shahjahan Majumder FCA Amanullah Khan FCA Fazle Rabbi Mohammed Hasan FCA Md. Nurul Haque FCA Kazi Ehsanul Huq FCA Kanai Lal Saha FCA Md. Harun-or-Rashid FCA Md. Akbar Hossain FCA Md. Moniruzzaman FCA M. Abu Bakar FCA Mohammed Jashim Uddin FCA Abu Muhammed Saiful Islam FCA Md. Abid Hossain Khan ACA Kishower Amin ACA Shafiq Musharrof ACA Sujit Kumer Das ACA Zareen Hosein ACA Chairman – DRC-ICAB Chairman – CRC-ICAB

Sustainable Development, Sustainability Reporting and the Professional Accountants

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Harun Mahmud FCA

Member Secretary: Secretary-ICAB N I Chowdhury FCA

- A. N. Raman

Sustainability Reporting - Dr. Aditi Haldar

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Value Reporting for Sustainable Development 22 – Integrated Reporting - Matty Yates

Private and Public Sector Partnership in Resource Management and Reporting

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Stay Hungry. Stay Foolish

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- Jennifer K. Thomson

- Steve Jobs (1955-2011)

Making the Most of Public-Private Dialogue 37 - Kim Eric Bettcher

Strategic Planning in an Age of Uncertainty

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Social Business and Emerging Needs in Bangladesh

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Good Governance and Development

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Bangladesh’s Ready-Made Garments Landscape: The Challenge of Growth

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ICAB News

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- Robert Gjetsund - Robert McNamara - Alison Kennedy

- Khalid Hasan PhD

- Prof. Hafiz G. A. Siddiqi

- McKinseys Report

The Bangladesh Accountant Quarterly Journal of the Institute of Chartered Accountants of Bangladesh

Published by the Editorial Board of the Council the Institute of Chartered Accountants of Bangladesh (ICAB) 100 Kazi Nazrul Islam Avenue, Dhaka 1215 Tel : 9117521, 9112672, 9115340, 9137847 Email : [email protected] Website : www.icab.org.bd Designed & Printed By :

DISCLAIMER "The opinions expressed in this publication are those of the respective authors themselves and do not necessarily reflect the views of the Editorial Board of the Institute of Chartered Accountants of Bangladesh (ICAB) or the ICAB itself."

EDIT ORIAL

The world has become so much smaller not because of airplanes or telecommunication or even the speed with which information spreads across it. Its true size should be measured by the speed with which events in one part of the world impact the rest of it. And invariably this translates into effects on the economy. Political developments in the Middle East instantaneously cause stock markets in Europe and USA to tremble. News of China’s economic slowdown creates shivers in Australia. The Eurozone crisis shook every capital market in the developed and developing world. With the growth of international trade and cross border financing, the economy of every country has become dependent on every other. This makes any economy vulnerable to the weaknesses or vagaries of another, seemly otherwise unconnected. This, and the merciless speed with which international or overseas events impact local economies, makes it imperative to anticipate likely events and plan for them. It is in this context that the Editorial Board of ICAB

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decided to focus on the economy of Bangladesh, and its prospects, in the current issue of the Journal. Material was hard to come by and contribution from members of the ICAB was disappointing. Nevertheless we made a valiant effort to put something worthwhile together. I hope the contents of this issue will add to the knowledge of our readers and give them a better insight into the economic issues facing the Country at this time. On a completely separate note, this will be my last editorial, as the Editorial Board now has a new Chairman. I wish him well and look forward to the standard and contents of the Journal improving with every issue. I must take this opportunity to express my deepest appreciation to all those members of the Editorial Board without whose wholehearted, sincere and selfless support it would have been impossible to have brought out the Journal in its new design and format. I am also deeply indebted to the Senior Assistant Secretary (Press & Publications) of the ICAB who worked tirelessly to

bring out each issue of the Journal as near as possible on time and to the best standards of layout and presentation. I remain however disappointed with the lack of feedback from those who matter most – you, our readers. Without this we are unable to gauge whether and to what extent we meet your expectations of the journal. Meaningful improvement can only come about if you tell us what you consider to be the shortcomings of the journal. I hope you will let the Editorial Board have your views on each issue in future. I know that this will be most appreciated. Best wishes.

Akhter M Chaudhury Chairman, Editorial Board

October - December 2011

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PRESIDENT’S DESK FOCUSING ON ECONOMIC OUTLOOK AND REPORTING FOR SUSTAINABLE DEVELOPMENT Over the past twenty years Bangladesh has been experiencing continuous economic growth. Even following the global meltdown, the rate of economic growth in Bangladesh averaged a respectable growth of around six per cent, which in the context of South Asia is second only to that of India. The Institute of Chartered Accountants of Bangladesh (ICAB) can play a strategic role to ensure sustainable growth and broader economic development of the country. Our leap forward as a nation has been recognized by the UN award we received in 2011 for satisfactory progress in attaining the Millennium Development Goals (MDGs), particularly in reducing child mortality and successfully eradicating polio successfully, a disease that still infects other neighboring countries. In a survey by International Research Office of Japan Bank for International Cooperation (JBIC), Bangladesh advanced to becoming 16th in 2011 from being 29th in 2007 in an international ranking of potential countries for foreign investors and businessman. Companies primarily considered Bangladesh to be promising due to an abundance of inexpensive labor, easy availability of certain raw materials, local market size and concentration of specific types of industry as well as a need for risk diversification. Remittance inflows had hit a decade high at $12.17 billion in 2011, offering the government a much needed cushion against dwindling

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foreign exchange reserves and exchange rate volatility. Remittances grew 10 percent in 2011 from the previous year. The latest growth in remittances comes as more workers are joining the bandwagon of more than 7.6 million Bangladeshi migrants, 80 percent of whom working in the oil rich Middle East. Bangladesh is the eighth largest remittance earning country according to a World Bank survey. In order to reach middle income country group threshold by 2030, we need to maintain our current growth momentum. Focusing on identifying impediments and overcoming these challenges are essential for continuous growth. Constant creation of investments and employment, adaptation to new technology and perpetuating good corporate governance are keys to fuelling sustained long term economic growth. Services of accountants holding a fiduciary position in nation building are crucial for the country’s future prosperity. Accountancy profession is the most effective means to bring about financial discipline, accountability and transparency within a country’s economic activities. Professional accountants are agents indispensable in forging a country’s future by to adhering to their professional code of conduct and inspire confidence in businesses. Their roles as decision-makers, auditors and consultants to ensure sustainable reporting can move businesses towards greater organizational accountability ultimately resulting in

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sustainable development. National and international definitions of sustainability have mainly been derived from the 1987 UN definition from the Brundtland Report. It defines sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” This definition emphasizes that sustainability reporting should recognize the interdependence of economic, social and environmental factors and the importance of intergenerational timescales. It also has a social responsibility element to it - the need to focus on the impact on the poor. Despite an increased demand for corporate accountability the emerging dominant global practice is through voluntary disclosure on sustainability. Sustainability encompasses Corporate Citizenship (CC), Corporate Responsibility (CR) and Corporate Social Responsibility (CSR). Sustainable business practices include energy saving, water saving, reducing green house emissions, concern for bio diversity, forestation, poverty alleviation program and conformity with recognized environmental management standards, e.g. ISO 14001 among others. In 2001, ICAB introduced the Annual National Awards for Best Published Accounts and Reports (BPA Awards) of listed companies with an objective to create corporate awareness about the value of timely publishing of audited financial

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statements as well as disclosing of financial and non-financial information. ICAB in its continuous persistence to achieve global standards. BPA Awards are also expected to harmonize Accounting and Financial Reporting Standards in Bangladesh with IFRSs and ISAs. This would in turn aid in attracting more foreign direct investment in the country by making reporting more streamlined and transparent.

broadened the role of the accounting professionals. Apart from specialized traditional accounting and auditing services, the chartered accountants now render many more other important services. There is an increasing expectation that traditional financial reporting boundaries should be extended to include information about environmental impact and corporate social responsibility.

Across the globe, organizations and governments are implementing measures to be more socially responsible. Companies no longer are only accountable to shareholders for sustaining a viable financial return on their capital investment but rather are increasingly expected to act responsibly towards their broader stakeholders as well. The accounting bodies across the globe collectively developed the Sustainability Framework released by International Federation of Accountants (IFAC) which provides guidance to professionals working at senior management levels and supporting decision makers of the organizations. IFAC’s Sustainability Framework can help professional accountants grasp all the important aspects of sustainability that they may encounter, directly or indirectly, in a business. The International Integrated Reporting Committee (IIRC), launched in August 2010, is in the process of creating a globally accepted integrated reporting framework. Members of IIRC include from Accounting for sustainability (A4S), the Global Reporting Initiative (GRI), IFAC, the main global accounting firms (PWC, E&Y, Deloitte), the UN, the International Organization of Securities Commissions, the World Bank, the IMF, the Financial Stability Board (FSB) as observers, the International Accounting Standards Board (IAASB) and the Financial Accounting Standards Board (FASB), as well as from a range of businesses, investors, NGOs and academic institutions.

The emerging global dominant practice of sustainable reporting is voluntary disclosure on sustainability reporting. Under Code of Corporate Governance, organizations reporting should report beyond financial reporting. The credibility gap characterizing sustainability reporting, especially CSR reporting can be bridged by professional auditors providing CSR assurance. Accountants should take the lead in managing risk of maintaining sustainable reporting besides their traditional role in financial reporting. ICAB is persistently working to achieve global standards. But the best is yet to come. To encounter potential economic threats to the society and to play the role of partner in economic growth, ICAB must and have taken up the challenge to educate the members through continuous professional development and to uphold the mandate of preserving public interest. The enhanced capacity of ICAB will enable timely implementation of international good practices on accounting, auditing and corporate financial reporting.

The increasing emphasis on corporate reporting has greatly

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ICAB as an Institute needs a greater focus on reporting for Sustainable Development. This is a particularly relevant and timely topic in an era of climate change and environmental concerns with heightened demand for reliable information flow and decision-making process. Sustainable development within business creates value for customers, investors and environment. This is the time for the top management to ensure their businesses give back to

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their communities and our planet. We must develop strategic plans for long-term sustainability through collaboration among accounting professionals, government agencies and business leaders. Rapid globalization has been accompanied by challenges pertaining to environmental, social and economic changes. These challenges require businesses to be both transparent and accountable. Sustainable development recognizes the interconnectedness between economic, environment and social performance ensuring that economic advancement does not damage the natural environment and the community it serves. It helps businesses deliver superior financial performance by looking ahead into future with long-term strategic planning. It also provides new business opportunities to organizations in the short-term. There should be wider incorporation of Sustainable Development Reporting (SDR) within businesses in Bangladesh and elsewhere in Asia. SDR is a major component of an overall management approach designed to align an organization’s strategic objectives with sustainable development goals. SDRs are publicly available reports that provide a clear understanding of an organization’s sustainable development vision, values and principles, information on economic, environmental and social performance, and management’s commitment to improvement over a timeline. SDR is an effective tool for businesses to identify its economic, environmental and social impacts, assess its performance in these areas, make improvements, and identify new opportunities consistent with goals of sustainable development. Sustainable Development is a holistic and integrated concept that recognizes the importance of, and interrelationships among the various aspects of economic environment and social performance. It refers to the forms of progress that meets the needs of the present without

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State of the Capital Market and Recent Policy Initiative Al Maruf Khan FCA

Market perceptions of policy

announcements depends on how markets perceive the underlying problem that needs to be addressed through policy measures and whether the announced policy measure is timely, appropriate, sufficient, and credible to address this problem. In one of the most recent initiatives to stabilize the market, Securities and Exchange Commission on 23rd November 2011 announced ten short term measures, four mid term measures and six long term measures. I shall distinguish categories of announced package in five major areas: (i)

fiscal policy: package includes revisiting some of the previous budgetary announcement on capital gains, reducing tax on brokers etc;

(ii) monetary policy: which remained unchanged indicating high interest rate phenomena with contraction policy, government borrowing with deficit financing as a characteristics with no effect on package or vice versa. (iii) liquidity support: Package includes Bangladesh Bank’s agreement in

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extending the timeline to 31 December 2013 to bring down single party exposure limits; understanding from the bank, leasing and insurance companies that they would invest more in capital market. (iv) financial sector measures: package includes bringing the overall exposures within the limit as well as relaxing some of the definitions of exposures, interpretations of shareholdings by the banks in subsidiary companies allowing opportunity for fresh equities, arranging speedy remittance for foreign brokers, allowing some of the accounting adjustments like gain / loss net off overlooking prudence concept etc. v)

Good governance policy: Maintaining minimum 30% shares by all directors/ sponsors including minimum 2% shareholding by directors with some exceptions with subsequent notification issued by the SEC on 7th December 2011 for ease of implementation.

Some of the initiatives taken in the form of this package, which I would call as “targeted policy”, aimed at achieving

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THE LAST CHALLENGES, IS CONTROLLING THE MULTITUDE OF FACTORS INCLUDING VARIOUS ANNOUNCEMENTS BY VARIOUS PARTIES THAT MAY HAVE BEARING ON certain immediate result. For example, initiatives to hold certain percentage of shares by the sponsors / directors, understanding for participation in capital market by financial institutions etc. The involvement by these two parties in the capital market is a common feature. However, for this period of time, this is an action oriented policy to be implemented immediately. Since the announcement, the market has so far seen slow but positive response. Announcement from few of the directors has brought in some kind of hope amongst the frustrated investors. The investors are still feeling shaky as previous announcements from various parties to the package in some cases raised uncertainty and information asymmetry. Should this attempt fail or reflect some kind of uncertainty, this may affect market stabilization and defeat this targeted policy. We observed strong market sentiment in favour of the package as we noticed that announcement of associated parties created immediate increase of turnover. It

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should be our joint commitment and efforts that the targeted policies are implemented as planned.

MARKET RESPONSE. FOR EXAMPLE, INACTION OR SLOW

Targeted policies, I would call unconventional policies, which are likely to show immediate impact on the market itself, however, it is very difficult to assess its long term sustainability.

ACTIONS BY BANKS

The announcements of other kinds of policies are likely to affect the market. For example, although both monetary and fiscal easing aim to support macro economic objectives, the impact of monetary easing on credit and liquidity likely to be stronger on capital market as it directly relieves funding pressures and increases market demand for shares. Impact

MEASURES BY

AND FINANCIAL INSTITUTIONS AGAINST ANNOUNCED THEMSELVES, DELAYED RESPONSE BY SPONSORS TO BUY BACK THEIR REQUIRED HOLDING OR SEEKING COURT INTERFERENCE NOT TO IMPLEMENT SUCH DIRECTIVES MAY AFFECT THE REVIVAL OF THE MARKET.

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could be reverse if a tighter policy is adopted. Announcements of liquidity support like extending time for bringing down the exposure over the next two years even if reduces immediate pressures, may have an ambiguous impact if markets are uncertain whether the liquidity provision could mask underlying problems. Like what is next? We have seen the market beginning to shoot up during the caretaker government when real investment was down, banks were sitting on liquidity, BOP surplus, interest rates were low etc. Many industrialists diverted their working capital in the sector and finally the financial institutions themselves got involved in the spiral process. Huge bubble against limited supply was created, burden of which is now borne by the small investors. Many sponsors and directors dumped as much as they could in the market. Does it also not correlate that poor economic opportunities in macro economic perspective push the market upward? Does it not indicate institutions and individuals behaved in the same manner when there was lack of supervision? Does it not indicate that market regulators failed to look after movement of the insider traders? The onset of the crisis was identified in July -August 2010 and both the stock exchange came out in public in September 2010 to discourage the investors informing factors inherent in the market. Aggressive use of monetary and fiscal availability by the institutional players, moving away from core business under a less regulatory supervision gradually

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eroded policy room available to authorities. Sharp enforcement initiatives by the regulators as well as fiscal disincentives offered by the authorities shook the fast growth of the market. As we are trying to bring back the market confidence, we need to

their appropriateness, timeliness, feasibility and ultimate implementation. We must not forget that this is a sensitive market which is regulated by law where any directed and intentional announcement which is not true and which directly and indirectly affects the market is a punishable offence. Objective of the capital market is to raise capital for the industries and create exit and entry for the shareholders of diverse group. The over or undervalue of stock should be taken care of market force itself. Policy of the market should be such that each party plays its role. Institutions should behave befitting to its standard and they would look for long term investment prospect and strict policy guidelines should be introduced to deter this kind of vulture investors.

ensure similar situation does not arise at the same time parties involved in the erratic process should participate actively to control the damage. The last challenges, is controlling the multitude of factors including various announcements by various parties that may have bearing on market response. For example, inaction or slow actions by banks and financial institutions against announced measures by themselves, delayed response by sponsors to buy back their required holding or seeking court interference not to implement such directives may affect the revival of the market. I would also focus on the credibility of the announcements as well as on market participants’ beliefs about

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With little caution, monetary policy as well as fiscal policy should be coordinated in such manner that it synchronizes with capital market objective of the government. We all hope that there will be good coordination amongst the parties this time.

The Author is the President of Chittagong Stock Exchange Limited and the Vice Chairman of NOB Capital Limited

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Sustainable Development, Sustainability Reporting and the Professional Accountants A. N. Raman

Sustainable development is a process of

change in which exploitation of resources, the direction of investments, the orientation of technological development, and institutional change are all in harmony and enhance both current and future potential to meet human needs and aspirations. -----Brundtland Commission, 1987 Sustainability means that we pay attention to the entire life cycles of our products and to the specific and changing needs of our customers. ---- Business Council for sustainable Development 1992 (BCSD) BCSD declaration brought in the three elements of • Corporate Social Responsibility • Environmental Responsibility • Economic Viability All the above three elements combine into the now famous Triple Bottom Line and its reporting.

Brief History of Sustainability 1919 ILO concerns after World War I to discuss about social responsibility on humanitarian considerations. Declaration

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of ILO principles in 1944 ranging from freedom of bonded labour to occupational safety and health, freedom of association etc. Addition of environmental concern in 1960 due to relentless development efforts of the West rooted in greed and thoughtless degradation of resources. Formation of Club of Rome in 1968 to develop understanding on the finite nature of earth resources . Resulting in 1972 Report of the Club of Rome project on the Predicament of the Mankind 1972 conference of the United nations and the Stockholm declaration: “ The natural resources of the earth , including air, water, land, flora and fauna and especially representative samples of natural ecosystems must be safeguarded for the benefit of present and future generations through careful planning or management a appropriate. The discharge of toxic substances or of other substances and the release of heat , in such quantities or concentrations as to exceed the capacity of the environment to render them harmless, must be halted in order to ensure that serious or irreversible damage is not inflicted upon eco systems. ------Stockholm Declaration 1972

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1983 efforts of Perez de Cuellar and the constitution of the Brundtland commission. Commission expresses concern on the rate of destruction outstripping scientific abilities to resolve them and the need for global strategies for more sustainable development paths. Recommended a conference on Environment and Development leading to the earth Summit in Rio de Janiro in 1992.Rio summit brought into its fold both environmental and social concerns resulting in Agenda 21. The Rio Summit was also followed by a UN Conference resulting in the formation of KYOTO protocol and commitment of the leading nations to bring the green house emissions to 1990 level. Again in 1999 Kofi Annan of UN made the world embrace Global Compact to bring in the business world and the private sector thus making it an agenda of the business and not only the Government. The World Summit on Sustainable development of Johannesberg in 2002 brought a coomitment from all nations to involve the business community and all stakeholders to have a serious agenda on the following three aspects of sustainability : • Social Responsibility • Environmental Responsibility • Economic Viability Following the Global Financial Crisis of 2008 and the melt down the G 20 nations discussed the same subject in the context of changed economic reality of the world and called for inclusive and sustainable growth. This is further accentuated by the Euro Sovereign Debt Crisis/ The emerging nations and developing nations need to grow through only exploitation of resources and the developed nations cannot put brakes on this fearing their competitive disadvantage.

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Sustainable Development of SAARC region There is a view point that the sustainable growth strategies are being enforced on the non OECD nations owing to fear of the loss of competitive advantage by the OECD group. The work done so far clearly indicates that the emission responsibilities lie more with the developed nations as the current situation is a culmination of the mindless exploitation by the West. On other hand Western nations are trying to impose a minimal norms on the emerging and developing nations on the plea that the growth process should not further aggravate the problem already caused. United States is one nation leading this argument. While environment dimension can be central to the sustainable development of the West , we in the SAARC region have altogether different concern. Events of this nature should discuss such issues in depth and also carve out the role of the professional accountants. Led by the growth story of the Indian economy clocking a GDP rate of almost 9% the SAARC region is facing a blistering pace of growth. While the rate of growth of the region looks attaractive we have the basic issues making it inclusive so that the benefits of the growth reach the bottom of the pyramid. There is still a significant check of the population to be lifted above the poverty line and cannot be left out during the growth process.

FOLLOWING THE GLOBAL FINANCIAL CRISIS OF 2008 AND THE MELT DOWN THE G 20 NATIONS DISCUSSED THE SAME SUBJECT IN THE CONTEXT OF CHANGED ECONOMIC REALITY OF THE WORLD AND CALLED FOR INCLUSIVE AND SUSTAINABLE GROWTH. THIS IS FURTHER ACCENTUATED BY THE EURO SOVEREIGN DEBT CRISIS/ THE EMERGING NATIONS AND DEVELOPING NATIONS NEED TO GROW THROUGH ONLY EXPLOITATION OF RESOURCES AND THE DEVELOPED NATIONS CANNOT PUT BRAKES ON THIS FEARING THEIR COMPETITIVE DISADVANTAGE.

The sustainable growth strategies for the SAARC region will have to therefore address the following challenges : • Meeting the rising demand for energy through expansion of renewable or clean sources. • Adapting technology which will mitigate the impact of fossilized fuels usage. • Preserving the rich bio diversity of the Himalayan and other regions

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and at the same time exploiting the resources which may be otherwise not harnessed. • Adapting to a life style which need not follow the western model but ath the same time does not add to the problem while improving the standards of living. • Managing the development process without causing social unrests and political unstability. • Ensuring the benefits of the direct intervention policies of the SAARC Governments reach the needy and the poor. • Ensuring amelioration of the living conditions of the masses in the rural areas. • Ensuring the development of high quality world class infrastructure in a balanced way and establish a pricing policy of the same so that it benefits the common man. • Designing products and services of consumption considering the people at the bottom of the pyramid instead only focusing on top premium products. The above list is not exhaustive. But the above all to be met with the growing challenges of terrorism and other forces of destabilization in the SAARC region.

Contextual Role of the Professional Accountants in the SAARC The role of professional accountants from the premier accounting bodies of the SAARC region should be seen in the above context. Bodies like SAFA can play a major role instead of a subdued existence as an ornamental body. SAFA for example can play a major role in coming up with solution framework to issues of addressing the sustainable pricing of infrastructure in SAARC region. This would not be a necessity in other parts of the world.

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Development of a Competency Framework of Accountants Driving Sustainability can become a major tool in the hands of SAFA member bodies to be on the cutting edge of the subject. Such a tool can conceptualise the skilling required for the SAFA accountants on sustainability and prepare an Expectation gap. Irrespective of the size of the member body , we should strive towards such common goals instead of constantly resting on scale laurels of the region. The standards of external reporting while surpassing global standards, the knowledge levels on the same and their adherence also should be impeccable. This is going to be very important as the growth in the SAARC region needs enormous global investments. The global investment community besides any one else should have an impeccable faith in the reporting and competencies of the public accountants of the region. This alone can bring down the cost of capital and ensure financial security for the SAARC region. In this regard SAFA has a major role

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in becoming a facilitating body and not a oversight body for the region.

