2021 Q3 Deloitte CFO Express

The second quarter of 2021 saw the global outbreak of the Delta variant of COVID-19, although this is unlikely to have an overall impact on China's economic recovery. July's economic data showed a slowdown in China's exports and a sharp fall in total social financing, making the People's Bank of China's recent cut to the reserve requirement a move to "batten down the hatches". The commodity price boom has eroded margins in manufacturing, and businesses are being challenged to "go green" against the backdrop of China's stated goal of carbon neutrality.

The multiple lingering uncertainties facing the economic recovery have heightened the importance of business agility, particularly the ability to adapt technology and innovation, grasp market and regulatory trends, and maintain and strengthen workplace morale. This issue of CFO Express covers the latest hot topics, including environmental, social and governance (ESG) investing, deployment of 5G technology, the global minimum tax, application of artificial intelligence (AI) in strategic planning, and the Deloitte Global Millennial and Gen Z survey. It also explores key issues on CFOs' daily work agenda – organizational trust, team building, employee wellbeing, and workplace environment. We hope finance executives and their colleagues find these excerpts instructive.

A conversation on organizational trust with Punit Renjen

Deloitte Global CEO Punit Renjen spoke recently with Harvard Business School researchers Sandra Sucher and Shalene Gupta on the topic of organizational trust. The Chemistry of Trust study conducted by Deloitte has found that trustworthy companies outperform low-trust companies by 2.5-fold, and 85% of its respondents said they are more likely to sever their relationships with a company that suffers from a "negative trust event". This creates a need for companies to increase the trust of their major stakeholders (including customers, employees, shareholders, and regulators) by adopting a practical approach and evaluating trust as a quantifiable metric.

Harvard Business School researchers Sandra Sucher and Shalene Gupta set out a framework to define trust in their new book The Power of Trust, covering organizational competence; intention and motives; how organizations accomplish their goals; and social impact.

Punit agreed with the authors' framework and shared the principles Deloitte uses to build organizational trust: accountability; clear common goals; communication; and its incentive and reward structure. He added that to enhance organizational trust, Deloitte first strives to hire the right type of talent who share the firm's values, and subsequently build a culture of integrity and high ethical standards through its global network of member firms.

CXOs & 5G edge networks

As demand grows for more powerful networking and digital capabilities, C-suite leaders (CXOs) are gradually recognizing that 5G edge computing provides network infrastructure with greater data throughput, helping to unleash the next phases of innovation, efficiency, and agility. In a recent Deloitte survey of more than 400 global organizations, nearly 80% of respondents said deploying more powerful networking capabilities will be critical to their digital initiatives over the next three years, during which they anticipate spending an average of USD150 million on wireless technologies. Fifty-eight percent of respondent organizations are already running 5G pilots or deploying solutions, and the number of organizations planning to use advanced wireless at the edge is growing steadily. The next two years are expected to be a critical window for 5G edge technology scaling to the mass market, and organizations investing in 5G today will likely find themselves at the vanguard of innovation tomorrow. 

5G technology can drive competitive advantage in two main ways:

• Empowering emerging technologies, which leads to automation and new business models: With faster speed, higher data throughput, and lower latency, 5G supports the application of emerging technologies such as computer vision, IoT, AI, and analytics. Computer vision supports real-time analysis of images and videos, saving manufacturing and logistics costs. For instance, AI and computer vision can be placed throughout warehouses to count stock; "collaborative robots" boost the efficiency of logistics and warehousing tasks such as sorting packages; IoT sensors help deliver an "autonomous shopping experience"; and in healthcare, 5G edge, AR, and precision robotics are accelerating the development of remote treatment and surgery.
• Optimizing operations through digital twins to obtain real-time business insights: Constructing digital twins or digital replicas requires a powerful data processing platform. In smart manufacturing and autonomous retail, 5G edge computing can accelerate data conversion and analysis by moving processing and storage capacity closer to the source of data, allowing for flexible connectivity, real-time monitoring, and smart applications. Supply chain, distribution, and delivery are three major areas for digital twin adoption, where it can be leveraged to optimize output, limit waste, and perform predictive maintenance.

