In the Harvard Business Review article of 1998,11 Goleman gave an example of contrasting leadership styles in an unnamed brokerage business following a merger. Both managers are concerned about their futures.
The first shares his gloomy view, telling his team that many of them are likely to be made redundant. The other was more open about her concerns, understanding that others would feel the same. She only promised her team that she would keep them informed and treat them fairly. Naturally, the first manager’s team soon lost talented members. It was disbanded. The second manager’s openness and empathy with her team won their trust so they remained engaged. This team was retained with only a few of them being let go.
There has been a trend over many years towards more openness in reporting to improve governance. A 2003 CIMA report provided a guide to good practice in Performance Reporting to Boards.12 More recently, this form of management accounting has been brought into the public domain.
The Financial Reporting Council (FRC) is soon to be replaced by the new Auditing, Reporting and Governance Authority (ARGA). But the FRC has already required bigger businesses to include a strategic report in their annual reports for accounting periods beginning from January 2017.
The FRC’s objective in requiring a strategic report is closely related to the expectation that business leaders should be open and transparent. This reporting requirement has brought examples of management accounting into the public domain. This elevates our profession by providing instructive examples of the value management accounting can contribute to business.
‘The aim of the Financial Reporting Council (FRC) is to promote transparency and integrity in business. The FRC believes that encouraging entities to prepare a high-quality strategic report — which provides shareholders with a holistic and meaningful picture of an entity’s business model, strategy, development, performance, position and prospects — is a key part of achieving this aim’.
— Financial Reporting Council
Unless they transform their business models for the digital age, many long-established businesses could be displaced by more digitally enabled competitors. The UK’s long-established big retailers are on the front-line of this digital disruption. Their strategic reports provide real-life examples of leadership in hard times. They are trying to work towards becoming ‘clicks and bricks’ retailers. They are building on the brand awareness afforded by their high street presence to offer an integrated high street and online experience. They are also looking to make use of data analytics to better understand their customers.
Almost 25 years after Amazon first opened as an online bookstore,13 2019 was the worst year on record for British retailers.14 The relentless trend towards online shopping was compounded by more cautious consumer spending due to uncertainty about Brexit. The important Christmas season was disappointing too. Long before the new coronavirus was a concern, some retailers were expected to fail in 2020.
11 What makes a leader? Daniel Goleman, Harvard Business Review 1998 12 Performance Reporting to Boards, a guide to good practice, CIMA 2003 13 www.britannica.com/topic/Amazoncom 14 Guardian 9 Jan 2020
The UK’s high street retailers provide real-life examples of leadership in hard times. Marks and Spencer Marks and Spencer Group plc was founded in 1884. It is a major British international retailer with a turnover of £10bn, 1,400 stores in 57 countries and 80,000 employees. It sells food, clothing and homewares. It enjoys a reputation for quality.
These are the opening paragraphs of the Chairman’s Letter at the beginning of Mark’s and Spencer’s Strategic Report included in their 2019 annual report:
‘In September 2017, I took over as Chairman of M&S in the belief that, despite years of decline, a far-reaching turnaround programme driven by a strong leadership team could revive one of the UK’s most special brands. This letter outlines my assessment of our progress in this turnaround. I made clear at the time that the genesis of any turnaround starts with the unvarnished truth, setting aside corporate vanity to face the facts about the state of a business. Behind most financial failures sits an organisational failure and an inability to be self-critical and embrace the challenges ahead. In our case, a siloed, slow and hierarchical culture that has proved resistant to change. As I made clear last year, the change needed is not one-dimensional, not a touch of the tiller, and not just a question of strategy. Highly capable management teams have come and gone with perfectly sensible plans and the long-term downward trajectory of the business has continued. Our failure to adapt, despite rapidly changing markets, means M&S stands on a burning platform. We are aiming to transform all the pieces of the jigsaw: the way we are organised, the way we work, our technology, our store base, our product, our supply chains and our value in the market’.
Archie Norman, Chairman of Marks & Spencer, opening paragraphs of the Chairman’s Letter in the Strategic Report within Marks & Spencer Annual Report 2019
Here, Archie Norman, a highly regarded, seasoned business leader, tells the unvarnished truth. He says clearly ‘M&S now stands on a burning platform’. The report goes into detail to share how M&S is being transformed so that staff, customers, suppliers and investors might share his confidence that years of decline can be addressed and this much-loved British institution will succeed in its ambitions.
This strategic report demonstrates the leadership qualities needed in hard times. The reader is left in no doubt as to the scale of the challenges M&S faces. It is also clear that these challenges are recognised and are being addressed. Unfortunately, the pandemic will have added to those challenges.
Next plc Next plc, the fashion and homeware retailer, provides an excellent example of how to address the risk of internet-enabled competitors. Next has around 510 stores across the UK and Ireland and 200 franchised stores in 35 countries, selling own-brand homeware and fashion along with products from other brands.
Over the last 15 years, to accommodate the changes they had forecast, they extended overseas, developed an enviable online offering and became a multi-brand aggregator. A little over 50% of Next’s sales are now online.
In its 2019 annual report it presents a concise “big picture” overview of what is happening to the retail sector. New online competitors certainly have some cost advantages. However, they must advertise to build brand awareness. Delivering to customers’ homes and the handling of returns can be expensive. Next’s brand is well-established and its combination of shops and online channels, through allowing the in-store collection and returns of online sales, can provide cost advantages in these areas.
Next’s report explains how the threat from new online competitors that they face in their home markets also presents opportunities. The internet reduces the barriers to entry for competitors but it has enabled Next: (1) to build an aggregation platform to sell others’ brands in their home markets and (2) to build their brand in overseas markets.
Of course, established retailers with a nationwide store network are often burdened by a high level of fixed costs. So, Next provides a 15-year stress test to map ‘a way through the woods’. This shows the impact on cash flow of a shift from in-shop to online sales and the cost of rent as leases of stores to be retained can be renewed on expiry at less-onerous lower market rents in the future.
Next’s latest annual results statement released 19 March 2020,15 showed total group sales rose 3.3% to £4.36bn in the year to January 2020. Profit was up by 0.8% to £728.5m. Retail sales had fallen 5.3% to £1.85bn but online sales had performed well, up 11.9% to £2.14bn.
However, sales slumped in March when first stores and then the online service closed.
‘When the pandemic first appeared in China, we assumed that the threat was to our supply chain. It is now very clear that the risk to demand is by far the greatest challenge we face and we need to prepare for a significant downturn in sales for the duration of the pandemic.
‘People do not buy a new outfit to stay at home'.
Lord Wolfson, Chief Executive of Next PLC quoted in The Telegraph and on BBC news 19th March 202016
15 Next PLC Results for the year to January 2020, as announced 19th March 2020. 16 Simon Wolfson (Lord Wolfson) CEO of Next Plc quoted in The Telegraph and on BBC news 19th March 2020