PART TWO ------- ON SUSTAINABILITY REPORTING (Extracted from IFAC PAIB Committee report to the IFAC Board) Developments in sustainability reporting have been staggering on the one hand, and present various challenges moving forward. Some of the most significant developments in business reporting over the last 20 years have been driven by corporate responsibility issues. Sustainability reporting, at least in larger listed companies, has taken off helping to foster a broader based stakeholder view and incorporating non-financial measures and greater narrative reporting. To some extent, developments in sustainability reporting have been dealing with the limitations of conventional financial reporting, which was seen as narrowly focused and excluding a wide

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range of non-financial issues and concerns. But there are challenges ahead, not least the additional complexity and length of reporting that can result from disclosures on governance, social and environmental issues. In general, as investors increasingly determine share price valuations and base their perceptions of management credibility on their expectations of future cash flows, they are demanding a better analysis of opportunity and risk, and more forward-looking financial and non-financial information. In addition to environmental and other sustainability issues, non-financial information also includes a range of indicators, such as on customers, employee performance, and levels of innovation. Presenting a coherent and useful picture of the underlying economics and performance of a company is a complex task with few easy answers.

Building Blocks of Sustainability Reporting The components – Ethical responsibility and sound governance – Climate change and carbon reduction – Employee relations and human rights – Providing social and economic development within communities.

change agents. The advantage to thinking about stakeholders residing in a linked ecosystem, is that we can more readily accept and understand the roles of various stakeholders and how they can influence improvements and contribute to sustainable societies. Companies: Lead the way in implementing sustainable business models, and making sustainability issues mainstream by dealing with them as part of an organization's strategy and performance management and integrating them into reporting and disclosure. The successful implementation of sustainability practices rests with organizations. Investors: Analysts and brokers can incorporate ESG into their mainstream research. Asset managers reward ESG research and integrate it into their investment processes, including using ESG issues into financial analysis, and as a positive or negative filter in portfolio construction. This can also be combined with shareholder engagement activities.

Regulators/stock exchanges/governments: Governments and regulators can implement reporting and

disclosure standards which is happening in many parts of the world driven by government policy. Generally, stock exchanges do not require ESG disclosures as part of their listing rules but many corporate governance standards and codes refer to the inclusion of non-financial reporting in company reports. Several exchanges in emerging markets have taken initiatives to require better transparency and disclosure on ESG related performance and risk factors, e.g. Thailand and China (Shenzen and Shanghai exchanges) have been promoting the publication of annual CSR/sustainability reports on a voluntary basis. In Malaysia, close working between regulators, the exchange and policy-makers led to a transition to mandatory CSR reporting by listed companies. Therefore, clearly there is a role that stock exchanges can play in influencing the improvement of disclosures and reporting of ESG issues (and it was interesting to hear the CEO of Aviva at the recent UNCTAD/PRI Sustainable Stock exchanges conference in NY to promote a policy to ensure that all exchanges include a listing rule to require companies to include ESG disclosures.

In the investor community these issues are generally grouped as ESG (environmental, social and governance) disclosures. An Ecosystem of Stakeholders Sustainable economic growth and sustainable societies depend on a chain of key stakeholders acting as

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Accountants: as creators, preservers and reporters of value in organizations accountants are change agents and can be influential in various roles, including: As strategic business leaders: challenging conventional assumptions of doing business, and establishing a strong business case to highlight what sustainable development means for an organization, and how improved sustainability performance can translate into enhanced business performance; Ensuring that information flows to support decisions and to monitor and report performance go beyond the traditional ways of thinking about economic success; As preparers and providers of auditing and assurance services: providing legitimacy to disclosures and to improve standardization and comparability of disclosures. NGO and wider stakeholders (e.g. academics/consultants) provide sustainability research and objective information to support others in the ecosystem.

Sustainability Reporting: A Positive Lens We have a number of research surveys that provide useful feedback on the scope of adoption of sustainability reporting.

integrated approach. G250 companies are drawn from the Fortune Global 500 list and represent over a dozen industry sectors.

separate their governance, strategy and sustainability. Ten years ago, Coca cola developed its 3-R strategy: reuse, replenish and recycle water.

Three quarters of these G250 companies have a corporate responsibility strategy with defined objectives. Only 13 companies with a strategy did not publish a sustainability report. This shows that companies with a sustainability strategy and objectives are more likely to report on sustainability issues.

The reason for that is twofold. From the strategic thinking of that board, they realized that, to be a good corporate citizen, water use had to be better managed as it is a scarce commodity. Coca Cola’s most valuable asset is brand and reputation, which makes up some 70% of its market capitalization, and from a sustainability perspective, I think Coca Cola shareholders such as Warren Buffett would be concerned if they thought the board hadn’t paid attention to having access to drinkable water in order to continue making Coca Cola around the world. So today, Coca Cola recycles millions of liters of water every day and report on this as part of an extensive sustainability reporting.

The KPMG survey clearly shows the business case for improved reporting and also cites companies’ main motivations for reporting as being ethical and economic considerations.

According to Goldman Sachs’s recent report, Challenges in ESG disclosure and consistency, over 3000 companies produced CSR/sustainability reports in 2008.

The business case is best summed up by our recent interview with Mervyn King (as part of the business reporting interviews highlighted by Charles) in which he said:

The 2008 KPMG international survey of corporate responsibility reporting: 197 of 250 (Global 250 companies) produced CSR reports, rising to 207 for those with an

The world is using natural resources faster than they are being regenerated. When looking at great companies like Coca Cola, their management cannot afford to

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There are also other drivers supporting increased reporting. In the area of climate change, thousands of organizations from across the world’s major economies measure and disclose

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their greenhouse gas emissions and climate change strategies through the Climate Disclosure Project that works on behalf of investors to take action on climate change. CDP is an independent not-for-profit organization holding the largest database of primary corporate climate change information in the world. Investor driven initiatives such as this can substantially impact practice.

Sustainability Reporting: A Negative Lens Scale of adoption is deceiving There around 46,000 listed companies worldwide, so on the whole relatively few with any form of sustainability disclosure, and particularly covering social and environmental issues: the improvements are a drop in the ocean. Only about 15% of the 20,000 companies covered by Bloomberg provide sufficient data about their ESG practices. [according to Paul Abberley, the chief executive of Aviva Investors, a UK-based asset manager]. Furthermore, of the 3000 sustainability reporters around half originate in Europe which therefore leaves scope for improved reporting in emerging markets. Varying quality and usefulness of reporting and disclosures present challenges: • While volume up, analysis is often weak. Laundry list of disclosures but little insight into what they mean in relation to a company’s performance? What are the sustainability risks it is facing, and what are the opportunities being seized. Only a few weeks ago, the UK

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Financial Reporting Council issued a report in which it suggested that CSR type KPIs clutter rep

investors do not find these metrics and indices to be particularly convincing or useful.

• Data consistency is poor: the defacto global standard for sustainability reporting, GRI, is applied with varying degrees of rigor, as are other standards, for example the measurement of GHG emissions using the GHG protocol. Data consistency and reliability is therefore patchy. One needs to be confident in reporting if it is to be useful

• The work of IFAC and many of its members focuses on positioning accountants to deal with the limitations of conventional financial reporting, and embrace a wider range of non-financial issues and concerns.

Specific Developments to Improve Integration

• Timing of a sustainability report can be 6 months or more after the annual report. Decision useful information, particularly for investors probably needs to be more timely

There is no global standard for general purpose CSR/sustainability reporting. The sustainability reporting guidelines issued by the Global Reporting Initiative are widely acknowledged as representing best practice.

• Too often professional accountants are disengaged from sustainability reporting and therefore not positioned to support developments in managing sustainability issues and reporting. This is an opportunity lost for organizations and accountants. Sustainability reporting often driven by specific CSR groups.

However, GRI is typically used in a stand-alone context for a broad range of stakeholders. It is not always seen as working well for the financial community and separate sustainability reports are often seen as detached from the business and providing much greenwash making it difficult to distinguish the important from the not so important.

Two global surveys conducted in 2008 by McKinsey, which canvassed 238 CFOs and investment professionals. "How Virtue Creates Value for Business and Society" stated, among other conclusions, that while investors often see CSR as part of the company's long-term strategy, 50% of the CFOs surveyed view CSR primarily as a compliance issue -that is, avoiding trouble -- rather than a positive force for change.

Therefore new reporting frameworks are being developed to promote sustainability being seen as a key part of the business in terms of strategy, governance, targets, risk management and business performance. Increasing requirements around the global for carbon emissions measurement may help to facilitate greater integration of carbon issues in mainstream reporting, e.g. the Climate Change Bill will require UK businesses to report on their carbon emissions from 2012. Carbon, climate change and supply chain issues are very significant risks for some companies and the investment community is becoming increasingly active in

To add to the challenge according to the McKinsey surveys, many metrics and indices may now exist for evaluating the impact of CSR for CSR sake and most CFOs and

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King III suggests that the Board may delegate oversight of the integrated report to an appropriate committee (either the audit committee or a sustainability committee). The audit committee should oversee the provision of independent assurance over sustainability issues and should assist the Board by reviewing the integrated reporting and disclosure to ensure that it does not contradict financial reporting. CSDB Reporting Framework which is part of the CDP Project:

demanding more information in these areas.

King III code of Corporate Governance King III Code of Corporate Governance for South Africa launched in September: Is now the most advanced code on corporate governance with its key theme around integrating strategy, risk, performance and sustainability to enable stakeholders to make a more informed assessment of the economic value of a company, and this also requires integrating these areas in reporting and disclosure. It is includes a principle (9.2) stating that sustainability reporting should be integrated with the company’s financial reporting. King III proposes integrated reporting to mean holistic and integrated representation of the company’s performance in terms of both its finances and its sustainability. This could take the form of a single or dual report. However, where there is more than one document, the documents should be available at the same time and disclosed as an integrated report.

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CDSB is developing a Reporting Framework to harmonize corporate climate change related disclosures in relation to

The Prince of Wales A4S project is working with a number of case study companies on the implementation of a connected reporting approach e.g. HSBC and AVIVA. The CRF is a reporting model which presents key sustainability information alongside more conventional financial information to give a more rounded and balanced picture of the organization’s overall performance. It explains how all areas of organizational performance can be presented in a connected way, reflecting the organization’s strategy and the way it is managed. The key principles of the CRF are:

o Climate change strategic analysis o Regulatory risks of climate change o Physical risks o GHG emissions reporting The standards says that disclosure should be made in the management commentary section of the mainstream financial report either with a separate CC section, a sub section of risk factors or interspersed within various sections in the MC so linking CC issues with strategy, capital resources, liquidity, KPIS, outlook etc. Best practice is thought to be interspersing. Prince of Wales A4S - the connected reporting framework: This framework develops the narrative reporting of sustainability issues so to encourage organizations to report on the range of sustainability issues affecting their strategy. The opportunities, the risks, the targets put in place for improvement, progress against them and issues for the future.

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• sustainability issues need to be clearly linked to the organization’s overall strategy; • sustainability and more conventional financial information should be presented together in a clear and concise manner, so that a more complete and balanced picture of the organization’s performance is given; • there should be consistency in presentation to aid comparability between years and organizations; • reported information should be aligned with that used to manage the business.

IASB MC In June 2009, the International Accounting Standards Board (IASB) issued the exposure draft (ED), Management Commentary, based on in its 2005 Management Commentary discussion paper (DP) with the same name.

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Framework created by the International Integrated Reporting Committee (IIRC) is the first Global framework for Integrated Reporting. Apart from IIRC, GRI, Prince of Wales project on Accounting for Sustainability (A4S) are making efforts to popularize the discipline around the world. IIRC has released a discussion paper titled “Towards Integrated Reporting: Communicating Value in the 21st Century” seeking views of the stakeholders from all over the world latest by 14th December, 2011.

IASB has intentionally kept the guidance very high level without inclusion of application guidance or illustrative examples. Therefore, unlike the earlier discussion paper, there are no references to environmental or social issues. The ED continues to promote the MC as an opportunity, particularly to provide management’s view of the entity’s performance, position and development; and to complement financial statements with financial and non-financial information about the entity and its performance that is not presented in the financial statements. It is an interesting point of discussion on whether more guidance and specification on what should be included in the MC should be in the IASB’s guidance.

Ceres-ACCA North American Awards for Best Sustainability Reporting Awards are used as mechanism for acknowledging and publicizing best practice in reporting on sustainability, environmental and social performance by corporations

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and organizations and to provide leadership to those companies that are publishing or intend to publish sustainability reports. CERES is a national network of investors, environmental organizations and other public interest groups working with companies and investors to address sustainability challenges such as global climate change. The long-running CERES/ACCA sustainability reporting awards recently recognized the 2007-08 Citizenship Report from GE provides a complete picture of how the company’s sustainability priorities are aligned with the company’s strategic business priorities. The report also presents these priorities in the context of emerging global challenges including climate change and energy, globalization, human rights, water scarcity, and the subprime mortgage crisis.

Integrated Reporting from IIRC and the Discussion Paper The Integrated Reporting

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Integrated Reporting demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, Integrated Reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organization is performing. By addressing the material issues for an organization, an Integrated Report should demonstrate in a clear and concise manner an organization’s ability to create and sustain value in the short, medium and longer term. Integrated reporting supports the creation of long-term sustainable value by bringing together financial and non-financial information on areas that are material to an organisation’s strategy and business performance. India is a nominated member of the IIRC and is represented by a senior executive of the TATA group. Responsible Investment as the future stakeholder groups will insist on integrated reporting and will not be satisfied with financial reporting. ICWAI has been tasked by Ministry of Corporate Affairs, Government of India to lead the initiative of compilation of views

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from various stakeholders through a nationwide consultation process in collaboration with Indian Institute of Corporate Affairs. Accordingly, ICWAI is organizing the seminars/discussion forums/programmes to sensitize the Indian Corporates with emerging form of reporting. Earlier, ICWAI had brought out two monographs on sustainability and the role of cost and management accountant.

Committee, is a web-based tool that positions professional accountants who can influence the way organizations integrate sustainability into their objectives, strategies, management, and definitions of success. It highlights the issues organizations must address to make sustainability an integral part of their business model.

For placing the Integrated Reporting in the DNA of Corporate Reporting, the member bodies of SAFA are organizing a Round table discussion with participation from CEOs/CFOs of the leading organisations. Ms. Matty Yates, Head of International Network, Prince of Wales Project on Accounting for Sustainability (A4S), UK has been invited to make a presentation on the topic at New Delhi, Colombo and Dhaka This is a major enabling role played by SAFA.

• Business strategy • Internal Management • Reporting Perspective

The Three Perspectives:

Latest developments in sustainability reporting covered in the third and fourth perspectives.This framework has been designed to support the efforts of IFAC member bodies to promote and position PAIBs and what they can do position organizations to create long term sustainable value, and to help PAIBs deal with key considerations.

The IFAC Sustainability Framework Version 2.0

FINAL WORD

The Sustainability Framework developed by the IFAC PAIB

Basically due to the WTO commitments and the opening up

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of the Accountancy sector the accountants of the region will basically face competition from accountancy firms emerging in the region from other parts of the world. There is a basic challenge in terms of capacity building not only in terms of scale or size but also in terms of competencies and ability to handle global issues. Though by training and exposure we are aware that the accountants of our region are in a world class , they need to become the thought leaders in various areas. We should aim at setting the standards for the globe. Best practices should be picked up from our region to be followed by the world by bodies like IFAC or IASB or IAASB instead we becoming the followers. This should be the vision of bodies like SAFA.

The Author is the President of South Asian Federation of Accountants (SAFA), PAIB of IFAC and ex CCM of ICWAI

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Sustainability Reporting Dr. Aditi Haldar Thousands of organisations now report on their economic, social and environmental performance, showing that sustainability reporting adds value. If sustainable development is to be reached, the time has now come for sustainability reporting to become standard practice. International principles and objectives for sustainable development were agreed at the United Nations Conference on Environment and Development in Rio de Janeiro in 1992. Their implementation was elaborated on at the World Summit on Sustainable Development in Johannesburg in 2002. In 2012, the United Nations Conference on Sustainable Development (Rio+20) will provide an opportunity to realize these principles and objectives at a time when global sustainability challenges are ever more critical. In practical terms, how can the world manage the transition to a Sustainable Economy in the context of sustainable development and poverty eradication? This proposal suggests that a Sustainable Economy can only be achieved if information on economic, social and environmental performance - the three pillars of sustainable development - is widely available to decision makers, including governments and private sector organizations. If businesses and all other 1

organizations monitor and report data on their sustainability performance, they will have the vital information needed by executives to manage risk and identify sustainability opportunities. This would them engage with stakeholders, and help financial markets work efficiently, in a shared effort to pave the way to sustainable development worldwide. This information is also needed to monitor the effectiveness of sustainability policies, and to help in the development of new macro-level metrics such as national Sustainable Development Indicators. By looking beyond traditional GDP, this would enable a more comprehensive measurement of wellbeing, environmental health and the progress made towards a Sustainable Economy.

Background on sustainability reporting Governments first referred to environmental reporting at the United Nations Conference on Environment and Development in 1992. In Agenda 21 of the Conference, governments agreed that business and industry should be ‘encouraged to adopt and report on their environmental records, as well as on the use of energy and natural resources’. 1 Building on this, the World Summit on

UNCED Agenda 21, Chapter 30, para 10(a).

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Sustainable Development also underlined the importance of reporting by noting the need to enhance corporate environmental and social responsibility and accountability, including through actions such as ‘public reporting on environmental and social issues’. 2 Organizations worldwide are increasingly integrating sustainability into their overall strategy to ensure they operate responsibly and sustainably. A 2011 report by KPMG shows that 62 percent of the companies surveyed have sustainability strategies in place, compared to just over half in 2008.3 According to a recent McKinsey survey, more than 50 percent of executives consider sustainability “very” or “extremely” important in a wide range of areas, including overall corporate strategy.4 Sustainability reporting is an important gauge of the improvement of a business’s sustainability: it enables companies to measure, monitor and manage their impact on society, the economy, and a sustainable future. 5 Businesses generally seek to make a profit by pricing competitively and driving down costs. Costs are not just set against financial accounts, but also economic, social and environmental ones. A growing number of organizations recognize this and are beginning to act upon it. The practice of sustainability reporting was given support in 1997 when the idea of creating a global framework for sustainability disclosure was conceived and the 2 3 4 5 6

Global Reporting Initiative (GRI) was founded. Publicly inaugurated at the UN Headquarters in 2002, GRI produces what has become the leading global framework for sustainability reporting. Key features of GRI’s Sustainability Reporting Framework include its: • Comprehensive scope, covering the main sustainability issues • Continuous development, reflecting user experience • Multi-stakeholder developed framework and governance model • Universal relevance, including for private sector, public agency and civil society organizations. 6 Comparability between different frameworks and principles is very important for sustainability reporting. Various regulations, standards and initiatives now recommend or require such reporting. This is why GRI collaborates closely with other organizations, including the United Nations Global Compact (which requires Communications on Progress), the Organisation for Economic Cooperation Development (whose Guidelines for Multinational Enterprises recommend disclosure on social and environmental performance), the United Nations-backed Principles for Responsible Investment initiative (which specifically encourages use of the GRI Framework), and the International Organization for Standardization (whose Standard on Social Responsibility encourages reporting). By working together to harmonize with these organizations, current and potential reporters have clarity and consistency to make their respective contributions to a sustainable global economy.

THOUSANDS OF ORGANISATIONS NOW REPORT ON THEIR ECONOMIC, SOCIAL AND ENVIRONMENTAL PERFORMANCE, SHOWING THAT SUSTAINABILITY REPORTING ADDS VALUE. IF SUSTAINABLE DEVELOPMENT IS TO BE REACHED, THE TIME HAS NOW COME FOR SUSTAINABILITY REPORTING TO BECOME STANDARD PRACTICE.

WSSD Plan of Implementation, para. 18 Corporate Sustainability: A progress report, http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/corporate-sustainability-v2.pdf How companies manage sustainability: McKinsey Global Survey results, www.mckinseyquarterly.com/ How_companies_manage_sustainability_McKinsey_Global_Survey_results__2558 Harvard Business School, I. Ioannou and G. Serafeim, The Consequences of Mandatory Corporate Sustainability Reporting: http://www.hbs.edu/research/pdf/11‐100.pdf. For more information on sustainability reporting, GRI and the Sustainability Reporting Framework, visit www.globalreporting.org.

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The market case for sustainability reporting

The business case for sustainability reporting

business case is building as uptake of reporting increases.

Thousands of organizations worldwide now produce sustainability reports. Research shows that in 2008 nearly 80 percent of the largest 250 companies worldwide issued sustainability reports, up from around 50 percent in 2005. 7 In producing such reports, these companies assess the sustainability dimensions of their activities and report their policies and performance. Among these reporters are innovators, leaders and early adopters of sustainability reporting. These companies represent an enormous pool of experience and expertise that continues to contribute to better disclosure and transparency.

Some organizations are now producing integrated reports, a form of corporate report that brings together financial performance data with material information about an organization’s strategy, governance, performance and prospects in a way that reflects the economic, political, social and environmental context within which it operates. An integrated report provides a clear and concise representation of how an organization creates value, now and in the future. Although a relatively new concept, work is underway for its development and wider adoption. In August 2010, the International Integrated Reporting Committee (IIRC) was established to create a globally accepted framework for integrated reporting. The objective is that through integrated reporting many more companies and their stakeholders will become aware of sustainability performance measurement and disclosure and start acting on this information. 9

The internal and external value that companies have found in sustainability management and reporting is widely documented. Sustainability reporting increases innovation and competition and at the same time makes organizations more accountable for their impacts. 8 The evidence for the 7 8 9

Recent years have seen an increasing interest from markets in sustainability performance data disclosed in reports. Investors look for positive returns, either by holding stock or by trading it, and study markets to see how they will develop. Markets are hindered by incomplete data, making it difficult for to assess risks or opportunities arising from sustainability issues. This is why information brokers such as Bloomberg now offer environmental, social and governance (ESG) performance data on thousands of companies on more than 350,000 terminals worldwide. Bloomberg’s competitor, Thomson Reuters, also offers ESG information to clients, while rating agencies such as Standard & Poors have created ESG indices for India, Egypt and the MENA region. While the number of reporters is growing, including in emerging economies such as Brazil, China and India, and the quality of reporting improves, sustainability reporting is yet to achieve its full potential. Although reporting is increasing and mainstream financial analysts have already started to include sustainability information in their analyses, the adoption of sustainability reporting is too slow. At the current rate it would take decades before sustainability reporting is common practice across global markets. An estimated 4,500 organizations are included in sustainability reporting databases, a fraction of the more than 45,000 publicly traded companies that are required to

See KPMG International Survey of Corporate Responsibility Reporting, 2008: http://www.kpmg.com/LU/en/IssuesAndInsights/Articlespublications/ Documents/KPMG-International-Survey-on-Corporate-Responsibility-Reporting.pdf. See above and Steve Lydenberg, Jean Rogers, David Wood, From Transparency to Performance, Industry-Based SustainabilityReporting on Key Issues: http://hausercenter.org/iri/wp-content/uploads/2010/05/IRI_Transparency-to-Performance.pdf. For more information see: www.theiirc.org and http://www.globalreporting.org.

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Landmark developments demonstrate the benefits of a report of explain approach to regulation.

disclose their annual accounts and the estimated 82,000 corporations that do business across national borders in the world today. This means that regulators, investors and stakeholders know little or nothing of the sustainability practices and impacts of the vast majority of the world’s large companies. Markets will not use sustainability information as long as only a minority of companies report. A critical mass of sustainability information is needed to inform markets and enable performance benchmarking and analysis. Companies that do not report withhold from the markets information that is important for the assessment of medium to long term risk and value. By leaving information gaps and creating asymmetries of information, non-reporting companies impose a cost on the markets and undermine its effective functioning. The world needs to move from the innovative and pioneering approach of 4,500 companies to a true global mainstream practice for all companies.