International tax reform

Recently, over 130 countries and jurisdictions, including the vast majority of signatories to the Organization for Economic Cooperation and Development and G20's Inclusive Framework on Base Erosion and Profit Shifting (IF), agreed an international tax reform package. The global minimum tax initiative introduces a uniform floor to reduce tax competition between jurisdictions, largely obviating the effect of low tax rates or fiscal policy measures. The package has two pillars, each addressing a separate concern. The rules for both pillars are intended to be drafted in 2022, with the majority of those rules becoming effective in 2023. Further details on their operation are expected to be published this October.

Of the 139 IF countries and jurisdictions, over 130 – representing 90%+ of the global economy and including Asia's economic powerhouses China and India – have agreed Pillar One and Pillar Two. The agreement paves the way for more international tax cooperation and reform. Some jurisdictions did not agree to the measures, but this is unlikely to impact the measures' overall effectiveness.

The impact of Pillar One and Pillar Two on the international tax system is likely to resonate in domestic tax systems. With implementation set for 2023, Deloitte is encouraging multinationals to begin assessing and tracking these impacts soon, to facilitate adjustments as early as needed.

ESG investing to build competitive advantage

The evolving market and regulatory trends are challenging businesses to demonstrate more sustainable and socially responsible practices. A recent survey shows that environmental, social, and governance (ESG) initiatives do not necessarily mean sacrificing bottom line, but bring about tangible benefits including revenue growth and stable or even stronger competitive advantages. In a Deloitte Global and Forbes Insights survey of 350 executives from the Americas, Asia, and Europe, more than half of respondents said ESG benefited revenue growth and overall company profitability, and around half said ESG increased customer satisfaction. Furthermore, 38% believe embracing strong ESG values enhances their ability to attract and retain talent.

Leading companies are already capturing financial and operational benefits from their ESG investments. For instance, a global asset manager that shifted some of its investment portfolio to ESG and launched sustainable financial products grew by 96% in 2020; sustainability programs launched by a global consumer products company have saved it more than USD375 million in costs; and a leading global cosmetics company invested in responsible sourcing and social impact, positioning itself to attract top talent and leading to its recognition by Forbes as the "#1 employer for women".

CFOs can start by focusing on three key steps:

1. developing a clear vision of what ESG means for their company, and defining how the Finance function will drive ESG strategy;
2. connecting performance metrics to ESG goals, where Finance can help assess ESG initiatives that yield the most value for stakeholders; and
3. creating a framework to measure the cumulative effect of ESG initiatives, assess their impact regularly, and commit to transparency in reporting results.

Intelligence gathering: Bringing AI technology into strategic planning

Using conventional planning based on historical performance to map company strategy is no longer adequate in today's fast-developing world. AI technology is changing the strategic planning process. For CFOs, the most valuable AI applications include handling complex data sets, dynamic capacity to analyze information, and predictions based on selected scenarios, all of which improve decision-making by avoiding entrenched thinking and opening a wider universe of strategic options for consideration.

AI technology will supplement traditional strategic planning by:

1. enabling data import and analysis using an abundance of sources to make continuous updates to forecast models based on selected scenarios, monitor realization, and set up an alert system for emergencies;
2. facilitating forecast models that CFOs can use to initiate high-level strategy discussions (e.g. between management and the board) to align expectations of the strategic plan;
3. supporting customized models that can be used continuously and rarely expire; and
4. improving in-house capabilities in analytics.

To better implement AI-driven strategic planning, CFOs can consider:

1. the quality of data fed into the forecast model;
2. the completeness of data used in the forecast model, including internal business data and external metrics;
3. compatibility between the AI embedded decision-making mechanism and the existing mechanism; and
4. business agility.

Putting wellbeing to work can offer long-term returns

CFOs can sometimes rank the expectations of shareholders and customers above those of employees, but the current competition for talent and pandemic uncertainties are making many aware of the importance of building a competitive employer brand and attracting talent. In Deloitte's 2020 Global Human Capital Trends survey, 80% of respondents identified well-being as a priority for their organization. About 40% cited their reputation in the market, customer experience, and financial outcomes as positive impacts from wellbeing strategy.