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The case for a report or explain approach During the early development of sustainability reporting, the question was ‘why do you report?’ Reporting on aspects of performance other than financial was not required by managers, regulators or investors. Pioneers of sustainability reporting started the process because they recognized its value to their operations. They recognized that better information was needed to improve the management of their companies, and its relationships with all stakeholders. Continued and growing sustainability reporting by companies demonstrates their assessment that the practice adds value. As sustainability challenges grow, increasing the need for urgent action, the question is now becoming ‘why don’t you report?’. Regulators, managers, employees, investors and consumers all have a direct interest in knowing how companies and other organizations are contributing to sustainable development. Where this information is missing, they have a right to be concerned.

In Denmark, large businesses (including state‐owned companies) have been required by law to include information about their corporate social responsibility (CSR) policies and practices in their annual reports since 2009. Companies must account for their CSR policies (or disclose if none are in place), how these policies are translated into actions, what the companies have achieved as a result, and what they expect in the future. An impact assessment study published by the government in 2010 concluded that the requirement to report was helping motivate more businesses to develop and report on sustainability. In South Africa, the over 450 companies listed on the Johannesburg Stock Exchange (JSE) are required to apply or explain the King Code of Governance (King III). The King Code recommends that organizations produce an integrated report in place of their annual financial and sustainability reports. As King III now falls within the listing requirements of the JSE, listed companies have to produce an integrated report, or explain why they have not. Underlying this requirement was the recognition that sustainability information was nowadays as important to company directors as it was to investors. There are many reasons for governments to adopt a report or explain approach to sustainability reporting by all companies. Level playing field: By establishing the basic principle of report or

More information on the Danish legislation: http://www.csrgov.dk/sw51190.asp. The Study “Corporate Social Responsibility and Reporting in Denmark Impact of the legal requirement for reporting on CSR in the Danish Financial Statements Act” is available at the following link: http://www.csrgov.dk/graphics/publikationer/CSR/CSR_and_Reporting_in_Denmark.pdf.

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explain, a common floor of practice would be established. While sustainability reporting would remain voluntary, companies would still be free to choose what information to disclose. A consistent reporting approach, applied across national boundaries, would make it easier for companies to operate more effectively in global markets and along transnational supply chains. Transparency: A report or explain requirement would help ensure that the information needed by markets and society to assess a company’s management and performance, is provided. This would be based either on reported data, or the explanation for not reporting. Investors and customers would then be able to make informed decisions regarding penalties or premiums they would attach to disclosures, or lack of disclosure. Innovation: By monitoring and reporting their sustainability performance, all organizations would be better placed to consider innovative ways to improve their performance and increase their contribution to sustainable development. Evidence from the last decade suggests that sustainability reporting is a powerful source of innovation, as businesses that report are better able to reduce associated risks, and

bring to market new products and services. Flexibility: A ‘report or explain’ approach would not prescribe how companies should report, leaving space for them to choose their preferred framework, sustainability indicators and standards. This would enable new reporters, including small and medium sized enterprises, to start at a basic level and improve quality and expertise over time. Smart regulation: A ‘report or explain’ policy would be relatively simple to enact and implement. It does not require complex or excessively prescriptive regulation and is fully consistent with current financial reporting requirements. It could be required by governments and public authorities, and also by market actors, such as stock exchanges requiring listed

companies to report or explain, or institutional investors requiring their investment targets to report or explain. Stakeholders would become engaged as part of the reporting process. Markets and society as whole would play a monitoring, assuring, promoting, and enforcing role. Progress towards sustainability: A common ‘report or explain’ approach would ultimately make more and better quality sustainability information available. This would enable markets and policy makers to better monitor progress, provide support, and refine policies, thereby contributing the transition to a Sustainable Economy and sustainable development. The Author is Director, Focal Point India, Global Reporting Initiative

About the Global Reporting Initiative The Global Reporting Initiative (GRI), a Collaborating Centre of the United Nations Environment Programme (UNEP)produces a comprehensive Sustainability Reporting Framework that is widely used around the world, to enable greater organizational transparency. The Framework, including the Reporting Guidelines, sets out the Principles and Indicators organizations can use to report their economic, environmental, and social performance. GRI is committed to continuously improving and increasing the use of the Guidelines, which are freely available to the public. Website: www.globalreporting.org About the GRI Focal Point India GRI entered into a strategic alliance with the Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) to set up the GRI Focal Point India in the framework of the IICA-GIZ CSR Initiative. The IICA-GIZ CSR Initiative seeks, among other things, to develop a sustainability reporting framework and upscale sustainability reporting in India. GRI seeks to disseminate and promote better knowledge of GRI and its Framework for Sustainability Reporting among companies and organizations in India, and to facilitate and promote the active engagement of these organizations in the further development of the concept of sustainability reporting in India and worldwide. To fulfill these common objectives, the IICA-GTZ CSR Initiative and GRI agreed to collaborate in the establishment of a regional GRI Focal Point in India. Contact: Dr. Aditi Haldar, Director, GRI Focal Point India; [email protected]

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Value Reporting for Sustainable Development – Integrated Reporting Matty Yates

Introduction Our economies are facing many challenges - actual and prospective resource scarcity, including energy security and food scarcity; population growth; and environmental concerns, such as climate change and pollution. At the same time, the world is facing unparalleled levels of financial indebtedness, an interconnected global economy and heightened expectations for both government and private sector transparency and accountability. These trends are already impacting economic prosperity and social stability in some regions, and they force us to think hard about how we can develop sustainably – to use our resources to meet human needs in an equitable and economically viable way while preserving the environment, which will allow us to meet the needs of the present without compromising the ability of future generations to meet their own needs. Unless we can properly measure, record and report our activities, we cannot reliably manage our resources to achieve sustainable development. It is clear that the existing reporting model needs to evolve and improve in order to help us achieve our goal.

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The development of Integrated Reporting is designed to enhance and consolidate existing reporting practices…to move towards a reporting framework that provides the information needed to assess organizational value in the 21st century.

Background and History Since the current business reporting model was designed, there have been major changes in the way business is conducted, how business creates value and the context in which business operates. These changes are interdependent and reflect trends such as: • globalization, • growing policy activity around the world in response to financial, governance and other crises, • heightened expectations of corporate transparency and accountability, • actual and prospective resource scarcity, • population growth, and • environmental concerns. Against this background, the type of information that is needed to assess the past and current performance of organizations and their future resilience is much wider than is provided for by the existing business reporting model. While

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there has been an increase in the information provided, key disclosure gaps remain. Reports are already long and are getting longer. But, because reporting has evolved in separate, disconnected strands, critical interdependencies between strategy, governance, operations and financial and non-financial performance are not made clear. To provide for the growing demand for a broad information set from markets, regulators and civil society, a framework is needed that can support the future development of reporting, reflecting this growing complexity. Such a framework needs to bring together the diverse but currently disconnected strands of reporting into a coherent, integrated whole, and demonstrate an organization’s ability to create value now and in the future.

consensus on the direction in which reporting needs to evolve, creating a framework for reporting that is better able to accommodate complexity, and, in so doing, brings together the different strands of reporting into a coherent, integrated whole.

REPORTING IS

Integrated Reporting brings together material information about an organization’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. It provides a clear and concise representation of how an organization demonstrates stewardship and how it creates and sustains value. An Integrated Report should be an organization’s primary reporting vehicle.

AND CONSOLIDATE

The International Integrated Reporting Committee (IIRC) has brought together world leaders from the corporate, investment, accounting, securities, regulatory, academic, civil society and standard-setting sectors to develop a new approach to reporting.

• a meaningful assessment of the long-term viability of the organization’s business model and strategy; • meeting the information needs of investors and other stakeholders; • and ultimately, the effective allocation of scarce resources.

It builds on the foundations of financial, management commentary, governance and remuneration, and sustainability reporting in a way that reflects their interdependence.

Integrated Reporting reflects what can be called “integrated thinking” – which involves monitoring, managing and communicating the full complexity of the value creation process and how this contributes to success over time. It will increasingly

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INTEGRATED

DESIGNED TO ENHANCE

Integrated Reporting

The IIRC aims to forge a global

DEVELOPMENT OF

What is Integrated Reporting?

The benefits of Integrated Reporting Research has shown that reporting influences behaviour. Integrated Reporting results in a broader explanation of performance than traditional reporting. It makes visible an organization’s use of and dependence on different resources and relationships or “capitals” (financial, manufactured, human, intellectual, natural and social), and the organization’s access to and impact on them. Reporting this information is critical to:

Reporting requirements have evolved separately, and differently, in various jurisdictions. This has significantly increased the compliance burden for the growing number of organizations that report in more than one jurisdiction and makes it difficult to compare the performance of organizations across jurisdictions.

THE

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EXISTING REPORTING PRACTICES…TO MOVE TOWARDS A REPORTING FRAMEWORK THAT PROVIDES THE INFORMATION NEEDED TO ASSESS ORGANIZATIONAL VALUE IN THE 21ST CENTURY.

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be through this process of “integrated thinking” that organizations are able to create and sustain value.

An International Framework The IIRC is developing an International Integrated Reporting Framework that will facilitate the development of reporting over the coming decades. The core objective of the Framework is to guide organizations on communicating the broad set of information needed by investors and other stakeholders to assess the organization’s long-term prospects in a clear, concise, connected and comparable format. This will enable those organizations, their investors and others to make better short and long-term decisions. The initial focus is on reporting by larger companies and on the needs of their investors. The Framework will help to elicit consistent reporting by organizations, provide broad parameters for policy-makers and regulators and provide a focus for harmonizing reporting standards.

The Building Blocks Five Guiding Principles underpin the preparation of an Integrated Report. • • • •

Strategic focus Connectivity of information Future orientation Responsiveness and stakeholder inclusiveness • Conciseness, reliability and materiality These Principles should be applied in determining the content of an Integrated Report, based on the key Content Elements summarized below. The presentation of the Elements should make the

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interconnections between them apparent. • Organizational overview and business model • Operating context, including risks and opportunities • Strategic objectives and strategies to achieve those objectives • Governance and remuneration • Performance • Future outlook

Future Direction The development of Integrated Reporting is designed to enhance and consolidate existing reporting practices and, through collaboration, consultation and experimentation, to move towards a reporting framework that provides the information needed to assess organizational value in the 21st century. The next steps that the IIRC will take in this direction

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are to: • Undertake a Pilot Programme to encourage experimentation and innovation among companies and investors. • Develop an International Integrated Reporting Framework Exposure Draft, reflecting responses received to this Discussion Paper and the experience gained from the first year of the Pilot Programme. • Work with others to support the development of emerging measurement and reporting practices relevant to Integrated Reporting. • Raise awareness among investors and other stakeholders and encourage organizations to adopt and contribute to the evolution of Integrated Reporting.

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• Explore opportunities for harmonizing reporting requirements within and across jurisdictions. • Develop institutional arrangements for the ongoing governance of Integrated Reporting.

Your Comments Requested The IIRC has issued a Discussion Paper Towards Integrated Reporting – Communicating Value in the 21st Century, which considers the rationale behind the move towards Integrated Reporting, offers initial proposals for the development of an International Integrated Reporting Framework and outlines the next steps towards its creation and adoption, including the publication

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of an Exposure Draft in 2012. Its purpose is to prompt input from all those with a stake in improved reporting, including both producers and users of reports. The Discussion Paper is open for comments until Wednesday 14th December 2011. If you would like to provide feedback on the Discussion Paper, please submit your answers to the Consultation Questions and any other comments you would like to make to [email protected] or online.

provides a better reflection of organisational strategy. In this way, Integrated Reporting can align the information needed to manage sustainable corporate value creation – thereby allowing investors and other stakeholders to make better decisions consistent with sustainable development.

The Author is Head of International Network, Prince of Wales Project on Accounting for Sustainability (A4S), UK

Conclusion Integrated Reporting, which incorporates a variety of financial and non-financial metrics and their interlinkages, captures a longer-term perspective, and

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Private and Public Sector Partnership in Resource Management and Reporting Jennifer K. Thomson

What are Public and Private Partnerships?

In today’s fast changing global village, Governments have the difficult task of protecting the public’s interest while meeting the diverse needs of their citizens. When people speak of partnership, it is usually in general terms. Hence, Pops is simplistically viewed as a sharing of responsibility between government and the private sector entities but a closer look in the subject will reveal that the scope is considerably broader. There is no hard and fast definition or form of PPP framework. The framework of PPP varies from country to country depending upon local context, needs and priorities. The Canadian Council for Public-Private Partnerships defines a public-private partnership as “a cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly define public needs through the appropriate allocation of resources, risks and rewards.” The PPP in Canada is one of the key tools in its effort to address the emerging challenges facing the country on a wide range of public interest issues.

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The country that has strong PPP framework in South Asia Region is India. It has channeled over US$ 12.6b through PPP to fuel its booming economy. PPP is defined in India as: Public Private Partnership means an arrangement between a government / statutory entity / government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or public services, through investments being made and/or management being undertaken by the private sector entity, for a specified period of time, where there is well defined allocation of risk between the private sector and the public entity and the private entity receives performance linked payments that conform (or are benchmarked) to specified and pre-determined performance standards, measurable by the public entity or its representative. From a practical standpoint, Pops represent a form of collaboration by which public and private sectors, acting together, can achieve what each acting alone cannot. At the heart of all Pops is the deployment of public and private sector resources, a sharing of risks and rewards. With this sharing or resources, risks and rewards, comes the need for high quality resource management and financial reporting, and the accountancy and

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auditing profession, in both the public and private sector, has a vital contribution to make in this regard. Recent experience says effective public – private sector collaboration is often born out of necessity. Many countries witnessed unprecedented public-private partnerships in the wake of natural disasters, environmental issues, developing of cutting edge technology, reconstruction in war ravaged countries and other pressing public policy issues (e.g., healthcare, education, ). In summary, PPP is no longer viewed as an option but a way to meet challenges. The recent financial crises is one of those challenges. The accounting profession around the globe has and is facing significant challenges following the corporate failures over the last several years. Though these high profile failures are the combined effect of multiple factors, deficient reporting alone has immensely eroded investors, shareholders, bankers’ confidence in accounting and auditing practices. This has consequently impacted national economies and has resulted in a loss of public trust in a variety of institutions and parties. This in turn has stimulated standard setters, regulators, and professional bodies, accountability institutions towards repositioning and strengthening roles and responsibilities and for more effective economic and fiscal management at country, government and entity levels.

Transforming Government services: Role of private sector and Accountancy Profession Governments do not generally exist to make profit. Instead, a government is generally concerned with the welfare of its citizens, determining the best way of

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financing the goods and services that it wishes to provide to its citizens and establishing the regulatory framework within which business is conducted. Public sector entities are usually required to demonstrate that to the best of their ability and available resources, they have provided the goods and services required by citizens at least cost. In contrast, private sector entities are usually accountable to shareholders for making a return on funds employed in a competitive environment, rather than for the nature of the goods and services that they have provided. Throughout the course of history, the private sector has flourished with it focus on the objective of maximizing the shareholders wealth, and has brought many benefits and are important in adding value to the management of resources in public sector private sector and PPP endeavours. I would like to highlight some of these: • Developing products and services that add value to the consumers through a deep understanding of the consumers needs derived from continuous research and development. • Deliver personalized value added services that differentiates with competition and gives the sustainable advantage over the long term

I WOULD LIKE TO DESCRIBE DEVELOPMENTS IN PUBLIC SERVICE DELIVERY AND PPP IN SEVERAL SECTORS WHICH HIGHLIGHT THE IMPORTANCE OF ENHANCED PUBLIC SECTOR RESOURCE MANAGEMENT AND REPORTING AND THE GROWING COLLABORATION BETWEEN PUBLIC AND PRIVATE SECTOR ACCOUNTING AND AUDITING.

• Continuous emphasis in selecting, developing and retaining employees with the right skill set • Reduction of operating costs and minimization of waste to enhance profitability by maintaining a culture of continuous cost containment without damaging the business through periodic “slash and burn” cost cutting • Develop a culture of innovation in developing new products and services

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this means greater openness, accountability and transparency. Having sound financial management and reporting in the public sector is an important contributor in achieving greater transparency, accountability, fiscal responsibility and, hence improved governance.

• Elimination of activities that are not aligned to the core values of the organizations and do not add value - consider outsourcing wherever practicable and financially feasible • Reduction of costs and improved service through use of IT as a business enabler; this includes use of global ERP systems and use of shared service centers • Continuously improve procurement processes, organizational redesign and working capital reduction • Developing a high quality information system that aids in speedy and quality decision making • Strengthening and delivering high quality financial reporting for enhanced accountability and transparency in resource management The professional accountancy organization of a country, when properly structured and supported can have a powerful impact and bring greater reform and development for the benefit of the public interest by acting as a center

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of excellence and as a resource for government, regulators, and the private sector to develop the overall economy of a country. The formation, audit and dissemination of high quality financial information both in the public and private sectors increases transparency, fosters confidence in the markets, enhances the effective management of public resources, and furthers country stability and economic growth.

Emerging Private Public Sector Partnership Practices in Accounting and Audit profession Public sector organizations make decisions every day, which significantly affect a nation’s economic, social and cultural well-being. They manage taxpayers’ money and oversee the delivery of key services such as health, education, defense and other services. The general public is demanding good governance both from the public and private sectors. For the public sector, citizens are concerned that government programs are well managed, meeting their objectives and delivering quality services –

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There has been growing trend towards more outsourcing of private sector accounting and assurance service and management consultancy even within traditional government service delivery channels. In a performance based budget framework, state governments nowadays are more focused on the actual service and outcomes rather than mere delivery. Through the integration as well as cross transfer of public and private sector skills, knowledge and expertise have become an increasing means for efficient resource management and timely higher quality reporting and bringing about inclusive development for the people.

PPP in Public Service Delivery Sectors I would like to describe developments in public service delivery and PPP in several sectors which highlight the importance of enhanced public sector resource management and reporting and the growing collaboration between public and private sector accounting and auditing. Health Sector: Healthcare accounts for the largest share of budget appropriation of the governments. Traditionally the sector is dominated by doctors who are also the budget holders but their ability to make optimal use of resources while following appropriate government financial

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rules and monitoring financial performance against results has been much debated. The sector often has Complex public sector accounting and reporting requirements which are labor-intensive and difficult to be managed by non finance personnel and managers. Often the financial reporting practices of healthcare bodies lack the framework and sophistication found in other service sectors and this makes timely decision increasingly difficult. To address these challenges, and in particular to eliminate antiquated paper-based treasury processes, complex accounting and financial reporting practices and to adopt more advanced methods of documenting and reporting financial performance there is growing PPP in the accounting and reporting function in the Health Sector, through such mechanisms as outsourcing, contracting of and in particular with greater involvement of private sector accounting professionals, as well as in management of health facilities and services. This is a big step forward for governments across the world to work hand in hand on all aspects of financial management reporting, auditing, management accounting, and controls etcdelivered by professional finance specialists and making health service delivery transparent and efficient.

analysis to tax implication to timely financial reports are nowadays earmarked for services to be provided by professional accountants. The trend of PPP in infrastructure programs is increasing the demand for enhanced public and private sector reporting Information technology: Technology is rapidly changing the nature of the work of most accountants and auditors both in private and public sector. In recent years, information technology (IT) has played a critical role in the services provided by the public accounting industry. Advances in information technology (IT) in many advanced economy have heightened the collaboration between public sector entities and private sector accounting and audit service providers. State governments have made tremendous progress in recent years in investing and managing their information technologies for accounting and reporting functions. In many cases, public sector and private partnership has been in the forefront of many of these developments. While rapidly changing technology environment requires new thinking and

innovative approaches, government and private sector leaders are strengthening their cooperation and collaboration to reap the benefits of these emerging technologies and innovations. The emergence of accounting information systems has enabled professional services firms and the governments to leverage their human resources more effectively and devise more effective professional education and training. Non-Government and Non-Profit Making Organizations: A spontaneous collaboration has emerged between governments and the accounting profession with non-government organizations and non-profit making organizations starting to play a larger role in the development agenda in many developing economies around the globe. The accounting profession is uniquely positioned for providing financial management services to agencies and in particular to bring higher standard of financial management and reporting to underpin effective resource management, accountability and transparency in the sector. In this regard, it is important to note that various professional bodies, standard setters and regulators

Infrastructure Sector: Investors and financiers look for accurate and timely information for prudent business decision before deploying private investment in large infrastructure projects. Not only is the PPP framework increasingly considered for large infrastructure programs, the whole gamut of services/functions including economic return to cost benefit

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Financial Reporting

have issued Guidelines for Accounting, Financial Reporting and National Accounting standards for Non-Governmental/ Not-for-Profit Organizations.

Accounting for Public Private Partnerships From a government budget perspective, PPPs involving the government buying services move spending from the capital to the recurrent budget or, to put it another way, today's capital investment by the private sector becomes tomorrow's current spending by the government. However, an issue is how governments should account for PPP payments and, in particular, whether they should be brought into the government's balance sheet as debt. When the government issues debt, it has to repay the interest and principal to debt holders. The government records the total outstanding debt as a liability in its balance sheet. Repayments of principal are recorded as reductions in outstanding debt. Critics of PPPs claim that governments can use PPPs to understate debt by not recording in the balance sheet the total value of payments. In other words, PPP obligations are 'off the balance sheet'.

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Therefore accounting for PPPs has become an issue for policy makers to ponder across the various countries. The Accounting Standards Board (ASB) in UK stated that the capital value of Private Financing schemes should appear on the Government's "balance sheet". However, following negotiations between the ASB and the [UK] Treasury, a new version of their note allowed most PFI transactions to be excluded from Government borrowing figures on the grounds that they were "operating leases", not "finance leases". However, this is not the case for most other countries where an accounting framework for PPP is an urgent need but is yet to be drawn up. The public sector increasingly engages in partnering arrangements to determine and deliver public policy. Strengthening the system of public financial accountability calls for the accounting professions- public and private- to work together to help government improve its accounting policies, standards and practices. As business and governments face increasingly complex and challenging issues of our modern and increasingly inter-dependent world, a harmonized approach is the answer to these challenges.

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The International Federation of Accountants (IFAC) the global organization for the accountancy profession through the International Public Sector Accounting Standards Board (IPSASB) focuses on the accounting and financial reporting needs of national, regional and local governments, related governmental agencies, and the constituencies they serve. International public organizations increasingly are using the IPSAS for their financial accounting and financial reporting. Organizations such the European Communities, the Organization of Economic Cooperation and Development OECD, and United Nations agencies such as the World Food Program (WFP) issue Financial Statements based upon the IPSAS. An increasing number of countries are adopting and implementing IPSAS for the financial reporting, while at the same time adopting IFRS for public interest entities as well as State Operating Enterprises. There has been long standing collaboration between Financial Reporting Councils, Accounting and Auditing Standards setting bodies and relevant Government bodies (Supreme Audit Institution or Accountant General Office) in formulation and adoption of IPSAS that best suits the specific country reporting requirements. Through partnership agreements, the professional bodies and the accountancy profession in general are increasingly engaged in working with governments in implementing IPSAS (cash, modified or accrual) as part of enhanced financial reporting and increased disclosure in the use and accountability for resources of government.

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makers and development of the supporting institutional, educational and professional development infrastructure for effective implementation.

Emerging Need for Partnership between Private and Private Sector Audit

IFAC - PSC and IASB have been instrumental in developing international public sector accounting standards and reporting guidelines. However, the adoption and compliance of these standards depends largely on national government’s discretion and willingness to be monitor and enforce compliance with standards. The development of institutional frameworks, relevant standard setting bodies, monitoring and oversight arrangements, and supporting education are key areas for partnership between the public and private sector. This is particularly so in relation to public sector reporting standards, where the need for a central standard setting and regulatory body such as to oversee the adoption and compliance with standards in the public sector is still evolving. Harmonizing the accounting standards for both sectors is an important aim that should be pursued and supported by the accounting and auditing profession. There are also many emerging areas where effective collaboration between the private and public sectors and the accounting

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profession and standard setters is required. For example, environmental accounting" sometimes referred to as "green accounting", "resource accounting" or "integrated economic and environmental accounting" – is a model involving modification of the System of National Accounts to incorporate the use or depletion of natural resources. A new program, the Green Accounting Initiative, is now prompting the accounting and audit profession and regulatory bodies to equip themselves and help improving environmental management. Many countries are starting to respond to the need for harmonization of accounting and reporting standards by adopting a set of common IFRS for government and private entities and stringent enforcement of these standards including sanctions for non-compliance by transgressors. It is recognized that all these cannot be achieved in a short span of time. What is required is a strategic goal and a clear roadmap for adoption of internationally recognized standards and harmonization of financial reporting standards by the policy

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There has been a strong partnership between auditors of both sectors through knowledge sharing and skills for audits in specialized functions and sectors such as IT, climate, new revenue earning entities, highly technical regulatory bodies - telecom and energy, forensic audit in developed economy. The synergy promoted by collaboration has proven extremely useful when governments engage private sector auditors for contract management and complex procurement audits. Likewise auditing private sector businesses and individuals whose activities are subject to government regulations or taxation in a rapidly changing business environment has become a daunting challenge for public auditor and collaboration between public and private sector auditors is bridging the gap. INTOSAI (International Organization of Supreme Organization) is the authority for issuing guidance and principles for public sector audit. The challenges in case of public sector audit continue to be quality assurance and effective regulation and oversight of the public auditing profession. In developed countries, the services of private audit professionals are often contracted by the Supreme Audit Institution to conduct audits of public sector entities and functions. This has proved to be an effective PPP to deliver high quality audit assurance

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Final Remarks

services. The arrangement is promoted as a good practice example around globe.

Building blocks for a successful partnership As with all PPPs, including private and public sector partnerships, there are several key building blocks that are needed for success; • Collaborative partnerships with an intent to meet a common objective or goal, to provide and exchange and share knowledge exchange and a willingness to leverage resources to achieve common goals. • Commitment from Executive Leadership - a commitment from "the top" of both the government and private sector organizations to work collaboratively together. • A well-crafted plan - strategic goals, roadmaps and defined responsibilities in well crafted plans that are allowed to evolve as implementation and progress is made. • Effective communications - open and candid communication to promote the value of the partnership.

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For high quality reporting and improved resource management, effective partnerships between the public sector (government policy makers) and the private sector (accounting and auditing profession) are important. The reach and positive effects of high quality financial reporting and sound resource management are extensive – they include attracting Foreign Direct Investment and strengthening capital markets; furthering the growth and development of the Small and Medium Enterprise Sector; greater transparency and accountability in the use of public funds; sound economic and financial management o f public resources; improving the development and delivery of vital public services; and increasing the ability of international donors to rely on partner country systems. To strive and achieve such impacts results countries need effective private and public partnerships is needed to build and sustain:

The paper highlights various practices and emerging trends in public and private partnerships and provides some insights to the importance of such partnerships in relation to the accountancy profession, oversight bodies, regulators, standard setters and public sector entities and their important role in high quality financial reporting which supports effective resource management. The core of sound financial and economic management is the accountancy profession and it is critical that the public and private sectors act together to enhance reporting and improve resource management. As mentioned in the introduction, the formation, audit and dissemination of high quality financial information increases transparency, fosters confidence in the markets, enhances the effective management of public resources, and furthers country stability and economic growth.

The Author is Manager, Financial Management, The World Bank

• A Strong Professional Accountancy Organizations • Competent & Capable Accountancy Professionals • Effective Regulation and Oversight of Accounting, Auditing and Financial Reporting.

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Stay Hungry. Stay Foolish Text of the Commencement addresses by Steve Jobs, CEO of Apple Computer and of Pixar Animation Studios

I AM HONORED TO BE WITH YOU

TODAY AT YOUR COMMENCEMENT FROM ONE OF THE FINEST UNIVERSITIES INT HE WORLD. I NEVER GRADUATED FROM COLLEGE. TRUTH BE TOLD, THIS IS THE CLOSEST I’VE EVER GOTTEN TO A COLLEGE GRADUATION. TODAY I WANT TO TELL YOU THREE STORIES FROM MY LIFE. THAT’S IT. NO BIG DEAL. JUST THREE STORIES.

The First Story is About Connecting the Dots I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out? It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his wife. Except at the last minute they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later

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found out that my mother had never graduated from college and that my father had never graduated from high school. She refused to sign the final adoption papers. She only relented a few months later when my parents promised that I would someday go to college. And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my colleg tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting. It wasn‘t all romantic. I didn’t have a dorm room, so I slept on the floor in friends rooms, I returned coke bottles for the 5c deposits to buy food with, and I would walk the 7 miles across town every Sunday night to get one good meal a week

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at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on. Let me give you one example: Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn't have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can‘t capture, and I found it fascinating. None of this had even a hope of any practical application in my life. But ten years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography. If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, it's likely that no personal computer would have them. If I had never dropped out, I would have never dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do. Of course it was impossible to connect the dots looking forward when I was in college. But it was very, very clear looking backwards ten years later. Again, you can't connect the dots looking forward; you can only

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connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.

My Second Story is About Love and loss I was lucky — I found what I loved to do early in life. Woz and I started Apple in my parents’ garage when I was 20. We worked hard, and in 10 years Apple had grown from just the two of us in a garage into a $2 billion company with over 4000 employees. W had just released our finest creation — the Macintosh — a year earlier, and I had just turned 30. And then I got fired. How can yo get fired from a company you started? Well, as Apple grew we hired someone who I thought was very talented to run the company with me, and for the first year or so things went well. But then our visions of the future began to diverge and eventually we had a falling out. When we did, our Board of Directors sided with him. So at 30 I was out. And very publicly out. What had been the focus o my entire adult life was gone, and it was devastating.

I DIDN’T SEE IT THEN, BUT IT TURNED OUT THAT GETTING FIRED FROM APPLE WAS THE BEST THING THAT COULD HAVE EVER HAPPENED TO ME

I really didn't know what to do for a few months. I felt that I had let the previous generation of entrepreneurs down - that I had dropped the baton as it was being passed to me. I met with David Packard and Bob Noyce and tried to apologize for screwing up so badly. I was a very public failure, and I even thought about running away from the valley. But something slowly began to dawn on me — I still loved what I did. The turn of events at Apple had not change that one bit. I had been rejected, but I was still in love. And so I decided to start over. I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again,

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Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You have already been exposed. There is no reason not to follow your heart.

less sure about everything. It freed me toenter one of the most creative periods of my life. During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the world’s first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I returned to Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together. I'm pretty sure none of this would have happened if I hadn't been fired from Apple. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to

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fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only wa to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle.

My Third Story is About Death When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly b right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I amabout to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.

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About a year ago I was diagnosed with cancer. I had a scan in the morning and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes. I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas an got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.

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This was the closest I've been to facing death, and I hope it's the closest I get for a few more decades. Having lived through it, I can now say this to you with a bit more certainty than when death was a useful but purely intellectual concept: No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice.

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And most importantly, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary. When I was young, there was an amazing publication called The Whole Earth Catalog, which was one of the bibles of my generation. It was created by a fellow named Stewart Brand. This was in the late 1960's, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and Polaroid cameras. It was sort of like Google in paperback form, 35 years before Google came along: it was idealistic, and overflowing with neat tools and great notions.

country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: "Stay Hungry. Stay Foolish." It was their farewell message as they signed off. Stay Hungry. Stay Foolish. And I have always wished that for myself. And now, as you graduate to begin anew, I wish that for you. Thank you all very much.

This article is reprinted from the Magazine of Bangladesh BRAND FORUM with their permission

Stewart and his team put out serveral issues of The Whole Earth Catalog and then when it had run its course, they put out a final issue. It was the mid-1970s, and I was your age. On the back cover of their final issue was a photograph of an early morning

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Making the Most of Public-Private Dialogue Kim Eric Bettcher

Public-private dialogue has become

widely recognized as an essential component of efforts to reform governance and the business climate. Dialogue improves the flow of information relating to economic policy and builds legitimacy into the policy process. To date, the private sector's role has received less attention than the public sector's role in facilitating dialogue. This article therefore explores the value of private initiative in policymaking and the conditions for successful business participation. Through democratic policy advocacy, the private sector strengthens the dialogue process, improves the representation of economic interests, and creates space for civic engagement in governance. Although the government has the power to invite private participation in dialogue, the quality of participation depends on private action and capabilities. To get the most out of dialogue, private representatives must ensure that the substance of business concerns is addressed, that the process gives voice to a range of private stakeholders, and that government and business find a basis for ongoing communication on vital policy matters.

Aims of Dialogue

improvements over closed or purely technocratic policy processes. It can generate insights, validate policy proposals, build momentum for change, or secure buy-in. By supporting informed and participatory policymaking, dialogue improves governance. Each side has distinctive reasons to participate in dialogue. The government may aim to acquire input on business conditions, bolster legitimacy, obtain support for government positions, or extend its control over the economy. The private sector may aim to draw attention to issues, obtain better representation, secure support for business development, or streamline regulations. In general, business seeks government's assistance in establishing a low-cost, predictable business environment. Dialogue driven by government may take the form of consultation. In a consultative or top-down process, government decides whom it will consult on which issues. The process serves the government's need for information and opens a channel for the expression of private opinions. Although valuable, consultation can be a limited form of dialogue that does not always permit a fuller expression of private points of view.

Done well, dialogue offers substantial

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The private sector also can take initiative in the policy process. By adopting an advocacy approach, it can define the issues, organize itself, and present its own policy proposals. Advocacy-a proactive effort to influence policy-makes business an effective contributor to dialogue. It gives the private sector a voice and ensures that its priority needs get heard.

Private sector representatives should recommend and demand policies-not favors-that benefit a broad spectrum of firms and entrepreneurs. Advocacy can be distinguished from lobbying. Lobbying sometimes implies campaigning for the narrow interests of a small group of people or businesses. Advocacy generates open discussion of recommendations and facilitates better coordination of long-term interests.

Note that public-private partnership is not synonymous with public-private dialogue. Dialogue is designed to include private input into the creation of policy. It involves a mutual exchange of views, including bottom-up contributions to policymaking. Partnerships, on the other hand, can be designed to coordinate investment in public projects, outsource government services, or obtain private assistance in implementing public policy. Such partnerships, typically initiated by government, exclude a broader consideration of private sector concerns.

Advocacy always involves dialogue. This is because advocacy is an attempt to persuade and offer solutions. It seeks areas of convergence, mutual understanding, and relationships with officials who are willing to listen. Yet, advocacy reaches beyond any particular dialogue. It builds pressure for reform throughout society and persists as the private sector presses its case from one conversation to the next.

Advocacy and Dialogue Advocacy is an effort to influence public policy in an open, transparent manner. As a tool of civil society, it addresses issues of broad concern to the community or country, and makes the case for change by presenting evidence and support from civic constituencies. Advocacy supports decision-making while informing and empowering the public. Through advocacy, the private sector shares essential practitioner information and perspectives with government on markets and the business operating environment. Government needs this micro-level input on the economy in order to understand the effects of its policy choices and to create incentives for investment and growth.

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Characteristics of Good Quality Dialogue Good quality dialogue, as judged by the criteria of democracy, effectiveness, and contributions to long term growth, has the following attributes. Quality dialogue is: Legitimate *

THE PRIVATE SECTOR MAY AIM TO DRAW ATTENTION TO ISSUES, OBTAIN BETTER REPRESENTATION, SECURE SUPPORT FOR BUSINESS DEVELOPMENT, OR STREAMLINE REGULATIONS. IN GENERAL, BUSINESS SEEKS GOVERNMENT'S ASSISTANCE IN ESTABLISHING A LOW-COST,

Transparent dialogue inhibits collusion, reinforces accountability, and empowers all constituencies to make informed contributions.

*

Inclusive dialogue promotes a broad range of interests and the public good instead of narrow, sectoral, or partisan interests.

*

Freedom of association and freedom of speech ensure open dialogue.

PREDICTABLE BUSINESS ENVIRONMENT.

Focused - Effective dialogue addresses important issues, has clear objectives, and examines concrete options. Flexible - The substance of dialogue takes precedence over protocol, and the process accommodates evolving issue agendas.

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a good chance of achieving positive results or at least mitigating negative results.

Rooted in civil society - Private sector participants are representative and qualified to speak for their organizations or constituencies. Policy-oriented - Constructive dialogue builds a policy framework that supports long-term growth and rule of law. The following sections lay out the components of dialogue and areas where business leaders can strengthen advocacy. * * * *

Issues Participants Messages Channels

agreeing on its priorities in advance of dialogue. Preparation is essential for three reasons. First, in any negotiation, one must know what one wants in order to articulate a position and bargain for meaningful gains. Second, a unified business message possesses greater credibility and keeps dialogue on track. Third, identifying issues ahead of time allows business to develop preferred solutions to the problems that it raises. In selecting issues for advocacy, business leaders should consider the following factors: *

Issue Selection - What is discussed? A focused dialogue begins with the selection of issues for the agenda. Since whoever sets the agenda enjoys considerable power, the private sector should not leave the agenda entirely in the hands of government. It should bring business priorities to the table and share the lead in framing problems. The private sector must have a process for determining and

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Constituent interest Associations should consult with and listen to their members before establishing what they consider the most pressing issues.

*

Widest benefit - Business should avoid issues that concern narrow interests and give priority to issues that affect multiple sectors of the economy.

*

Feasibility- The private sector should concentrate its advocacy in areas where it has

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The key to initiating productive dialogue is often to find a wedge issue-an issue of wide current interest that prompts action and opens the door for addressing related issues of strategic importance to business. When it is widely recognized that something has to be done about an issue-say, reducing youth unemployment or boosting national competitivenessbusiness can step forward with a plan. It should start with simple measures that build confidence-for instance, establishing a one-stop shop for licensing-and then move toward fundamental policy reform, such as improving oversight of regulatory bodies. In identifying issues, business also needs to know the government's priorities. An institutionalized policy process clarifies what will be decided and establishes channels for responding to those issues. Government should be transparent about its intentions, publish pending legislation, and disclose policy-relevant information.

Private Sector Participants Who speaks for business? The selection of private sector representatives who engage in dialogue influences the interests that are advocated as well as the credibility of business participation. In no country does business have uniform interests. Businesses vary in their size, sector, relationship to government, connection to the global economy, and so on. Thus, it matters who gets to speak for business. Three criteria should govern the selection of private sector representatives:

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1. Dialogue should be inclusive. Expanded participation amplifies legitimacy, builds momentum, and promotes respect for diverse interests. 2. Representatives should be effective: able to speak convincingly, rally business support, and reach agreement with government. 3. Business leaders should have integrity and be committed to reform guided by democratic, market based approaches. Business must have the power to nominate its own representatives, rather than passively accepting the government's choice of spokespersons. In order to enjoy autonomy in dialogue, it must organize itself and decide who can legitimately speak on its behalf. Freedom of association should be respected. Depending on the country, the organization of business interests tends toward either a corporatist or pluralist model of representation. Corporatism structures dialogue through defined channels that are recognized by the state. Under corporatism, nominally all firms receive representation, but in practice corporatist bodies tend not to advocate for member interests.

Apart from the voluntary character of associations, the objectives and orientation of associations are crucial to the quality of dialogue. Some associations attempt to capture the state, redistribute wealth to their members, and restrict market competition. Others promote market solutions and advocate for policies that enhance economic performance within rule of law. The latter offer a better basis for legitimate, broad-based dialogue. Individuals, no matter how distinguished, cannot be relied upon as sufficient representation for business. If they are not linked to business constituencies, they cannot speak with full knowledge of business needs, nor with the forcefulness of organized associations. Individual business leaders may be valued advisors, but without broad-based input there cannot be genuine public-private dialogue.

Messages - What does the private sector say? The private sector must bring well-prepared messages to the table. Preparation involves determining the themes of

dialogue, the positions that business will take, points of receptivity in the public sector, and desired outcomes. Prioritizing themes helps to guide discussion. By articulating high-level themes - such as reducing barriers to business, increasing transparency, or improving infrastructure - business moves beyond a list of technical questions and invites a wide range of stakeholders to focus on issues. Themes shape participants' thinking about policy objectives, clarifying to all that dialogue has broader aims than satisfying particular interests. In order to convert policy objectives into actions, business must present specific recommendations. Through its recommendations, business assists policymakers to take positive steps and demonstrates a willingness to work with government. Recommendations should be derived from member input and policy analysis, and feasible within the current environment. They should be backed by reputable research, possibly performed in conjunction with a think tank.

Pluralism favors open discussion and allows the independent expression of private business interests. Because pluralism is founded on voluntary association, coordinating and sustaining representation can be challenging in pluralist systems. Yet, voluntary representation generates greater dynamism and provides business an independent voice in dialogue. Independent business associations act as key vehicles for articulating business views and facilitating collective action on policy.

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Business must frame its messages carefully, acknowledging that government's role is to serve the public interest. Framing means presenting an issue from an appropriate perspective that connects with the audience's existing values and understanding of the issue. Thus, business should demonstrate how its proposals will benefit public objectives such as job creation or economic growth. For example, instead of arguing for lower tax rates for particular sectors, a business coalition might advocate for a simplified tax regime that will lower business costs, improve incentives to invest, and reduce economic distortions. Or, business might advocate deregulation on the grounds that a streamlined regulatory framework, one which recognizes business realities, will raise the level of compliance and therefore promote public objectives. A good communicator tailors the message to the specific audience. He or she demonstrates empathy for the other side's concerns and uses language familiar to the audience. A good communicator also takes time to listen, tries to understand the reasons for concerns, and asks questions to draw out further information. Although the private sector should definitely have a prepared platform, it should seek opportunities to develop recommendations jointly with government, thereby obtaining buy-in from officials.

Channels - Where does dialogue occur? Dialogue can occur through multiple channels. The private sector should assess openings and decide where to invest in advocacy.

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Business may have representation on existing commissions, task forces, regulatory boards, or at public hearings.

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The government may create special initiatives for consultation or dialogue.

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The private sector may take initiative by proposing dialogue or inviting public sector representatives to participate in its events.

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The private sector can pursue dialogue and advocacy in parallel activities for multiple stakeholders, including officials, business members, media, and civil society.

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A neutral third party such as an international donor or non-profit institute may mediate dialogue. This can help start conversations and build trust, though ultimately domestic business leaders must build capacity and take ownership.

Dialogue typically involves formal as well as informal conversations. Informal conversations can be a valuable means for building relationships, finding flexible solutions, and encouraging the continuous flow of information. They supplement formal dialogue, especially in between formal meetings. On the other hand, informal conversations may create a risk or perception of secret deals. Informal discussion does not replace the need for structured, inclusive, and transparent dialogue. Formal structures permit an ordered discussion, add weight to proceedings, and may be open to the public. They serve to institutionalize dialogue and

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therefore make it potentially sustainable. Formality should not be allowed to stifle conversation, however, and protocol should not overshadow the substance of discussions. After meetings, press conferences held to voice positions and monitor progress can help to assure the public of openness and accountability. Participants must decide whether to hold a general discussion that cuts across issues or to hold focused discussions on particular issues. A general discussion can secure high-level commitment and a coordinated response to issues that affect multiple jurisdictions or sectors. Alternatively, a focused discussion may be better suited to addressing policy details and implementation. Nothing prevents the private sector from participating in a general forum while seeking lower-level action on specific issues. The private sector must have means, though, to coordinate its positions for credibility and consistency.

Preparing the Private Sector for Dialogue Preparation for serious dialogue takes months, during which business leaders assess policy challenges, mobilize stakeholders, and formulate positions. Well-organized associations play an essential part in formulating business positions on issues, since they can credibly claim to represent their respective constituencies. Capacity building thus equips associations to lead dialogue by promoting internal governance reforms, membership development, and acquisition of advocacy skills. Strong associations establish close ties to their members, are responsive to member interests, and include members in policy discussions.

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Business leaders require methods to collect and process input from the business community on its needs and objectives. Input can be gathered in multiple ways, including surveys, focus groups, and outreach to association members. It is necessary to collect information on challenges facing business, the causes and effects of these challenges, and possible solutions. A professional secretariat can manage the process. Forming consensus on policy positions can be challenging because businesspeople have diverse interests and opinions. Associations and federations that perform well in this respect have internal processes for balancing and prioritizing demands. They funnel issues upward, assessing the breadth of business demands as well as points of common interest. Leaders must report back to members on draft recommendations and secure their endorsement. Advocacy requires technical skills in analysis and communications. Association leaders must develop these skills, create an advocacy plan, and allocate resources to advocacy. They might choose to partner with think tanks or media professionals for expertise. Before attempting a comprehensive dialogue, it is best to develop internal advocacy capabilities and acquire a little experience. Business leaders should reach out to groups in the business community and civil society to acquire mutual understanding and allies. Coalitions, founded on a core of strong associations with a common interest, may incorporate different sets of supporters depending on the issue. Whether coalitions are temporary or permanent, all

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members must present a common message to credibly influence dialogue.

Outcomes of Dialogue Outcomes of dialogue can take many forms. For instance, business may receive new recognition as a legitimate stakeholder in policymaking. The private and public sectors may reach agreement on important principles or develop joint action plans. They may negotiate policy standards and costs. Sometimes, the best result business can achieve is to mitigate or block a harmful proposal. Each of these outcomes has value to business and may provide avenues for future advocacy. Away from the negotiating table, private sector organizations see payoffs from dialogue in their ability to attract new members. Advocacy experience strengthens organizations' skills and reputation, and equips them to offer value to members. The experience also invigorates associations by mobilizing membership around issues of importance to business.

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Whatever level of success is achieved, dialogue must be followed by implementation steps and policy monitoring. The private sector must maintain pressure for follow-through, and assess the consequences of policy change. Private sector leaders must also report to their constituencies on the outcomes of dialogue and educate them about new policies. Reform requires ongoing effort that builds on earlier achievements. After each phase of dialogue, preparations begin for the next phase. Private sector leaders must assess the lessons and opportunities that emerge at each phase and refine their advocacy strategies accordingly. Over time, these investments in advocacy encourage a smoother and more productive dialogue process.

This article is reprinted from the Magazine of American Chamber of Commerce in Bangladesh News, December 2011, with their permission

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Strategic Planning in an Age of Uncertainty Robert Gjetsund, Robert McNamara and Alison Kennedy

The winners of tomorrow are those

seeking the right opportunities today, making bold moves while staying on course. Indeed, when faced with uncertainty in the past, the most successful companies did just this, making long-term and often unconventional bets. However, refinements to traditional strategy processes are needed in light of the current business environment. In short, changes must be made to address what Accenture's recent client experience has revealed as the current key challenge in strategy formulation: indiscriminate risk aversion. Our research has uncovered five common pitfalls that follow directly from that core problem, all of which have the potential to destroy significant value for the organization. Steering clear of these pitfalls while formulating and executing sound, long-term strategy requires a carefully designed process carried out at the top-management level. In this article, we lay out the key challenges of strategic planning in the new reality, and we point the way toward a comprehensive strategic planning process.