When employee wellbeing and the workplace environment become strategic priorities, CFOs need to take on additional responsibilities to build a culture of wellbeing, including by appointing a chief culture officer (CCO). CCOs can consider implementing wellbeing policies in two aspects:

• Incorporating interpersonal skills into hiring criteria and performance reviews: Hiring practices and reward systems should take into account behaviour including team building, creativity, and empathy, to advocate a healthy workplace culture. Existing structures and procedures should be evaluated, and CCOs should be wary of potential damage to workplace creativity and participation, including from hierarchies. Trust among team members is also an important indicator, and an open, honest work environment can enhance employee loyalty.
• Redefining the company's "ideal work style": CFOs should consider and define an ideal work style across multiple dimensions, including the level of autonomy granted by the current work environment, particularly if telecommunication impedes team work; redefine the role and value of traditional offices through features like collaboration stations and training venues; understand and monitor employees' true needs, and invite them to be part of culture building. 

2021 Millennial & Gen Z Survey

The 10th Deloitte Global Millennial and Gen Z survey suggests that in a world struck by the pandemic, political unrest, and extreme climate events, millennials and Gen Zs are committed to social reform and willing to take personal action, including consumption and career choices that reflect their values. They are also looking to government and other institutions to accelerate change that promotes a more equal and sustainable world.

The main survey findings are:

• Environmental and climate change remain a priority: Respondents' remain focused on environmental issues even when threats to their health and careers are more imminent in a global pandemic. Thirty-seven percent of millennials and 40% of Gen Zs believe that in the post-pandemic future, individuals will be better able to act on environmental issues and put their wallets where their values are. More than a quarter of millennials and Gen Zs agreed that businesses' actions on environmental issues (positive or negative) impact their purchasing decision.
• Millennials and Gen Zs believe discrimination is widespread: According to the survey, 60% of Gen Zs and 56% of millennials see systematic racism as very or fairly widespread in society, and 34% of millennials and 38% of Gen Zs believe systemic racism exists in the workplace. Three in five respondents agree that positive change will come from changes in attitude and action from top management. The survey also shows that individuals and citizens, education systems, government and politicians, and the legal and justice system are seen as the groups making the greatest effort to address systematic racism.
• Mental health issues are on the rise and companies should expand related support: Forty-one percent of millennials and 46% of Gen Zs often feel stressed and anxious due to their personal financial situations, family welfare, and career prospects. Similar to the global average, 58% of millennials in China have felt more stressed during the pandemic but chose not to reveal the status of their mental well-being to employers. Meanwhile, compared to the global average, more Chinese youth believe their employers have done a good job of supporting their mental well-being during the pandemic.
• COVID-19 aggravates income and wealth inequality, and increases economic concerns: The pandemic has created financial uncertainty, resulting in two-thirds of respondents reassessing and changing their financial goals. Although China's younger generation are more optimistic than their peers elsewhere are about wealth inequality, about 40% of respondents believe the compensation disparity between top executives and workers is a major driver of wealth inequality.

Group dynamics: How can you fix a dysfunctional team?

For many incoming CFOs, inheriting and tackling a dysfunctional team requires backtracking and assessing historical dysfunctions before coming up with solutions. CFOs need to first diagnose and determine the root causes of dysfunction through comprehensive evaluations, with metrics including teams' historical performance, reputation, shared goals, expectations, the roles of each team member, engagement and commitment, tolerance, diversity, and incentive mechanisms.  

Three common types of dysfunction and corresponding solutions are:

• Avoiding accountability and inability to make independent decisions: CFOs should create an environment with a culture of safety and engagement, where team members can commit themselves fully, debate issues openly, and make decisions without fear of retribution.
• Low energy, weak engagement, and lack of incentive mechanisms: Address problems based on diagnosis results, establish common goals to motivate team members, and recognize and reward efforts promptly. At the same time, examine ongoing projects, focus resources on the more important tasks, and avoid over-working team members.
• Organization silos, delayed communication, and failing to adapt to shifting market environments: establish a layered communication mechanism across teams (especially at lower levels of the hierarchy), cultivate cross-functional collaboration capability, and create a shared consciousness to improve overall execution and agility.