Introduction While the recession has transformed the global economic landscape, signs of

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recovery are now evident in many parts of the world. Indeed, emerging markets are growing rapidly, and recent data from the United States and the United Kingdom are showing positive signs of recovery. Looking beyond the recession, we find ourselves on the threshold of a new economic reality with important business implications in several key areas. For instance, customer values and buying behavior have changed substantially during the recession. These could be transient effects, or they could persist for the foreseeable future. In addition, power dynamics in the value chain will continue to shift, with business failures and consolidations among suppliers forcing companies to secure access to scarce resources or nullify established rules and agreements within their value chains. The competitive landscape is also different, with a new assortment of players created through bankruptcies and attractively priced acquisitions. On top of these changes, new financial and environmental regulations threaten to distort existing markets. With such dramatic shifts in the "normal operating environment," some believe the time for long-term strategies is over. Accenture, however, believes the fundamentals of strategic planning still

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apply-namely, that tactical decisions always should be aligned with a high-level strategic plan based on clear objectives. Furthermore, we believe that it is not advisable to make long-term strategic bets without strategic planning. During and after a storm, reactive strategies can keep you afloat, but they are not sufficient to steer the boat to a prosperous port. In other words, long-term strategies are needed for long-term, sustainable value creation. However, as a result of recent economic challenges, many organizations' short-term cash flow requirements are putting severe pressure on managers, often leading to pronounced risk aversion. While this tendency is understandable, and in many instances legitimate, indiscriminate risk aversion may severely impede the strategic planning process, with the potential of leading to long-term value destruction for the company.

The Risk Nature of Avoiding Risk While some risk aversion is natural given the trauma that many companies have been through, we have observed five key pitfalls that strategists must overcome when forging their long-term strategies in the current environment: relying on outdated methods and approaches, spending too much time focused inward, pursuing too many strategies at once hoping that one will work, moving too slowly and missing opportunities, and being so flexible that committing to a single strategy for the long term becomes impossible. We explore each of these in more detail.

Old is Good Limited information often leads to

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conservatism. Given these unfamiliar times, what has worked before often feels safer than an unfamiliar strategy. It is also true that today's changed landscape does not necessarily call for entirely new strategies. Nevertheless, it is important to be as broad as possible in the search for opportunities and possible future directions for the company. History shows that many of the winners coming out of the ashes of previous economic downturns took innovative and, at the time, highly unconventional steps. The creation of Nescafé (1938), the IBM PC (1982) and Apple's iPod (2001) are well-known examples. Moreover, many innovative companies such as Microsoft, HP, Xerox, Google and Coffee Republic were founded as the economy recovered from recessions. Certainly, bold moves are not necessarily winning strategies, but all possible options, including unconventional ones, should be carefully scrutinized in the search for the right strategic direction for the company.

Self-focus As a direct result of the financial crisis, many organizations have suffered failed projects and other setbacks which, in turn, can take a toll on these organizations' self-esteem. In such cases, managers may become focused on fundamental questions about the company's central capabilities or core values. These are certainly important questions to be asked. However, if an organization wants to stretch itself-which is the aim of strategic planning-then its focus should be outward, not inward. An example of self-focus that compromises outward focus can be found in the early days of commercial MP3 players. After some 20 years of domination in the market for portable music devices, Sony was undergoing major restructuring at the time when Apple introduced its iPod in 2001. Sony's internal focus partly explains why Sony failed to see the market potential of portable MP3 players. Thus, even in difficult times,

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MOREOVER, MANY INNOVATIVE COMPANIES SUCH AS MICROSOFT, HP, XEROX, GOOGLE AND COFFEE REPUBLIC WERE FOUNDED AS THE ECONOMY RECOVERED FROM RECESSIONS. CERTAINLY, BOLD MOVES ARE NOT NECESSARILY WINNING STRATEGIES, BUT ALL POSSIBLE OPTIONS, INCLUDING UNCONVENTIONAL ONES, SHOULD BE CAREFULLY SCRUTINIZED IN THE SEARCH FOR THE RIGHT STRATEGIC DIRECTION FOR THE COMPANY.

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differences- and interplay-between strategic and tactical decisions. First of all, strategic plans should be at a high enough level to allow short-term flexibility in response to volatility, without sacrificing longterm direction. Moreover, a certain level of adaptability should be incorporated, combining long-term strategic direction with pragmatism-for instance, by defining clear trigger events for changes to the overall strategic direction. Developing a robust actionable strategies in an age of uncertainties. organizations must delve into the new territories it could conquer, as well as the ultimate market position it could attain. Such an outward-looking perspectivecombined with a sensible amount of self-focus-should always underlie a company's strategic planning process.

Over-hedging Choosing among the vast number of possibilities available to an organization is a formidable challenge, especially during uncertain times. Instead of surmounting this obstacle, many companies instead decide to pursue numerous strategies simultaneously. However, betting on too many horses often leads to the suboptimal use of company resources. Rather, a sound and pragmatic way of prioritizing opportunities and deciding which to pursue and which to abandon is a difficult yet crucial part of the strategic planning process.

Wait-and-see Every day, new information becomes available and the future appears to become clearer. And

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while there are benefits to waiting for visibility to improve, there are also risks. In fact, once an opportunity is apparent and clear to everybody, it often already has been taken by the most farsighted player in the competition. When Apple introduced its iPad in January 2010, competitors had eschewed the product group for years, although the technology was well known. In some cases, a wait-and-see strategy may turn out to be a "wait-and-die" strategy. As such, companies must have dedicated resources in place to drive the strategic planning process as well as the rapid execution of the chosen strategy.

Over-flexibility After a strategic direction has been set, new information may be uncovered that makes the chosen plan suddenly appear less attractive or more troublesome than previously believed. Indeed, this has been the loudest argument against long-term strategic planning in the current environment: Strategic planning has little value when key variables change as rapidly and dramatically as they have in recent years. While the rationale behind this argument is clear, it also fails to recognize the

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Clearly, for today's organizations, an effective strategic planning process must be designed to overcome these pitfalls while managing risk exposure and enabling an organization to pursue the right opportunities. In our experience, such an approach has five critical elements. To begin with, the strategic planning process must incorporate a deep understanding of the level of uncertainty the company faces, as well as its opportunity space, or range of available of options. Simply put, the greater the level of uncertainty facing a business, the larger its opportunity space. In the aftermath of the recession, most businesses are faced with greater levels of uncertainty than before, which means they have more options to evaluate. And as uncertainty increases, it becomes much more difficult to predict the future with a meaningful level of precision. How, then, should companies appraise the opportunity space available to them? Not just with market research: High levels of uncertainty reduce its value for anything beyond macro-level trend analysis. Instead, tools and approaches such as scenario modeling and open innovation should be considered.

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And as a company's range of business opportunities grows, so does its need to make difficult decisions. An updated and sanctioned view of the company's ambition level and associated risk appetite can help guide such decisions. Such a view will help management have productive discussions on how to achieve its desired future financial performance, as well as how best to manage external parameters such as access to capital and talent. To ensure the comprehensiveness of such discussions and make sure they reflect the true viewpoint of the entire organization, new tools that help select and gather information and points of view from critical data sources should be employed. However, an understanding of risk and ambition alone will not enable companies to make the best choices among their range of strategic options: Although a certain outcome may be deemed more probable or less risky, it should not necessarily be included as a core element of the strategic direction. Rather, companies must be able to select a distinct strategic direction that reflects their key priorities. These key priorities must be defined in terms of the business' current organizational capabilities, its future needs and its competitive landscape. As an example, consider the different strategies required to support the priority of changing the auto industry through developing a complete new line of "green energy" vehicles, versus the strategy needed to reserve the right to play in the green market by acquiring a battery-pack producer. So far we have discussed the best ways for a company to determine its overall, long-term strategy. Once that formidable task has been completed, it is critical to

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fully align the organization's fundamental building blocks with the chosen strategy. This alignment process should be informed by recent research performed by Accenture, which suggests that high-performance businesses are characterized by the alignment of three building blocks: market focus and positioning, distinctive capabilities, and performance anatomy. This means that the strategic direction of the company must engender clear expectations about the markets in which the company will compete, which capabilities the company must possess to be able to achieve its desired position, and how the company's organizational culture will measure and value performance. With these expectations clearly defined, management then must develop a strategic roadmap that will drive the company in the desired direction. How does a company know that it is successfully executing the strategy it has worked so hard to create? There are two key elements to this: establishing the future value of the strategy and measuring the company's attainment of that value. However, this has become more difficult in today's environment, as high levels of uncertainty make it more difficult to assess the potential value of a given strategy. As such, traditional cash flow analysis should be complemented by additional tools such as game theory, option pricing, systems theory and scenario planning. With a reliable valuation in place, the company is ready to measure its progress against generating that value. In Accenture's experience, an adaptive performance management regime-in which key indicators such as company

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profitability act as triggers for revisiting and adjusting the company's strategy-not only enables such measurement, but can also help the company continually adapt its strategy as conditions, priorities, and performance expectations evolve.

Conclusion In the aftermath of the recession, business across all industries will be faced with an increased level of uncertainty, driving some to discount the efficacy of robust strategic planning. However, given all of the unknowns they face, companies need a rigorous approach to strategic planning now more than ever before. Without such an approach, high levels of uncertainty may result in strategies that are too risk-averse, and cause the company to miss out on its best opportunities. In addition, strategic plans that rely on historical data and outdated methods risk creating a false image of a future that may, in fact, be transformed by technological shifts and new buyer values. Instead, companies must take a more comprehensive approach to strategy formulation that accounts for their ambition and risk tolerance, helps them choose among the wide range of options they face, enables them to align their organizations with their chosen strategy and, finally, allows them to measure their performance against their strategic goals and make adjustments as needed. Such an approach will help companies balance risk with reward and opportunity with uncertainty. In short, it will help them pursue high performance no matter what the future brings. This article is reprinted from the Magazine of American Chamber of Commerce in Bangladesh News, December 2011, with their permission

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Social Business and Emerging Needs in Bangladesh Khalid Hasan PhD

SOCIAL BUSINESS “We live in exciting times – an era when the world is ripe for the kind of amazing, positive change that social business can create.” - Prof. Muhammad Yunus

Background Nobel laureate Prof. Muhammad Yunus conceptualizes the new mantra of Social Business for eradicating poverty globally. There is a growing interest in this new kind of business focused for the poor and thereby reducing poverty. According to him, social business is a cause driven business. In a social business, the investors/ owners can gradually recoup the money invested, but cannot take any dividend beyond that point. Purpose of the investment is purely to achieve one or more social objectives through the operation of the company; no personal gain is desired by the investors. The company must cover all costs and make profit, at the same time achieve the social objective, such as, healthcare for the poor, housing for the poor, financial services for the poor, nutrition for malnourished children, providing safe drinking water, introducing renewable energy, etc. in a business way.

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The impact of the business on people or environment, rather the amount of profit made in a given period measures the success of social business. Sustainability of the company indicates that it is running as a business. The objective of the company is to achieve social goal/s. The most popular concept of social business was created by Nobel peace prize winner Prof. Muhammad Yunus and is described in his books Creating a world without poverty – Social Business and the future of capitalism and Building Social Business - The new kind of capitalism that serves humanity’s most pressing needs. The main organizations promoting and incubating social businesses are the Yunus Centre in Bangladesh and the Grameen Creative Lab in Germany. Some advocates of social business have criticized Yunus and his followers of hijacking the name “Social Business,” and point out that many have used the term before him to describe capitalistic gains tied to social advancement.

Seven Principles of Social Business 1. Business objective will be to overcome poverty, or one or more problems (such as education, health, technology access, and environment) which threaten people and society; not profit maximization

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THE IMPACT OF THE BUSINESS ON PEOPLE OR ENVIRONMENT, RATHER THE AMOUNT OF PROFIT MADE IN A GIVEN PERIOD MEASURES THE SUCCESS OF SOCIAL BUSINESS. 2. Financial and economic sustainability 3. Investors get back their investment amount only. No dividend is given beyond investment money 4. When investment amount is paid back, company profit stays with the company for expansion and improvement 5. Environmentally conscious 6. Workforce gets market wage with better working conditions 7. ... do it with joy

Types of Social Business In Yunus’ book creating a World without Poverty - Social Business and the Future of Capitalism, two different types of social businesses are proposed: A Type I social business focuses on providing a product and/or service with a specific social, ethical or environmental goal. A prominent example is Grameen Danone. Grameen Danone Foods, popularly known as “Grameen Danone” is a social business enterprise which,

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has been designed to provide children with many of the key nutrients that are typically missing from their diet in rural Bangladesh. It is run on ‘No loss, No dividend’ basis. Initially, Grameen Danone agreed to create a small dividend of 1%/ year to shareholders, however, in December 2009, the board of Grameen Danone agreed to waive any monetary return. Grameen Danone was launched in 2006 as the first social business and is now succeeded by many others. Most social businesses are currently located in Bangladesh, such as Grameen Veolia, Grameen Intel, Grameen Uniglo or BASF Grameen. Additionally, several microfinance funds have allocated a certain portion of their capital to social business, the most prominent examples being the Grameen Credit Agricole Foundation in Luxembourg and the Danone Communities Fund in Paris.

SUSTAINABILITY OF THE COMPANY INDICATES THAT IT IS RUNNING AS A BUSINESS. THE OBJECTIVE OF THE COMPANY IS TO ACHIEVE SOCIAL GOAL/S.

A Type II social business is a profit oriented business that is owned by the poor or other underprivileged parts of the society, who can gain through receiving direct dividends or by indirect benefits. Grameen Bank, being owned by the poor, is the prime example of this type, although it would also classify as a Type I social business.

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Since social business is a cause driven business i.e. pro-poor focused business, the investors or owners can gradually get back the money invested, but cannot take any dividend beyond that point. Therefore, the purpose of the investment is purely to achieve one or more social objectives through the operation of the company, since no personal monetary gain is desired by the investors. The company must cover all costs and make revenue, but at the same time achieve the social objective.

Idea of Social Business Professor Muhammad Yunus, the key proponent of the social business model, argues that capitalism is too narrowly defined. The concept of the individual as being solely focused on profit maximizing ignores other aspects of life. Failures of this system to address vital needs, that are commonly regarded as market failures are actually conceptualization failures, i.e. failures to capture the essence of a human being in economic theory by limiting humankind to the home economics. (Homo economic us, or Economic human, is the concept in some economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively defined ends. This theory stands in contrast to the concept of: Homo reciprocans”, which states that human beings are primarily motivated by the desire to be cooperative, and improve their environment.) Yunus postulates a new world of business in which profit maximizing enterprises and social-benefit- maximizing enterprises coexist. In addition, a social business would operate

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much like a profit-maximizing business in that the company as a whole grows financially and gains profits. The only difference is that the company’s shareholders and investors would be re-accumulating their initial investment as opposed to receiving dividends. He calls the latter social business. Key ingredients to the success of the approach are education, institutions to make social businesses visible in the market place (a social stock market), rating agencies, appropriate impact assessment tools, indices to understand which social business is doing more and/or better than other social businesses so that social investors are correctly guided. The industry will need its Social Wall Street Journal and Social Financial Times. Therefore, a social business is driven to bring about change while pursuing sustainability. Although from a strictly profit-maximizing perspective it seems inappropriate to pursue a goal other than profit, social business’s aim is to achieve certain social and environmental goals. In this perspective, a social business can also be understood as a business-pursuing NGO which is (eventually) financially self-sufficient.

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The impact of the business on people or environment, rather than the amount of profit made in a given period measures the success of social business. Sustainability of the company indicates that it is running as a business. However, there is no provision of profit sharing among the owners or stakeholders, rather there is a precondition of social business that profit will stay with the company and is used to expand social benefits the company provides. The profits here remain with the business and help it to grow further.

Social Business and Other Social Concepts There are other frequently used concepts such as “social enterprise,” “social entrepreneurship,” “social marketing,” etc contradicts with social business. Although these are used in varying ways by different businesses and academicians, but they are generally used to refer to profit-making activities or highly subsidized. Social entrepreneurship describes as an initiative may be non-economic or a charity under the purview of traditional NGOs. Similarly NGOs non-profit, charitable organization, however, NGOs could also own

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potentially change the economic face of Bangladesh, can be built as a Social Business owned by the poor women of the country.”

social business, but it needs to be separated from NGO for legal, tax, and accounting purposes. Cooperation - another type of organization, that might be confused with social business. Cooperative is owned by a group of members, is primarily run for profit to benefit its member-shareholders. However, cooperatives can be a social business, if the members of the cooperatives are poor people and any profits generated by the cooperative would be invested for the poor and helping them escape from poverty. In India, Self Employed Women’s Association (SEWA), a trade union that helps self-employed Indian women pursue the goals of “full employment” (work security, income security, food security, health care, child care and shelter). Social marketing is another concept, primarily developed in the 1970s, describes efforts to change human behavior in a socially beneficial way by using all the tools and techniques of marketing and business. In Bangladesh, for example, Social Marketing Company (SMC) is responsible for distributing and marketing contraceptives, oral saline and micro nutrient powder. Although SMC uses marketing

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principles and it is a not-for-profit company and enjoys subsidy from various US and British donors. On the contrary, social business is a non-loss, non-dividend company with a social objective and vision, and it follows all the tools and techniques of marketing.

POVERTY, SOCIAL BUSINESS AND BANGLADESH SCENARIO Professor Yunus, in his recent book on Creating a World Without Poverty wrote that the eradicating poverty is the biggest challenge of humankind on earth. While free market capitalism is thriving globally almost unopposed now and bringing unprecedented prosperity to many, half of the world lives on two dollars a day or much less. He is optimist of changing the fortune of majority of the people living at the bottom of the economic base of the society. According to him social business “I always believed that poverty can be totally conquered in our own lifetimes if the right approach is adopted. I based my belief on the inherent ability of the poor that can be unleashed once they are given the opportunity to help themselves. … I have been advocating for, which will be used by several countries in the whole region and can

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Bottom of the pyramid: Prof. CK Prahalad explained the Bottom of the Pyramid (BoP) concept. According to him, majority of the people are at the bottom of the economy, where as a few people with high purchasing power at the top of the pyramid. According to recent UN Development Report, there are around 4 billion people at the BoP, earning less than US$2 per day. The BoPs are mostly confined to urban slums and rural areas. They are living at below poverty level (may be termed as “ultra poor”), and therefore, they are consistently at acute malnutrition level. They lack basic human needs, such as access to safe drinking water, health services, shelter, education etc. They are caught in the vicious circle of poverty. Indian rural marketing guru Pradeep Kashyap suggests for a new paradigm wherein all stakeholders (such as private sectors, NGOs and government) should collaborate to create opportunities that offer a win-all proposition, helping the economy for an impressive and sustainable growth. The new paradigm requires (1) driving innovation to create affordable and sustainable businesses, (2) nurturing sustainable businesses enabled by open and collaborative partnerships and (3) creating inclusive businesses through win all approach. Reshaping pyramid to diamond: Prof Philip Kotler suggested that there should be shift of the major bulk of the community from bottom to the middle with higher purchasing power and therefore converting pyramid to the shape of a diamond. The economists and the politicians are trying to reduce

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the population at the bottom of the pyramid. They have given the biggest challenge to transform the structure of wealth distribution among the people in the country from a pyramid shape to diamond i.e. shifting of huge population from the bottom of the pyramid to the middle of the structure, shaping like a diamond. When C K Prahalad narrated BoP, he mentioned that there a few people with high purchasing power at the top (around 3-5%) and majority of the consumers are at the bottom (40%++ population). If we want to eradicate poverty among the extreme poor or ultra poor population, the pyramid shape should be reshaped to a diamond like structure i.e. more number of people should have more disposable income and thereby have higher purchasing power and subsequently moving to middle income segment.

immediately after the great 1971 war of liberation with Pakistan (Fig 2). The impact of changing from bottom of the pyramid to a middle income level, there is an inevitably change in consumption pattern and thereby changing life style. It is noticed in different demographic and market research that there is a clear indication of shift of consumption of various fast moving consumer goods (FMCGs – such as tooth powder, shampoo, soap, crème, lotion, hair oil etc.) across all categories of population, covering both rural and urban areas. Remarkably observed that there is a significant shift of FMCG in the rural areas, compared to urban areas (Fig 3). Similarly, at present, more number of people is buying essential commodities and durables such as mobile phone, TV etc. According to recent Nielsen Media and

Demographic Survey (NMDS 2011), television is available to 56% of all the households, with 84% ownership amongst urban dwellers and 43% amongst rural ones. In comparison to the figures of 1995 media survey, it is apparent that the ownership rate has increased considerably over the past sixteen years. Within this period, the overall ownership of TV nationally went up by around seven times from 8% to 56%; and it was fourteen times in the rural areas, from 3% to 43%. Currently TV is available in 91% of the households in the metro areas. Similarly, in the recent years, Bangladesh has experienced a phenomenal growth in ownership of mobile/cell phones. In 2011, 66% of the individuals of 15 years and above own at least one mobile set with active SIM which was 40% in 2009. Among the rural respondents, 59% own a mobile set which was 30% in 2009. Similarly in the urban areas, it is currently 80% compared to 60% in 2009. As expected, 84% of the metropolitan respondents have access to mobile which was 62% in 2009. Similar shift is observed among the rural consumers, more than the urban consumers. Shifts in consumption from urban to rural: In Bangladesh, a country with around 160 million people, the rural base makes up approximately 70% of the whole.

This transformation has already started in many countries like China, India and Bangladesh. Figures 1 and 2 explain the Bangladesh scenario. Transformation in Bangladesh: The transformation has already started in Bangladesh too. Currently (2011), 32% of the population is at the BoP, which was 59% in 1991 and 78%

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In the last three years there has been a clear shift in the consumption of goods and services, especially FMCGs from urban to rural. The urban FMCG market share decreased from 58% to 49% in the period 2007-2010, while the rural share increased significantly from 42% to 51% in the same period (Nielsen Retail Audit; Fig 3). This trend is indeed important for the marketers who are sitting in the comfort of metropolitan city offices as it will help them shape their market offerings to reap the benefits of the growing rural market. Growing purchasing power of bottom of the pyramid: In a recent World Bank report – “World Development Indicators”, puts the population at 160 million, making it by most counts the 8th most populous country in the world. Out of these 162 million population, currently 32% of them are at poverty level; among them a significant portion are at extreme poverty or may be termed as “ultra poor”.

the pyramid (32% of the population), belonging to the socio economic class (SEC) E. There has been an increase in the purchasing power of this portion of the population, significant enough to change their lifestyles. They have moved from worrying fast moving consumer goods (FMCGs – such as tooth powder, shampoo, soap, crème, lotion, hair oil etc.) across all categories of population, covering both rural and urban areas. Remarkably observed that there is a significant shift of FMCG in the rural areas, compared to urban areas (Fig 3). Similarly, at present, more number of people is buying essential commodities and durables such as mobile phone, TV etc. According to recent Nielsen Media and Demographic Survey (NMDS 2011), television is available to 56% of all the households, with 84% ownership amongst urban

dwellers and 43% amongst rural ones. In comparison to the figures of 1995 media survey, it is apparent that the ownership rate has increased considerably over the past sixteen years. Within this period, the overall ownership of TV nationally went up by around seven times from 8% to 56%; and it was fourteen times in the rural areas, from 3% to 43%. Currently TV is available in 91% of the households in the metro areas. Similarly, in the recent years, Bangladesh has experienced a phenomenal growth in ownership of mobile/cell phones. In 2011, 66% of the individuals of 15 years and above own at least one mobile set with active SIM which was 40% in 2009. Among the rural respondents, 59% own a mobile set which was 30% in 2009. Similarly in the urban areas, it is currently 80% compared to 60% in 2009. As expected, 84% of the metropolitan respondents have access to mobile which was 62% in 2009. Similar shift is observed among the rural consumers, more than the urban consumers. Shifts in consumption from urban to rural: In Bangladesh, a country with around 160 million people, the rural base makes up approximately 70% of the whole. In the last three years there has been a clear shift in the consumption of goods and

In last few decades, Bangladesh has made significant progress in poverty reduction, is a matter of celebration. The percentage of people below poverty line now stands at 32% from a level of 59% two decades back (BBS). Also, the population of Bangladesh is characterized by a wide bottom of

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The Bangladesh Accountant

services, especially FMCGs from urban to rural. The urban FMCG market share decreased from 58% to 49% in the period 2007-2010, while the rural share increased significantly from 42% to 51% in the same period (Nielsen Retail Audit; Fig 3). This trend is indeed important for the marketers who are sitting in the comfort of metropolitan city offices as it will help them shape their market offerings to reap the benefits of the growing rural market. Growing purchasing power of bottom of the pyramid: In a recent World Bank report – “World Development Indicators”, puts the population at 160 million, making it by most counts the 8th most populous country in the world. Out of these 162 million population, currently 32% of them are at poverty level; among them a significant portion are at extreme poverty or may be termed as “ultra poor”. In last few decades, Bangladesh has made significant progress in poverty reduction, is a matter of celebration. The percentage of people below poverty line now stands at 32% from a level of 59% two decades back (BBS). Also, the population of Bangladesh is characterized by a wide bottom of the pyramid (32% of the population), belonging to the socio economic class (SEC) E. There has been an increase in the purchasing

The Bangladesh Accountant

power of this portion of the population, significant enough to change their lifestyles. They have moved from worrying about basic necessities of life and can now afford the luxury of being aspiring individuals to some extent. According to BBS, the average monthly income of rural people in 2005 was Tk. 6,096 which increased to Tk. 9,000 in 2011 and similarly in the urban areas, income increased from Tk. 10,463 in 2005 to Tk. 15,000 in 2011. However, according to a report – “Household Income and Expenditure Census 2011 (HIES)” published by Bangladesh Bureau of Statistics, among the population those who are at below poverty line, 17.6% of the country lives in extreme poverty, which was 25.1% in 2005. Extreme poverty is defined as those people whose total expenditure is equal to the food poverty line (the cost of a basket of goods amounting to the consumption of 2,100 Kcal per person day (Perry). If we consider 160 million population, around 28 million people are at extremely poverty. If all these extreme poor people are considered, it will make 53rd largest country by population in the world. Despite negative images of Bangladesh (such as poverty, political instability, natural

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calamities etc.) this young nation has been making solid strides in different development areas, Bangladesh has got more success stories than its failures. The major indicators responsible for the socio-economic growth are: improvement in health status, increase in literacy and education rate, progress in gender balance, more enhancement of employment opportunities, building transport and communications facilities, huge increase in media reach among the rural and urban people, booming ITC business, great rise in remittance, agricultural, industrial, textiles and readymade garments (RMG) booms. Moreover, it is to be noted that specially built and well protected Export Processing Zones (EPZs) have played a significant role in revolutionizing its industrial progress and employment. Social business – an emerging need: The people of Bangladesh have managed to not only survive, but also to drive the country forwards and upwards. Still there is a question, how to increase the momentum of reducing extreme poverty, compared to moderate poverty? The HIES surveys shows that the extreme poverty decreased slower than moderate poverty; and therefore the people in the extreme poverty still could not reap the benefit of progress (Perry). Further, the incidence of extreme poverty in rural areas has decreased more slowly than in urban areas. Therefore the gap between rural and urban is widening over period of time. Although (1) there is a clear shift of upward consumption of FMCGs and essential durables and (2) number of people at poverty level is reducing but still millions of people are at extreme poverty. If the current pace continues, Bangladesh will have to wait for

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many decades to watch a clear shift from pyramid to a perfect “diamond” shape of economic base. The solutions to this critical issue of reducing poverty and thereby minimizing the gap between rural and urban may be by introducing Social Businesses more rapidly, than thought. The public service provisions such as health care, schooling, social protection, agriculture etc. need to be reached to the people at extreme poverty through social business enterprises, otherwise the initiatives to reduce poverty related gap will take longer period. It is not only our moral obligation to look beyond statistics, but our necessity to be with this poverty stricken humanity. To conclude, it can be said that poverty remains one of the most important problems, facing humankind globally. In a country like Bangladesh, where a large number people are still at moderate and extreme poverty level (more than 51 million), and therefore the distribution of income is still in the shape of pyramid rather than a diamond (although politicians and economists are aspiring toward a diamond shape by 2021) with too many poor at the base of the pyramid. Prof Yunus initially showed the world through his historical micro credit approach and help bringing fortune at the bottom of the pyramid (Grameen Bank is an example). Now he has further added the great concept of social business. The enterprises created for the poor with the motives and principles of social business and using the techniques and tools of marketing mixes (such as product, promotion, places, price, people etc.) that makes the products and services affordable and accessible to the poor and

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thereby can help eradicating poverty. Earlier the acceptance of the new approach of social business may truly bring fortune at the bottom.

7. Kotler, Philip, Marketing 3.0; 2010

References

8. Perry, Jonathan (2011), New Statistics: 25 million in extreme poverty; Daily Star 8 October 2011

1. Yunus, Muhammad (2008), Creating a World Without Poverty: Social Business and the Future of Capitalism

9. Bangladesh Bureau of Statistics, Household Income and Expenditure Census 2011 (HIES) 2005

2. Yunus, Muhammad (2010), Building Social Business: The New Kind of Capitalism That Serves Humanity’s Most Pressing Needs

10. Nielsen Media and Demographic Survey (NMDS) 2011

3. http://www. Yunus Centre 4. Jäger, Urs (2010), Managing Social Businesses. Mission, Governance, Strategy and Accountability 5. Prahalad, CK, Fortune at the Bottom of the Pyramid 2006

11. Nielsen Retail Audit, Bangladesh 2007-2010

The Author is Managing Director, Nielsen Bangladesh (This article is reprinted from the Magazine of American Chamber of Commerce in Bangladesh News with their permission)

6. Kashyap, Pradeep, Rural Marketing, India 2006

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The Bangladesh Accountant

Good Governance and Development Prof. Hafiz G. A. Siddiqi Introduction Good governance is an essential prerequisite for national development. Its scope is quite wide and deep. The phrase “good governance” is used quite frequently, but occasionally misused without clearly understanding its connotation. This is a macro concept, usually used in the context of state management, particularly in the context of socio-economic development of a relatively less developed country like Bangladesh. It is not usually used in discussing the enterprise level management. Therefore, this phrase should not be confused with best management practices. However exceptions are there. Some people would prefer to express the same idea using the phrase “better governance” rather than “good governance” arguing that the absence of good governance is not necessarily “bad governance”. There is always a system of governance in a country that keeps running. However, it may find it desirable to go for political, legal, institutional and other reforms including state bureaucracy to modernize and respond to popular demand for changes. For example, governments in the Middle East have had so long a system of governance that worked fine for the rulers. However due to recent popular demand

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they are slowly moving toward democratic forms of governance granting the citizen western type of fundamental human rights, freedom of expression, empowerment of women, etc. In other words, they are trying to introduce a system of governance which is supposed to be better than what has been so far. In this article both the phrases, namely, “good governance” and “better governance” are used interchangeably. Good governance is an ideal perhaps not achievable in its totality. The general perception is that good governance or for that matter better governance is the most important pre-requisite for sustainable economic, social, political and cultural growth and development in the country. It is also essential to ensure that all the citizens enjoy the benefits of growth and development equitably that helps get rid of poverty and bring the marginalized citizens into a safety net so that they can lead peaceful and decent life. Sustained development takes place only when appropriately structured and staffed Executive Branch under the vigilance of the Legislative Branch and an independent Judiciary function effectively in conjunction with each other as decision-making and implementing body. The decisions are related to empowering all the people politically, economically,

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THE LEGISLATIVE BRANCH PLAYS A VITAL ROLE IN INSTITUTING GOOD GOVERNANCE. IN MULTI-PARTY DEMOCRACY, ONE WINNING PARTY OR A COALITION OF PARTIES FORM THE financially, socially and culturally on the basis of fairness and equity. In state management (Governance) three major types of governing machinery function. These are: 1) Legislative Branch, 2) Executive Branch and 3) Judiciary. Their functions are divided on the basis of the doctrine of separation of power. Beside these three, there are hundreds of central and local level government and semi government agencies that work jointly or in cooperation with each other to ensure good governance. Beside, national Parliament, there are local level elected bodies. The latter strengthen the people’s participation in the governance at grass root level and prevent concentration of power at the center.

Legislative Branch (Parliament) In state management, Parliament is the apex body. Members of the Parliament (MP) are the Legislators or the Law Makers. In democratic society they are elected by the people. The nature of governance is determined by the discipline the elected representatives at the Parliament as well as at the grass root local bodies / authorities can

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enforce in the state management. To institutionalize good governance a democratically elected legislative body is essential. The members of this legislative body (Parliament) frame and enact the national Constitution which provides the basic guidelines for state governance. Once enacted, the life of all citizens including members of Parliament, Government machinery, members of the armed forces, Judiciary and all other citizens’ life is governed by the articles/provisions of the Constitution. Therefore, the quality of governance in a particular country is greatly influenced by the quality of the Constitution it follows. The Legislative Branch plays a vital role in instituting good governance. In multi-party democracy, one winning party or a coalition of parties form the government headed by the Prime Minister. There is a party in power and another in opposition. Traditionally, the government MPs and opposition MPs debate over national issues in the Parliament. Arguments and counter arguments continue for days together, and for good reasons. It is absolutely essential for all elected MPs to participate in the deliberations and discussions in the Parliament to realize good governance. Unfortunately, in Bangladesh, MPs of the Opposition Party remain absent from the Parliament for months together. This makes the

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GOVERNMENT HEADED BY THE PRIME MINISTER. THERE IS A PARTY IN POWER AND ANOTHER IN OPPOSITION. TRADITIONALLY, THE GOVERNMENT MPS AND OPPOSITION MPS DEBATE OVER NATIONAL ISSUES IN THE PARLIAMENT. ARGUMENTS AND COUNTER ARGUMENTS CONTINUE FOR DAYS TOGETHER, AND FOR GOOD REASONS.

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general public totally disappointed. Whatever good reasons the opposition party has for remaining absent from the Parliament, it does not contribute to good governance. The opposition party does not perform its duty; as a result, there is no check and balance in the decisions taken in the Parliament by the party in power. This does not seem to be a sign of good governance.

Participation and Democracy Practice of participatory democracy is another very important pre-requisite of good governance. All citizens, irrespective of sex and religion, must have equal opportunity direct or indirect to participate in the decision-making process in state management. Citizens over certain age are eligible to elect through free and fair election their Representatives who form the Legislative Body at the center and separately at local authorities at City Corporations, Municipalities, Upazilla Parishods and Union Parishods. It is to be noted that democracy is not necessarily the rule of majority. Unfair behaviour of the “brute” majority does not contribute to promoting good governance. Of the many forms of democracy, one may consider Locke’s “the rule of majority with the consent of minority” or something more suitable for the people. It is heartening to add that Bangladesh Constitution guarantees equal rights to all citizens to practice their respective religions. Particularly, the present government has ensured that all minorities (non-Muslim) have equal access to opportunities to participate in political decisionmaking both at national and local levels. Beside, minority participation in government administrative machinery, judiciary

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and educational institutions is quite visible. At least on this count Bangladesh can claim that it is about to realize good governance.

The Executive Branch The Executive Branch commonly known as the government implements the decisions of the Parliament. While implementing the decisions of the Parliament, the Executive Branch complies with the provisions, rules and regulations derived from the Constitution. This Constitution provides the Executive Branch (Cabinet, Ministries including Defense Ministry and the Chief of Army, Government Departments, Autonomous corporations, semi-government agencies, city corporations, municipalities and similar others) the necessary guidelines, most importantly, the Laws and By-laws, Articles and Provisions embodied in the Constitution. The Executive Branch carries out the decisions of the Parliament and implements the annual development plans of the government (Annual Budget) approved by the Parliament. It is to be noted that the Executive Branch does not have any authority to make or interpret laws. Only Parliament can make laws. In case of disagreement, complaints or confusion only Judiciary interprets laws. The Executive Branch however, has the sole authority and responsibility for the daily administration of state bureaucracy. It prepares short and long term national development plans and annual national budgets in consultation with experts, academia, trade bodies and civil societies and have them approved by the Parliament, formulates implementation level policies and issues administrative orders related to national defense, fundamental human rights, freedom of movement, association, expression

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and choice, and law and order enforcement i.e. establishing a peaceful environment in which all desirable political, economic, commercial, trading, social, cultural and religious activities can be carried out. The quality of governance also determines the quality of diplomatic relations with other countries. One must note that foreign policy is an indicator of good governance. Improvement in governance attracts other countries to be friendly. Recent improvement in diplomatic relations that Bangladesh accomplished with India is a sign of better governance. The Executive Branch (the Government) of Bangladesh is implementing many development programs with a view to ensuring both national development and good governance. Thanks to the present government of the Prime Minister Sheikh Hasina, of these programs, one that stands out is “DIGITAL BANGLADESH”. As and when the entire operation of the government including its large procurement and service system are fully and effectively digitized, the making and implementing the decisions will take shortest possible time. No components of government machinery, be it Election Commission or Port Authority or Bangladesh Railways can delay its actions without being spotted. This will increase operational efficiency tremendously and accelerate development process accordingly. Above all, in FULLY DIGITIZED BANGLADESH the curse of corruption will be minimized. When both public and private sectors are fully automated the scope of misuse or stealing government resources or manipulation of contract documents will be difficult and easily detectable. This will tend to improve governance.

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Consequently, it is likely to increasingly attract FDI.

The Judiciary The Judiciary interprets and applies the law in the name of the state. It also provides a mechanism for the resolution of disputes. Under the doctrine of separation of power, the judiciary usually does not make laws or enforce law. Law makers sit in the Parliament and law enforcing agencies are not parts of the judiciary. An independent Judiciary is another pre-requite for good governance. An independent Judiciary is required to ensure justice when any citizens, public or private enterprises, government agencies including law enforcing agencies, specialized national institutions like Election Commission or AntiCorruption Commission, NBR, etc seek it. Independent judiciary which cannot be influenced illegally either by the legislative or Executive Branch can ensure a comprehensive legal framework that is enforced impartially and consequently prevent corrupt practices. Independent Judiciary, according to Webster’s-online dictionary, by definition includes rule of law and incorruptible police forces.

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Conclusions When all these three institutions, namely, Legislative Branch, Executive Branch and Judiciary function in a coherent way free from abuse and corruption but maintaining the doctrine of separation of power, the public institutions including ministries, government departments, autonomous agencies and courts of law will tend to conduct public affairs, for example, poverty eradication or empowerment of women, with due regards to justice and equity, manage public resources without taking undue personal benefits and ensure the functioning of democracy in real sense. Due to the built-in check and balance between the above three major institutions, this tends to be an approach to good governance. The situation will further improve with due reforms and empowerment of the Judiciary. It must be allowed to function independently without pressure from any quarters. Similar reforms are also necessary to empower Election Commission and Anti-Corruption Commission, among other institutions, so that they can work independently and effectively. The newly created public institutions, namely, Human Rights Commission and

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Rights to Information Commission are expected to promote good governance. Given the past records, Bangladesh will have to admit that it faces at least two major challenges to establish good governance: (1) it has an ineffective Parliament in spite of the fact that Bangladesh is a well recognized democratic country. It is so because the opposition party mostly remains absent from Parliament. Something must be done to bring the opposition Leader and her MPs to the Parliament and allow them to say whatever they want to say. Otherwise, Bangladesh will not accomplish good governance in global context; and (2) it suffers from rampant corruption that disqualifies Bangladesh for the time being to claim an achiever of good governance. However, as I said earlier, it is hoped that in fully digitized Bangladesh corruption will be reduced substantially. It is heartening to note that the present government has taken the DIGITAL BANGLADESH project with all earnestness and its progress so far is very encouraging. The wave of e-governance has started reaching remote areas far away from capital city. However, one must note that, although it is very powerful, egovernance is only one instrument to achieve good governance. It is true that Bangladesh has to go a long way to accomplish good governance, but certainly it is not a long shot. Let us hope Bangladesh will make it. After all it has so many success stories in her records!

The Author is Vice Chancellor, North South University (This article is reprinted from the Magazine of American Chamber of Commerce in Bangladesh News with their permission)

The Bangladesh Accountant

Bangladesh’s Ready-Made Garments Landscape: The Challenge of Growth McKinseys Report Foreword A growing number of chief purchasing officers (CPOs) in European and US apparel companies are scrutinizing their sourcing strategies, as margin and supplier capacity pressure building over the last several years has caused them to search for the next performance improvement opportunity. While China is starting to lose its attractiveness in this realm, the sourcing caravan is moving on to the next hot spot. With Bangladesh having developed a strong position among European and US buyers, many companies are already eager to evaluate the future potential. However, the lure of competitive prices, available capacities, and supplier capabilities offered is being cautiously weighed against a prevailing insecurity created by the challenges inherent in Bangladesh’s ready-made garments (RMG) market. McKinsey & Company has initiated a case study that sets out to review Bangladesh’s RMG growth formula, which builds on the country’s strong starting position and the increasing demand of international buyers. This report provides an overview of the rapid growth being seen in Bangladesh’s RMG industry and then describes the main hurdles that exist for buyers when it comes

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to sourcing in Bangladesh. The final section of the report details what the three core stakeholders – government, suppliers, and buyers – can do to overcome the challenges of growth in Bangladesh’s sourcing market. The case study and recommendations documented in this report are based on: • An extensive interview-based survey of CPOs from leading apparel players in Europe and the US, accounting for USD 46 billion in total apparel sourcing value and covering 66 percent of all apparel exports from Bangladesh to Europe and the US • A telephone survey of 100+ local RMG suppliers in Bangladesh, which represents approximately 10 percent of Bangladesh’s total apparel exports • In-depth desk research using both international (e.g., World Bank, International Monetary Fund, EIU, investment banks) and local sources (e.g., Bangladesh Garment Manufacturers and Exporters Association, Centre for Policy Dialogue, Bangladesh Institute of Development Studies) • Extensive field work, including in-depth

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MCKINSEY & COMPANY HAS INITIATED A CASE STUDY THAT SETS OUT TO REVIEW BANGLADESH’S RMG GROWTH FORMULA, WHICH BUILDS ON THE COUNTRY’S STRONG STARTING POSITION AND THE INCREASING DEMAND OF INTERNATIONAL BUYERS. THIS REPORT PROVIDES AN OVERVIEW OF THE RAPID GROWTH BEING SEEN IN

supplier interviews, factory visits, interviews with sourcing office managers, and discussions with other local and international experts (e.g., corporate social responsibility experts and logistics experts).

accordingly in order to secure their cost positions in the apparel market. While China was once considered “the place to be” for sourcing, the light is starting to shine ever brighter on Bangladesh. Current trends on the buying side

HURDLES THAT EXIST

McKinsey wishes to thank all participants of this study, especially the Bangladesh German Chamber of Commerce and Industry (BGCCI) President Md Saiful Islam and Executive Director Daniel Seidl, for their support in compiling this report.

For decades, European and US apparel buyers were benefiting from continually decreasing purchasing prices by moving their sourcing activities to low-cost countries in the Far East and by cutting out the “middle man.” Sourcing teams could freely take their pick of the next country sourcing opportunity along the five main criteria of price, quality, capacity, speed, and risk.

FOR BUYERS WHEN IT

Potential for rapid growth of Bangladesh’s RMG industry The sourcing of RMG is experiencing a new phase of transition, which is creating the need for companies to react

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BANGLADESH’S RMG INDUSTRY AND THEN DESCRIBES THE MAIN

COMES TO SOURCING IN BANGLADESH.

Within the last several years, however, European and US buyers have been faced with a growing number of margin and capacity issues, creating an increase in sourcing strategy revisions.

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Although the European and US apparel markets have regained much of their sales following the slump brought on by the most recent global financial downturn, market saturation, consumer price sensitivity, and ongoing economic insecurity continue to put pressure on top-line results. In addition, the end of a 15-year long apparel sourcing deflation is squeezing the profitability of buyers. Volatility of raw materials prices has spurred a decline in gross margins and created a general environment of insecurity among buyers. At the same time, labor costs in China and other key sourcing markets have increased significantly. This is leading buyers to question their current sourcing strategies, resulting in expansion of global direct sourcing and footprint revisions being the current key strategic focus areas. However, the playing field is becoming increasingly limited for European and US buyers, as new, fast-growing markets develop into

The Bangladesh Accountant

important customers for the traditional sourcing markets. These countries’ high growth levels and, to some extent, proximity to the markets, makes them attractive. A battle for capacities is on the horizon. For many years, China was almost always the hands-down answer to all buyers’ needs, but those times are changing. China is losing its attractiveness for new and established buyers In 2010, China dominated RMG imports to Europe and the US, accounting for approximately 40 percent of the import volume in each region. The macro trends of wage increases and capacity pressure, however, have proven to heavily weigh on the Chinese RMG sector. McKinsey’s survey shows that CPOs of leading apparel buyers in Europe and the US almost unanimously favor moving some of their sourcing away from China. In the survey, 54 percent of CPOs shared their plans

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to decrease their sourcing activities in China by up to 10 percent and 32 percent stated that they sought to decrease their share of sourcing in China by more than 10 percent over the next five years (Exhibit 1). • Labor shortages, especially in the coastal regions, are impacting the RMG industry in China, as workers continue moving on to more attractive industries and better jobs. • Wages in Coastal China are increasing, as Chinese RMG manufacturers try to better position themselves in the tight labor supply market. • Capacity for Western buyers is reaching its limits, as RMG players in Coastal China switch to serving the quickly growing, more profitable national market and as the Chinese government seeks to support more value-added industries in an effort to rebalance the economy. Since 2000, the share of total apparel exports has

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been reduced to nearly half of historical levels. As Western RMG buyers search for the “next China,” they are evaluating all options to strengthen their proximity sourcing, moving on to Northwest China, Southeast Asia, and other Far East supplier countries. Bangladesh is clearly the preferred next stop for the sourcing caravan (Exhibit 2). Bangladesh has what it takes to be the next sourcing hot spot Since the start of its garment export industry in the late 1970s, Bangladesh has seen its RMG export levels grow steadily and has become a top global exporter. With around USD 15 billion in export value in calendar year 2010, the RMG industry is currently Bangladesh’s most important industry sector (13 percent share of GDP and total export share of over 75 percent). With 12 percent average annual growth rates, clothing exports are the key driving force behind GDP

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development (7 percent CAGR from 1995 to 2010). The attractiveness for buyers lies in Bangladesh’s long-term experience and strong performance in the sourcing country selection criteria of price and capacity as well as product portfolio offered. Leading international retailers, especially from the value sector, started to source in Bangladesh already in the 1980s. Over time, buyers have strengthened their sourcing base by shifting toward direct sourcing and opening their own local offices in Dhaka and Chittagong. Of the European and US buyers McKinsey surveyed, 72 percent of those with activities in Bangladesh source directly. The high share is confirmed by the suppliers – 69 percent of the surveyed suppliers focus on working directly with international buyers. In the last 15 years, Bangladesh’s share of apparel imports to Europe and the US more than doubled, securing Bangladesh’s No. 3

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position among importers to the European Union 15 (EU-15) and the No. 4 position among US importers. Within just the last three years, 39 percent of the companies represented in the CPO interviews have increased their share of sourcing in Bangladesh by more than 30 percent, 13 percent of the companies by 20 to 30 percent, and 30 percent of the companies by 10 to 20 percent. Bangladesh’s growth has been recognized. Goldman Sachs included Bangladesh in the “Next 11” emerging countries to watch following BRIC (Brazil, Russia, India, and China) and JP Morgan lists Bangladesh among its “Frontier Five” emerging economies in which it is worth investing. Bangladesh offers the two main “hard” advantages – price and capacity. It provides satisfactory quality levels, especially in value and entry-level mid-market products, while acceptable speed and risk levels can be achieved

The Bangladesh Accountant

through careful management. Competitive price level is clearly the prime advantage – all CPOs participating in the study named price attractiveness as the first and foremost reason for purchasing in Bangladesh. Within the next three years, both CPOs and suppliers expect a labor cost increase of about 30 percent. Not only are all stakeholders certain about increases in the future, they see it as a necessity, since minimum wages had not been adapted for a long time despite high inflation. It wasn’t until November 2010 that wages were raised for the first time since 2006. And it has been announced that minimum wages will be adapted regularly in two-year rhythms. Leading suppliers already offer annual wage progression as well as profit contributions. Respondents see the development of wages in Bangladesh being in line with that in other countries. And as they expect significant efficiency increases to offset rising

The Bangladesh Accountant

costs in the future, respondents state that Bangladesh’s price levels will remain highly competitive in the future. Half of the international CPOs interviewed mentioned capacity as the second-biggest advantage of Bangladesh’s RMG industry. With a current 5,000 RMG factories employing about 3.6 million workers from a total workforce of 74 million, Bangladesh is clearly ahead of Southeast Asian RMG suppliers in terms of capacity offered (e.g., Indonesia has about 2,450 factories, Vietnam 2,000, and Cambodia 260 factories). Other markets, such as India and Pakistan, would have the potential to be high-volume supply markets, but high risk or structural workforce factors prevent utilization of their capacity. Supplier capability ranks third – mentioned by 30 percent of respondents in the survey of European and US CPOs. However, the current acknowledgment of capability is very focused:

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Bangladesh’s suppliers are known for supplying good quality and large order sizes for the value and lower mid-market. At the same time, suppliers have started to expand into more value-added services (Exhibit 3). In addition to price, capacity, and capability, a high share of European CPOs strongly emphasize the advantages of sourcing in Bangladesh due to favorable trade agreements. The broadening of the EU Generalized System of Preferences (EU-GSP) rules on duty-free imports of garments from Bangladesh to include products with two stage processing made sourcing from Bangladesh even more attractive. A shift from the currently dominant knitwear (70 percent of import value to the EU-15) to a more balanced sourcing product portfolio can be expected (e.g., the US sourced 26 percent knitwear and 74 percent wovens in 2010). This advantageous starting position in terms of price, capacity,

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capability, and trade regulations provides the base for positive RMG growth in Bangladesh. And the strong demand of international buyers from Europe, the US, and emerging markets will accelerate it in the future. In the medium term, Bangladesh looks to be the sourcing country of choice For the next ten years, McKinsey forecasts a continuation in the high growth of Bangladesh’s RMG sector. Driven by the sourcing trends described previously and Bangladesh’s current starting position, European and US buyers will continue expanding their sourcing activities in Bangladesh. Additionally, new buying markets are becoming increasingly important as sourcing customers for Bangladesh (Exhibit 4). European and US CPOs aim to significantly grow their share of sourcing in Bangladesh. Companies focused on a value segment plan expansion from a

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current average 20 percent to a 25 to 30 percent sourcing share in 2020. Mid-market brands, which generate around 13 percent of their sourcing value in Bangladesh today, plan to grow their share to 20 to 25 percent in the medium term. This growth will be driven not only by an increase of volumes in current product categories but, as stated by 63 percent of CPOs interviewed, by broadening the sourcing strategy to more complex, more fashionable, or more sophisticated items (e.g., the most frequently mentioned categories are outerwear and formal wear for value markets, and an expansion of existing products as well as flat knits for mid-market players). This means that the value market will be the key volume contributor, while the mid-market will demonstrate more dynamic growth (i.e., higher CAGR). Also, many Western mid- to up market buyers have recently begun or have concrete plans to source from Bangladesh.

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Interesting to note is that a new class of attractive customers for Bangladesh’s RMG industry is growing quickly. Garment exports from Bangladesh to new buying markets – those seeking alternative options in supplying products to their fast-growing consumptionoriented middle class – showed a CAGR of 56 percent in the period 2008 to 2010. Especially regional countries want to benefit from the advantages Bangladesh has to offer. Not surprisingly, suppliers in Bangladesh see China as the country gaining most importance for them over the next ten years, with India following suit with a ranking of third. Bilateral agreements, such as the recent duty-free deal between India and Bangladesh announced in September 2011, are being established in order to foster increased trade. Taking these drivers into account, Bangladesh’s RMG industry will continue to face growing demand. McKinsey has forecast demand growth through 2020, based on its

The Bangladesh Accountant

CPO survey, which covers approximately 66 percent of Bangladesh’s total export value to the US and Europe. CPOs of value players want to increase the value of their sourcing in Bangladesh by about a 10 percent annual growth rate, whereas mid-market players plan an annual growth rate of around 14 percent. Looking at the demand side from existing and new markets, an annual value increase of Bangladesh’s RMG industry of around 13 percent is likely. The supplier survey paints a similar picture, with some 73 percent of suppliers believing in strong growth of more than 10 percent per annum within the next ten years. However, a number of significant challenges brought on by growth exist. Depending on how well the most severe issues can be managed, the market will realistically develop at an annual rate of 7 to 9 percent within the next ten years, resulting in an export value of around USD 36 to 42 billion. This means the market

The Bangladesh Accountant

will double by 2015 and nearly triple by 2020.

Challenges of growth While Bangladesh represents some very promising advantages in certain dimensions, a number of challenges could create hurdles for companies seeking to source there (Exhibit 5). Only if these challenges can be overcome, will Bangladesh’s RMG industry continue to prosper. Infrastructure For all business stakeholders, infrastructure (transport and utilities supply) is the single largest issue hampering Bangladesh’s RMG industry. Buyers today are forced to carefully select the type of products to source from Bangladesh, since congested roads, limited inland transport alternatives, and the lack of a deep-sea harbor add inefficiencies to garment lead time. With the aim to move toward sourcing more fashionable, shorter lead time

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items in Bangladesh, reliable and fast transport is becoming extremely important. The transport issues need to be solved quickly in order to avoid a collapse in the transport network as volumes continue to grow (Exhibit 6). As the RMG industry is highly dependent on the Dhaka-Chittagong highway and Chittagong harbor as the only main transport routes, the following examples of current issues are already limiting the efficiency of Bangladesh’s garment industry: • The highway is often congested as capacity planning falls behind demand, increasing transport time from Dhaka to Chittagong up to 20 hours. • Lead time for sea freight is increased by about ten days due to the lack of a deep-sea harbor. • Productivity at Chittagong port suffers from inefficient processes (e.g., manual processing), limited crane capacity, and

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strikes that sometimes span several days at a time. • The Dhaka-Chittagong train connection offers limited capacity (i.e., only for about 120 containers per day) although logistics experts estimate a tenfold capacity need.

long-term efforts to establish a deep-sea port in Chittagong, improve efficiency at Dhaka airport, and double the train container transport capacity.

At the moment, suppliers are making adjustments and “manage” around these issues by incorporating additional transport days into planning, building very close relationships with transport companies, making drivers more accountable, and by using tracking systems to achieve full transparency of their products’ movements at all times.

It remains to be seen if the improvements planned by the government can be financed, implemented quickly enough, and are sufficient in their current form to avoid a possible transport network collapse. The country’s past success rate in finalizing projects on time raises some doubt about a quick solution for the infrastructure issue. For example, only about 17 percent of the work on the highway project has been completed to date, making the December 2012 deadline obsolete.

Discussions with government representatives validated a number of projects addressing the different transport routes that are being pursued to help ease the situation. For example, the government plans to expand the Dhaka-Chittagong highway to four lanes, prepare

The power supply issue seems more likely solvable within the next two or three years, although 90 percent of local suppliers rate the current energy supply as very poor or poor. Today, many factories are investing to ensure having a constant power supply

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October - December 2011

and are using their own generators in order to remain independent of the public energy supply. However, the issuing of gas licenses has been limited, leading to delays in manufacturers’ expansion plans. Additionally, conserving energy is becoming a more prominent topic. Some 12 suppliers have started to move toward “greener” production and are improving their energy efficiency within the “Cleaner Production Initiative,” coordinated by the World Bank’s International Finance Corporation (IFC) in cooperation with six leading garment buyers, including large buyers such as Walmart, H&M, and Marks & Spencer. For example, one vertically integrated supplier recently demonstrated 10 to 12 percent in energy savings in a report on preliminary results of the initiative. Improving the country’s energy supply is a core topic for the current government. Within the last two years, more than 2,000

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megawatts of power have been added to Bangladesh’s network, new contracts for 34 power plants have been awarded, and negotiations for a joint electricity grid to enable power trade in the region are under way. Compliance As a developing country, Bangladesh is under close scrutiny by nongovernmental organizations (NGOs) and corporate social responsibility (CSR) stakeholders regarding compliance. Both CSR experts and buyers report improved labor and social compliance standards, but there is still a broad range of compliance seen across suppliers and, as described in the following, many unsolved topics still exist. Solving these issues and achieving ethical labor standards and sourcing practices are key prerequisites in Bangladesh’s apparel industry from a McKinsey perspective. Regional concentration of Bangladesh’s RMG industry provides a relatively high visibility of the compliance situation. CSR stakeholders can visit a significant amount of suppliers within a relatively short time. This situation offers more opportunity to create transparency regarding supplier conduct than would be possible in countries such as China and India, as their industry locations are much more spread out. International buyers should also make active use of unannounced visits to achieve transparency. Some 93 percent of the European and US CPOs interviewed agreed that the compliance standard in Bangladesh has somewhat improved (67 percent) or strongly improved (26 percent) within the last five years. However, they reported that the spread among suppliers remains high.

The Bangladesh Accountant

As one buyer of a mid-market brand puts it, you would be “impressed by how good the compliance is in the good factories.” Some of the best factories have even started to increase transparency by implementing CSR reporting. However, only 50 to 100 manufacturers of around 5,000 that are active are mentioned as having achieved very high standards. McKinsey suggests that buyers should continually push efforts to increase and maintain compliance standards by educating workers, implementing standards at suppliers, and fostering full transparency in the supply chain via their local sourcing offices. The most developed suppliers understand that compliance is a key factor in achieving business success. As one interviewee stated, “things are changing and if I do not comply, I cannot get the orders.” Therefore, it is the responsibility of the buyers to choose their suppliers consciously and manage compliance – not only via on-site control but also by rewarding good compliance standards. Despite the progress of the last few years, gaps exist and new risks may be emerging. Issues in social compliance mentioned by some of the top buyers in Bangladesh are the lack of worker education, a remaining risk of subcontracting, lack of law enforcement, and a continued need for developing fair practices and compensation. For example, Bangladesh enacted child labor regulation in 2006, but UNICEF has reported a lack of enforcement. In 2010, a new legal framework was developed in conjunction with the input of UNICEF as well as other stakeholders. This most recent effort by the government of Bangladesh aims to eradicate child labor by 2015.

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Environmental compliance is just starting to get the required attention in the market. The previously mentioned “Cleaner Production Initiative,” coordinated by the World Bank’s International Finance Corporation, is the first big effort in this area. In October 2011, the IFC reported that the 12 factories involved in the pilot project have lowered water consumption by 75 million liters and achieved savings of USD 1 million in operating costs. Past improvements can be attributed to the strong push of critical Western stakeholders as well as European and US buyers. However, the new customer base of Bangladesh’s RMG industry might have a different idea of what standards need to be followed. Interviews conducted with CSR experts revealed that they expect implementation of and adherence to stricter standards to become more difficult as customers from regional markets increase their share of sourcing in Bangladesh. For European and US apparel players, McKinsey sees careful supplier selection, value chain transparency, a tireless effort, and close relationships with suppliers remaining crucial to ensuring compliance when sourcing in Bangladesh. Supplier performance and workforce supply In the medium term, McKinsey expects that labor costs will continually increase, that the apparel export market will grow at between 7 to 9 percent through 2020, and that value buyers are looking to source more fashionable and sophisticated products from Bangladesh. At the same time, mid-market buyers have just entered the market and are starting to source standard products. To

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realize the growth potential, garment manufacturers will need to make performance improvements and ensure the supply of skilled workers.

garment manufacturers are able to produce at an advanced level in terms of product categories, productivity, services, and compliance.

able to fill higher-skill middle management positions and if the amount of skilled workers needed in Bangladesh’s RMG industry is not secured.

Productivity at suppliers needs to improve, not only to mitigate rising wages, but also to close the existing productivity gap in comparison to other sourcing countries (Exhibit 7). Productivity in Bangladesh’s RMG factories needs to catch up to the levels seen in India if Bangladesh’s suppliers are going to be able to deliver on the unit demand growth that McKinsey forecasts, now expected to be 2x to 2.5x through 2020.

Representing 85 percent of those interviewed, the majority of CPOs are sure (41 percent)/ think it is likely (44 percent) that suppliers will be upgrading into more sophisticated products. And mid-market players are overall even more positive about the supplier upgrades than are value players. Supplier investment plans show mostly only minor developments within existing product categories. Just a few suppliers are starting to invest in new technologies in order to make any kind of notable upgrades.

When they were interviewed, all types of stakeholders mentioned the lack of skilled middle management as a key factor limiting productivity improvement at suppliers:

Additionally, a gap between customer requirements and supplier capabilities/investment plans is emerging. Buyers want to expand their sourcing product mix into more sophisticated categories, such as outerwear, tailored products, ladies intimates, and functional clothing. Currently, however, only 50 to 100 local

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Besides a lack of investment in new machinery and technologies, the current insufficient size of skilled workforce also impedes an increase in productivity and a move toward more sophisticated products. Also, existing challenges will multiply if suppliers aren’t

October - December 2011

• Educational institutions for technical skills are few or nonexistent. • The RMG industry’s image is not attractive enough to interest young top employees and graduates. • “Importing” middle management creates several problems, such as cultural issues and the lack of incentives for local workers to pursue internal training or development as well as increased costs.

The Bangladesh Accountant

Consequently, the low educational level of workers contributes to more inefficiency in the garment factories. Experts estimate that there is currently a 25 percent shortage of skilled workers in Bangladesh’s RMG industry. The majority of workers receive training only at a basic level on the job in the factories or in regional basic sewing schools, as vocational training institutions currently don’t exist. Also, the migration backgrounds of workers – coming from poor remote regions to the garment centers Dhaka and Chittagong – and limited employee loyalty in the low-wage jobs mean that suppliers constantly face high recruitment levels of about 5 percent per year. Along with high labor turnover, the future growth of RMG exports weighing above productivity increases will require up to 6 million workers by 2020. With most of the industry being focused on Dhaka, healthy and sustainable expansion – from a business as well as a social responsibility point of view – will necessitate geographic diversification into rural areas in order to more effectively utilize the availability of Bangladesh’s workforce. A key enabler for diversification into the less developed western part of the country will be the development and improvement of infrastructure. Raw materials The high volatility of raw materials prices seen within the last few years has increased buyers’ sensitivity to raw materials prices and ease of access in sourcing countries. Considering this context, the current lack of any noteworthy own raw materials supply of natural or man-made fibers in Bangladesh weighs even stronger, beyond the immediate issue of

The Bangladesh Accountant

lead time increase. Bangladesh’s dependency on imports creates sourcing risks and longer lead times. Whereas the average fabric lead time for wovens in Bangladesh is seven days, it increased to up to 15 days when sourced from India and up to 30 days when sourced from China. However, many fabrics produced in Bangladesh typically are at quality levels mainly suited for the value markets. Improvement in local capabilities and verti-calization would improve lead times. However, integration is likely to be seen more in knitwear due to the high capital investments needed for wovens. Also, recent changes to trade agreements (e.g., EU-GSP rules of origin, India duty-free deal) provide incentives for Bangladesh’s RMG industry to import fabrics, thus offering a chance for CMT (cut, make & trim) suppliers to upgrade and venture into more fashionable, more sophisticated products. However, the overall development of Bangladesh’s RMG industry leads to continued dependency, risk, and value chain inefficiencies. So it is not surprising that the average lead time for 45 percent of the local suppliers interviewed is still at around 90 days and for 25 percent, at 120 days. It should be noted, however, that 21 percent of suppliers manage to bring down their shortest lead times to less than 30 days. Economy and political stability In the opinion of European and US CPOs, economy and political stability are the fifth area of risk when sourcing in Bangladesh. About half of the CPOs interviewed stated that they would reduce the value of their sourcing in Bangladesh if political stability

October - December 2011

were to decrease. Planning security, political unrest and strikes, corruption, and ease of doing business are the topics mentioned most often. Bangladesh’s multiparty democracy is characterized by two large opposing parties and a five-year election cycle. The dynamics of the country’s government has partially contributed to interruptions in short-term planning and implementation of longer-term projects. Although mass strikes (known locally as “hartal”) have less frequently directly affected the RMG industry in recent times, political unrest and strikes in the supply chain can lead to significant delays. In McKinsey’s survey, Bangladesh’s RMG suppliers cited political unrest (50 percent of respondents) and strikes (21 percent of respondents) as the highest risks in sourcing from Bangladesh, right after infrastructure. The “hartal phenomenon,” as the local media call it, is not only a signpost for the continued social changes required, but a risk of which buyers need to be aware. The majority of CPOs see corruption as a major hurdle for doing business in Bangladesh. Some 57 percent of respondents are aware of corruption being present but manageable with experience, whereas 30 percent have seen limitations in their business dealings because of it. Though Bangladesh’s position in the Transparency Corruption Index has improved over the last few years, measures against corruption need to become more effective. In the view of CPOs and suppliers as well as international NGOs, the enforcement of law and order is inefficient – or as one CPO put it:

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“Laws exist, but the government does not enforce application.” Approximately 5 percent of suppliers mentioned high interest rates as a hurdle to capital investment in the RMG sector. In the past, the International Monetary Fund (IMF) had requested a reduction in lending interest rates to foster investment. Though the rates have dropped from an average of 16.4 percent in 2008, lending interest rates in Bangladesh in 2010 were still at an average 13 percent according to the IMF – more than double the level of China’s average lending interest rate at 5.4 percent. New industry and service sectors are starting to gain importance for the economy in Bangladesh (e.g., pharmaceuticals, shipbuilding, IT). Today and in the medium term, the labor-intense RMG industry still takes precedence, but in the longer term, a shift in the government’s focus will likely emerge. The potential for Bangladesh’s RMG growth can be realized only if the challenges in the five areas of infrastructure, compliance, supplier performance and workforce supply, raw materials, and economy and political stability are tackled. It will be paramount that stakeholders work jointly to achieve this goal.

Making it work: Overcoming the challenges of growth Despite all the challenges that exist in Bangladesh, companies can still highly benefit from its sourcing offering. There are a number of areas in which the three main stakeholders – government, suppliers, and buyers – can work to overcome various hurdles to success. Government: “Plan ahead”

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From the RMG industry perspective, longer-term plans and investments to accommodate the foreseen future growth are most important. The government’s top 3 priorities for investment are infrastructure, education, and trade support. • As previously noted, the current infrastructure investments are a start, but are far from enough to either provide the capacity needed today or come close to what is required for the future. Increased investments, diligent planning, and project management, as well as overcoming unnecessary bureaucracy and corruption are required. If the infrastructure is provided, additional incentives to decentralize the industry could support its healthy growth. • Investment in education requires broad initiatives. On the one hand, middle management education should be combined with an effort to improve the image of the garment industry. And on the other, vocational training needs to be developed and the appropriate institutions must be established either by the government or via public-private partnerships. • Continued trade support for Bangladesh’s RMG industry, especially with regard to bilateral agreements, is the third core priority. For the latter, the focus shouldn’t be on export markets only, but a long-term strategy needs to be developed in order to secure the required raw materials supply as well. Further support in increasing the country’s attractiveness and enabling national backwards integration

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in Bangladesh would help further reduce dependencies. These are the areas in which suppliers most strongly desire government investment, with 97 percent of suppliers asking for investment in infrastructure, 79 percent in education, and 50 percent in trade support. Additional focus areas for the government from an RMG industry perspective should be social/health, environment, and law and order. Suppliers: “Think beyond” McKinsey’s work has identified five “action fields” – productivity, compliance, partnerships, supply chain management, and funding – that suppliers should play upon to overcome the barriers to growth in Bangladesh’s garment export business. First, suppliers need to increase their professional standards and make their own efforts to improve productivity and education instead of waiting for the government to do so. Concrete steps that suppliers can take, for example, include: • Improve the management skills of top and middle management • Provide structured in-house training for both workers and middle management • Ensure fair wages and incentive schemes • Pursue lean workshops, certification, and automation of production • Incorporate enterprise resource planning systems, production planning systems, and continuous productivity monitoring.

The Bangladesh Accountant

The second field of action suppliers should affect is establishing clear standards for labor and environmental compliance. Here, a step change is required – from simply reacting to buyer and NGO demands, to proactively developing a comprehensive CSR strategy with dedicated compliance teams, “clean production” initiatives, worker satisfaction and loyalty monitoring, and best practice sharing within the industry and among NGOs and buyers. The industry-wide Garments without Guilt (GWG) initiative, established by the Sri Lankan apparel industry, could provide an interesting blueprint for a supplier-driven initiative in Bangladesh. Creating long-term partnerships with buyers and leveraging buyer know-how in capability building is the third field on which suppliers should focus. This can include, for example, utilizing buyer know-how for capability building, long-term capacity planning/blocking, co-development of products,

The Bangladesh Accountant

electronic data exchange, and balancing minimum order sizes. The fourth action field should involve suppliers managing their supply chains more strategically, focusing on core topics such as local versus foreign raw materials footprint, developing approved local sources (e.g., for accessories), evaluating the potential for verticalization, and diversifying into more value-added products. The final field of action would be for suppliers to optimize their funding for capital investments, considering, for example, retained earnings and equity funding, co-investments with buyers, and joint ventures. McKinsey’s research shows that some manufacturers have already set out on a path toward making improvements, but broader efforts along all five action fields are required and more suppliers need to join this improvement effort. Buyers: “Take care” What can European and US buyers do to secure Bangladesh as a

October - December 2011

sourcing powerhouse? Clearly, they should think about how to help overcome the hurdles to growth and improve efficiency from a full value chain perspective. Additionally, buyers need to be attentive to the shift from a buyers’ to a suppliers’ market, as the sourcing landscape in Bangladesh becomes more populated with Western buyers and new buying countries (e.g., China, India, and Brazil). At the same time, compliance efforts should never slow down, but should be pursued actively and continually. Selectively, buyers have invested in supplier development in the past, whether via preferred supplier programs or through compliance and environmental topics in joint programs with NGOs. To further increase efficiency and transparency in the supply chain, buyers should expand their support for lean operations and electronic data exchange. Furthermore, buyers can evaluate their involvement in efforts regarding middle management development or

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building up vocational training institutions. Another important lever suppliers can pursue in overcoming the challenges of growth is to build up close supplier relationships in order to position themselves in the emerging supplier market. As one sourcing office representative put it, what is needed is “a move from being directive, to being charming.” Already today, 84 percent of CPOs in companies buying from Bangladesh describes their type of supplier relationship as long-term. However, suppliers still see clear areas for improvement (Exhibit 8). Process hygiene on the buyer side is especially important to enable efficient end-toend processes. Often, suppliers feel that they are pressured about timekeeping. But long buyer response time, in-house process complexity among buyers between the merchandising and sourcing functions, and a high number of last-minute changes contribute to slowing down the overall process. As McKinsey experiences in its work with clients, buyers recognize this issue and have started to work on reducing their inhouse process complexity and improving the interface with suppliers.

increase is needed – there’s a large gap between FOB price and buyers’ sales price, but still buyers are bargaining for 5 and 10 cents and using FOB price negotiation across different standards of suppliers.”

which are based on McKinsey’s work with clients and the survey results:

To enable closer supplier relationships, having an own local sourcing setup is becoming increasingly important. In order to choose the right archetype (see table on following page), buyers will need to more seriously consider supplier relationships and development in addition to the following five typical strategic decision making criteria regarding sourcing setup: strategic and organizational direction (e.g., buyer versus product focus), volume, product sophistication, lead time requirements, and own capacities (global, regional HQ, etc.). Buyers are urged to continue pursuing their ongoing significant efforts and address compliance along the following dimensions,

• Their own capacities and standards to ensure suppliers’ environmental compliance

• Their own capacities and standards to ensure labor/social compliance of suppliers

• Governance schemes and monitoring to ensure compliance within their own sourcing setup/office • Cooperation with different NGOs and initiatives to ensure industry-wide improvement • Honoring supplier efforts rather than comparing different standards in quotations • Acknowledging development needs to ensure customer trust rather than focusing on past improvements.

Additionally, the past price negotiation focus of buyers is being met with increasingly more resistance from suppliers. The most developed suppliers in Bangladesh have even begun choosing their customers very carefully – at times, even breaking off ties with long-established buying partners in order to upgrade their customer base. The greater demand for mid-market products and higher absolute margins require a new pricing model. Suppliers are requesting a fair price model. As one supplier puts it: “An FOB price

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Together, the three main stakeholders – government, suppliers, and buyers – can accomplish the development potential and solve Bangladesh’s RMG growth formula. Most importantly, they need to work hand in hand on their continued efforts regarding all of the various measures involved in improving the image of Bangladesh’s RMG industry. McKinsey sees a need for a new level of collaboration with regard to compliance, in which forces join across government, suppliers, buyers, and other stakeholders to anchor ethical and sustainable business practices along the value chain. The future development of Bangladesh depends on addressing these critical issues now.

double by 2015 and nearly triple by 2020. Other markets in Southeast Asia will increase their exports too, but won’t be able to replace – at least in the near future – Bangladesh as a viable RMG sourcing hub. But Bangladesh’s sourcing market will get crowded, as incumbents plan to significantly increase and new players enter. In order to leverage the best of what Bangladesh has to offer in the way of sourcing opportunities, apparel companies will need to prepare

themselves accordingly. They should plan to revisit their sourcing and country strategies to secure the benefits, upgrade supplier management, move quickly, and not ignore the importance of managing the risks. This will of course also involve upgrading and further professionalizing the local setup, hiring top talent, strengthening supplier relationships, and improving logistics management.

Only if wholehearted efforts are led by all stakeholders together, will the stage be set to support a future “re-branding” of Bangladesh. Bangladesh should be on the radar screen of all European and US apparel buyers. This is especially true as Bangladesh’s RMG exports will strengthen the country’s position and are likely to grow –

Authors: Dr. Achim Berg is Principal in McKinsey’s Frankfurt office and Co-leader of McKinsey’s Apparel, Fashion & Luxury Practice. Saskia Hedrich is Knowledge Expert of the Apparel, Fashion & Luxury Practice in McKinsey’s Munich office. Sebastian Kempf is consultant in McKinsey’s Düsseldorf office. Dr. Thomas Tochtermann is Director in McKinsey’s Hamburg office and Leader of McKinsey’s Apparel, Fashion & Luxury Practice. (The article is reprinted from Daily Star on 19 December 2011, with their permission)

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October - December 2011

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ICAB News

Quarterly Journal of the Institute of Chartered Accountants of Bangladesh

ICAB Awards Presented for Best Published Accounts and Reports

T

he 11th ICAB National Awards for Best Published Accounts and Reports Ceremony was held amid much fanfare on October 04, 2011 at the Pan Pacific Hotel Sonargaon. Awarded each year by ICAB, this blue riband event is now widely recognized in the corporate and the business circles as the most prestigious award in the country for corporate reporting and presentation. The published accounts and financial statements of the listed companies and NGOs/MFIs were evaluated by the Review Committee for Published Accounts and Reports Committee of ICAB, under the Chairmanship of Past President and Council Member, Mr. Anwaruddin Chowdhury under a strict set of guidelines and criteria set by the South Asian Federation of Accountants (SAFA). Mr. Mohammad Faruk Khan MP, Hon’ble Minister for Commerce,GOB graced the occasion as Chief Guest. Mr.

M. Khairul Hossain, Chairman of Securities and Exchange Commission was present as Special Guest. Mr. Anwaruddin Chowdhury FCA, Chairman of Review Committee for Published Accounts and Reports also attended in the ceremony.

The list of the awardees is as follows:

FINANCIAL SECTOR

NON-FINANCIAL SECTOR

Category I: Banks subject to prudential supervision Prime Bank Limited First Bank Asia Limited Second Islami Bank Bangladesh Limited Third-Joint BRAC Bank Limited Third-Joint Eastern Bank Limited Certificate of Merit Dutch Bangla Bank Limited Certificate of Merit Dhaka Bank Limited Certificate of Merit Mutual Trust Bank Limited Certificate of Merit Premier Bank Limited Certificate of Merit Southeast Bank Limited Certificate of Merit Jamuna Bank Limited Certificate of Merit Arab Bangladesh Bank Limited Certificate of Merit Mercantile Bank Limited Certificate of Merit

Category IV: Manufacturing RAK Ceramics (Bangladesh) Ltd. Summit Power Limited GlaxoSmithKline Bangladesh Ltd. ACI Limited Singer Bangladesh Limited Berger Paints (BD) Limited

First Second Third Certificate of Merit Certificate of Merit Certificate of Merit

Category V: Communication & IT Grameenphone Limited

First

Category II: Non-Banks Entities IDLC Finance Limited Prime Finance & Investment Ltd. LankaBangla Finance Limited Union Capital Limited International Leasing and Financial Services Limited Bangladesh Finance and Investment Company Limited (BD Finance) FAS Finance & Investment Limited Category III: Insurance Companies Reliance Insurance Limited Green Delta Insurance Company Ltd. 74

First Second Third Certificate of Merit Certificate of Merit Certificate of Merit Certificate of Merit

Category VI: Other Services (Excluding Communication & IT) None Category VII: Non-Governmental Organizations Sajida Foundation First BRAC Second BURO Bangladesh Third-Joint Ghashful Third-Joint Uddipan Certificate of Merit Category VIII: Public Sector Entities Agrani Bank Ltd. First Rupali Bank Limited Second Investment Corporation of Bangladesh (ICB) Third Category IX: Agriculture None

First Second October - December 2011

The Bangladesh Accountant

The Bangladesh Accountant

ICAB News

Quarterly Journal of the Institute of Chartered Accountants of Bangladesh

Discussion Held on Draft Companies Act The main objective of the meeting was to discuss several important issues of the present Companies Act of Bangladesh, find out further areas to reform so that the issue of transparency and accountability is ensured on the one hand, and on the other hand the Act becomes user friendly.

T he Institute of Chartered Accountants of Bangladesh (ICAB)

participated in a Consultation Session on Drafting a New Companies Act for Bangladesh held on Tuesday, 11 October 2011 at Ruposhi Bangla Hotel. Ms. Parveen Mahmud FCA, President, ICAB chaired the Session while Barrister Tanjib-Ul Alam, the Lead Drafter of the New Companies Act moderated the Session. Among others, Mr. Masrur Reaz, Program Manager, BICF was also present in the Session.

ICAB President recommended amending several clauses by incorporating new provisions in the said draft which can obviously simplify the business process. She hoped that the final drafted Act, will be non-discriminatory and operationally viable. Finally, she expressed her satisfaction with the way the consultations are being done and thanked everyone for their valuable suggestions in this regard. Vice Presidents: Mr. Md. Abdus Salam FCA, Mr. Md. Shahadat Hossain FCA, Council Members & Past Presidents: Mr. Anwaruddin Chowdhury FCA, Mr. ASM Nayeem FCA, Past Presidents: Mr. AK Chowdhury FCA, Mr. A K M Rafiqul Islam FCA, Mr. M A Baree FCA, Mr. A C Nath FCA, Mr. A K Gulam KIbria FCA, Council Member: Mr. Md. Syful Islam FCA, Secretary: Mr. N I Chowdhury FCA, and Sr. Deputy Director; Mr. Mahbub Ahmed Siddique ACA, also took part in the consultation.

President urges CAs to work Responsibly, Honestly

C hartered Accountancy is a

responsible, professional job,” said Chief Guest Md. Zillur Rahman, Hon’ble President, People’s Republic of Bangladesh while inaugurating the 19th Convocation of the Institute of Chartered Accountants of Bangladesh (ICAB) at the Bangabandhu International Conference Centre (BICC), Dhaka on 23rd October 2011. The Chartered Accountants who qualified in the sessions from November-December’2008 to May-June 2011 were conferred with certificates. Dr. Hafiz G. A Siddiqi, Vice Chancellor of North South University, Dhaka was the Convocation Speaker. High profile personalities of the country including dignitaries from the Government, educational and business sectors attended the Convocation. President Zillur Rahman urged the Chartered Accountants (CAs) to show utmost honesty and integrity alongside their professionalism in preparing the financial statements for government and corporate institutions.

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Congratulating the new accountants, the President said, “In your professional life, wherever you go, don’t forget the people of this country and always remember that you came to this stage with the support of your country’s hard working people”. The President said the professional CAs must always work to ensure transparency and accountability of the accounts, both in government and corporate institutions. Parveen Mahmud said that this festive assembly will create an everlasting memorable impression in the life of the certificate recipients in the years to come. October - December 2011

Convocation Speaker Dr. Hafiz GA Siddiqi said the newly graduated Chartered Accountants will have to demonstrate their professional ethics and personal integrity while discharging their professional duties. A total of 232 graduates were awarded professional certificates at the Convocation while 11 students (2 FCAs and 9 ACAs) received certificates from the President for their outstanding performance. A large number of members, students and invited guests were present at the Convocation.

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ICAB News

Quarterly Journal of the Institute of Chartered Accountants of Bangladesh

ICAB Organizes 5-day long International Conference stakeholders and international counterparts. The goal of the International Conference was to formulate a roadmap for developing strategic plans for long-term sustainability through collaboration among accounting professionals, government agencies and business leaders. The conference was held in the backdrop of global financial meltdown and tremendous adverse effects on large and small economies of developed and developing countries. The conference highlighted the opportunities for business enterprises for embracing the goals of sustainability.

T he Institute of Chartered

Accountants of Bangladesh (ICAB) organized the International Conference of Chartered Accountants 2011 on ‘Best Practices and Reporting for Sustainable Development,’ and other Events in Bangladesh. The International Conference was

part of a five-day series of events followed by Regional Standard Setters Conference, SAFA BPA Awards Ceremony-2010 and an International Seminar at Chittagong. International Conference was hosted by ICAB to foster knowledge sharing among members,

Hon’ble Prime Minister of the Government of People’s Republic of Bangladesh Sheikh Hasina inaugurated the Conference as the Chief Guest. Mr. Abul Maal Abdul Muhith, MP, Hon’ble Finance Minister, GOB and Mr. Muhammad Faruk Khan MP, Hon’ble Commerce Minister, GOB presented on the occasion as Special Guests. Mr. A N Raman, President SAFA presented the Keynote paper on the theme of the Conference.

SAFA Assembly Meeting

T he 18th SAFA Board Meeting of the South Asian

Federation of Accountants (SAFA), an Apex body of SAARC held on 25 November 2011 at Pan Pacific Sonargaon Hotel under the Chairmanship of Mr. A N Raman, President, SAFA. Office bearers of SAFA, Board Members and Technical Advisors of SAFA members bodies attended the meeting. 74th SAFA Assembly Meeting was held in the evening of the same day under the Chairmanship of Mr. A N Raman, President, SAFA. In the evening concurrently four SAFA Committee meetings Professional Ethics and Independence, (iii) accounting and were held in the evening on November 28, 2011 at Hotel Sonargaon. The Committees were: (I) Education, training and auditing Standards and (iv) Improvements, transparency, accountability and Governance. Continuous Professional Development (CPD), (ii)

Regional Standard Setters (RSS) Conference

The 18th SAFA Board Meeting of the South Asian Federation of

Accountants (SAFA), an Apex body of SAARC held on 25 November 2011 at Pan Pacific Sonargaon Hotel under the Chairmanship of Mr. A N Raman, President, SAFA. Office bearers of SAFA, Board Members and Technical Advisors of SAFA members bodies attended the meeting. 74th SAFA Assembly Meeting was held in the evening of the same day under the Chairmanship of Mr. A N Raman, President, SAFA. In the evening concurrently four SAFA Committee meetings were held in the evening on November 28, 2011 at Hotel Sonargaon. The Committees were: (I) Education, training and Continuous Professional Development (CPD), (ii) Professional Ethics and

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Independence, (iii) accounting and auditing Standards and (iv) Improvements, transparency, accountability and Governance.

October - December 2011

The Bangladesh Accountant

The Bangladesh Accountant

ICAB News

Quarterly Journal of the Institute of Chartered Accountants of Bangladesh

SAFA Best Presented Accounts and Corporate Governance Disclosures Awards 2010

O n 29 November 2011 at evening,

ICAB hosted SAFA BPA and CG Awards- 2010 for the second time in Bangladesh at Celebrity Hall, BICC. Chief Guest was Mr. Muhammad Faruk Khan, MP, Minister for Commerce, Government of Bangladesh. Mr. A. N. Raman, President, South Asian Federation of Accountants, Mr. Lasantha Wickremasinghe FCA, Chairman, SAFA Committee for Improvement in Transparency, Accountability and Governance (ITAG) and Mr. Anwaruddin Chowdhury, FCA, Council Member, Past President and Honourable Chairman of the Review Committee for Published Accounts & Reports (RCPAR), ICAB &

CAPA Board Member spoke on the occasion. Performance quality has improved in all the SAFA countries. Like other SAFA countries, Bangladesh has also escalated its performance over the years. In SAFA BPA Award Ceremony Noted singer Ms Runa Laila rendered songs, which was followed by dinner. This year in SAFA Best Practices & CG Award- 2010 Bangladesh’s performance is remarkable. Bangladesh has secured 19 awards out of 93 awards in total. Bangladesh has secured 1st position in the Banking sector: and it is Prime Bank Ltd, Financial services sector also Bangladesh came out first jointly and it

is Prime Finance and Investment Ltd and IDLC Finance Ltd. In Communication and IT Sector, Grameenphone Ltd. received the 1st prize. In Corporate Governance Sector, Islami Bank of Bangladesh Ltd secured first position. Bangladesh got two 2nd positions in NGO Sector, it is Sajida Foundation and in Public Sector Investment Corporation of Bangladesh (ICB). This is the first time Bangladesh received award in the Public Sector. Two 3rd positions are achieved in the NGO Sector by BRAC and Glaxo SmithKline Bangladesh Ltd in the Manufacturing Sector. Bangladesh received total 8 (Eight) merit certificates. They are in the : Banking Sector: Bank Asia Ltd and Islami Bank Bangladesh Ltd Insurance Sector: Reliance Insurance Ltd and Green Delta Insurance Company Ltd. Manufacturing Sector: RAK Ceramics (Bangladesh) Ltd and Summit Power Ltd. And in NGO Sector: Buro Bangladesh And, as overall winners Bangladesh is in the top. Prime Finance & Investment Ltd’s overall ranking is 1st and IDLC Finance Ltd’s overall ranking is 2nd position.

International Seminar at Chittagong

I CAB held an International seminar in Chittagong titled

“Professional Accountants, Role for Sustainable Development”. The objective is to ensure that ICAB members and corporate leaders from the Port City where much of the nation’s business and trade activities are conducted are able to hold an international dialogue on sustainability in the corporate sector. Almost after two decades, an international program is arranged in Chittagong. On November 30, 2011 morning about 45 participants by flight went Chittagong to attend, International Seminar at Hotel Agrabad, Chittagong on the theme “Professional Accountants role for Sustainable Development”. Chief Guest was Mr. Dilip Barua, Minister for Industries, GOB, Session Chairman, Mr. Showkat Hossain FCA, Council Member, ICAB and Resident Partner, Hoda Vasi & Chowdhury, Chartered Accountants. Mr. A N Raman, President, SAFA was keynote speaker. Mr. Mujahid Eshai, Past President, ICAP, Mr. Sujeewa Rajapakse, Vice President, ICASL, Mr. Reyaz Mihular, Chairman SAFA Committee on Accounting The Bangladesh Accountant

and Auditing Standards spoke on panel discussion on “Regional Perspectives on furthering Sustainable Development”. Mr. Shubrata Kumar Bhowmik, President, CRC made the vote of thanks. The Seminar was followed by cultural program, laser show and dinner. It was the last event of a five-day series of programme organized and hosted by ICAB.

October - December 2011

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The Bangladesh Accountant

ICAB News

Quarterly Journal of the Institute of Chartered Accountants of Bangladesh

Award Ceremony for Children of ICAB Officials and Staff

M eritorious children of ICAB

Secretariat officials and staffs were awarded on December 26, 2011 for their outstanding academic performance during 2011. About 35 children received awards at the ceremony. Dr. Abdul Momen, Permanent Representative to the United Nations from Bangladesh was the event’s Chief Guest. Dr. Abdul Momen, Permanent Representative to the United Nations from Bangladesh as Chief Guest said that the objective of this ceremony is to encourage them to continue their sincere effort and to do even better in their future endeavors. It will also create awareness among them about the activities of ICAB and help them to choose their profession in future. This will also encourage other children to follow their path to be recognized by ICAB in this befitting manner. Ms. Parveen Mahmud FCA, President, ICAB in her address of welcome said that though it is a little programme but the importance of this is not small. The brilliant children will obviously get more inspiration in their every sphere of examination in future. She said that there was no alternative to be industrious. It would make a student success in life. Mr. N I Chowdhury FCA, Secretary, ICAB in his speech said that the main

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objective of this ceremony was to inspire the children to build up future. He added that CA was most rightful profession which could make the future bright. Among the awardees 5 children received the awards of Excellence. They are: Farhana Zaman Miti, daughter of Mokteruzzaman Khan Senior Assistant Secretary, Sayla Seraj Sharmin, daughter of Md. Serajul Islam Sarker –Assistant Co-ordination Officer, Shamia Hashem Nitu, daughter of Md. Abul Hashem-Daptury-cum-Record Keeper, Nusrat Jahan, daughter of Tayab Ali-Liftman and Taswar Sharif, son of Mirza Tabassum Yeasmin-Senior Assistant Secretary(P&P). The other awardees in different categories are: Md. Shakil Rabby , son of Md. Abul Kalam –Messenger, Boy, Md. Shorab Hossain Choton, son of Md. Jashim Uddin- Despatch Assistant, Md. Hasan Mahmud, son of Md. Jashim UddinDespatch Assistant, Mohammad Abdul Gaffar Howladar, son of Abdus Sattar-Electrician, Asma Akter Akhi, daughter of Md. Abdul Awal-Messenger Boy, Aysha Akter,daughter of Md. Abdul Mannan-Messenger Boy, Ayndrila Hossain, daughter of Md. Afzal Hossain- Controller of Examinations, Md. Sabbir Serniabat, son of Md. Abul Kalam- Messenger Boy, Md. Noor

Hossain Rony, son of Md. Noor Ahmed Bhuiyan- Messenger Boy, Attreyi Hoque, daughter of Dr. Mahfuzul Hoque- Director-LPD, Tajreean Ahmed, daughter of Sqn.Ldr.(Retd.) SM Abu Nayem Ahmed, Md. Sabbirul Islam, son of Md. Sirajul Islam Sarker-Assistant Co-Ordination Officer, Mohiuddin, son of Md. Abdul Mannan-Messenger Boy, Sharmin Akter (Mitu), daughter of Md. Mizanur Rahman-Computer Designer, Albar Uddin Ahmed, son of Md. Afsar Uddin –Deputy Chief Accountant, Rayna Binte Hasan, daughter of Nasrat Hassan- Senior Assistant Secretary, Sajid Al Safin, son of Md. Nizamuddin-SO(IT), Tasnu Akter, daughter of Md. Abul Kalam-Messenger Boy, Fatema Jahan, daughter of Md. Ishaque Faruque, Md. Taif Sikder, son of Md. Alauddin Sikder (Jashim)-Engineering Assistant, Symonty Sapthashi, daughter of Sangrami Chowdhury Librarian-cum-Accountant, Nusrat Jahan Mou, daughter of AKM Abdus Sattar-Electrician, Afia Nushrat, daughter of Sqn.Ldr.(Retd.) SM Abu Nayem Ahmed, Adib Hossain, son of Md. Afzal Hossain-Controller of Examinations, Afrin Noon Nahar Muskan, daughter of Md. Afsar UddinDeputy Chief Accountant, Salma, daughter of Yusuf Ali- PMO, Abrar Moin Turjo, son of Mahabuba Akhtar.

October - December 2011

The Bangladesh Accountant

The Bangladesh Accountant

ICAB News

Quarterly Journal of the Institute of Chartered Accountants of Bangladesh

39th AGM of ICAB held at CA Bhaban

T he 39th Annual General Meeting

(AGM) of the Institute of Chartered Accountants of Bangladesh (ICAB) was held on 29 December 2011 at the ICAB Auditorium, Dhaka under the Chairmanship of Ms. Parveen Mahmud FCA, President-ICAB. Before the AGM Mr. Md. Syful Islam FCA, Member Council, ICAB has been elected President of ICAB for the year 2012 by the Council-ICAB in its meeting. Mr. Md. Abdus Salam FCA, Mr. Shahjahan Majumder FCA and Mr. Showkat Hossain FCA were elected Vice Presidents of the Institute for the same tenure. At the beginning the meeting paid rich tributes to the departed soul of Mr. Muhammad Idris, FCA (Enrollment No 394) who expired in August this year.

Md. Syful Islam FCA President

The Bangladesh Accountant

The house observed one minute’s silence and prayed for the salvation of the departed soul. The minutes of the 38th AGM held on 19 December 2010 were confirmed and the Annual Report of the Council and Financial Statements of the Institute for 2010-2011 were adopted after necessary perusal and discussion. The outgoing President, Ms. Parveen Mahmud FCA introduced the newly elected office bearers of the ICAB for 2012. The ICAB office bearers for 2012 are Mr. Md. Syful Islam FCA is the President, while Mr. Showkat Hossain FCA, Mr. Md. Abdus Salam FCA and Mr. Shahjahan Majumder FCA are Vice Presidents. The meeting also approved the proposal to appoint Mr. A. Wahab FCA (48) and Mr. Enamul Kabir FCA (280)

Showkat Hossain FCA Vice President

as auditors of the Institute for the year 2011-2012. In his speech the outgoing President, Ms. Parveen Mahmud FCA thanked the Members, the senior management and employees of the Institute and expressed her gratitude to them for extending cooperation and giving her valuable advice, suggestions and guidelines while discharging her responsibility as President during her tenure. The newly elected President Mr. Md. Syful Islam FCA thanked all the honourable Councilors and Members of the Institute for extending their support to him and electing him President-ICAB for 2012. He sought cooperation from all to enable him to discharge his responsibilities to promote the interests

Md. Abdus Salam FCA Vice President

October - December 2011

Shahjahan Majumder FCA Vice President

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