Suits the C-Suite

19 July 2021

Benigno F. Leongson

The inestimable value of reliable accounting for estimation transactions

This challenging period during the COVID-19 pandemic has made demand for reliable and transparent financial reporting rise even higher. The increasing uncertainty in accounting for complex business transactions requires not only present information, but in certain cases, also requires estimation in order to be properly accounted for in the books of account and sufficiently reported in the financial statements.This pandemic has added a layer of uncertainty to an entity’s ability to achieve its long-term goals, requiring management to implement more frequent reviews of financial budgets and forecasts in assessing the valuation of corporate assets. In many respects, management applies estimation in financial accounting and reporting, posing unique challenges. For example, in accounting for the acquisition of a business, management estimates the valuation of assets and liabilities acquired and, in the process, must determine what information will be used and where such information will be sourced. Management also has to have a robust process for ensuring that the estimation transactions are processed and accounted for consistently, including the determination and application of the appropriate methodology especially when there are various acceptable approaches in the industry. While it is true that accounting estimation is not a new concept in management and financial reporting, it has become complicated yet inestimably valuable in this period of uncertainty.Given such challenges, management can only put its best foot forward by using its deep experience and knowledge of the industry and exercise sound judgment based on the available information to properly measure and report these transactions in the books.A PRUDENT EXERCISE OF JUDGEMENTManagement needs to exercise sound judgment in accounting for and recording estimation transactions based on the latest available information at the time the estimate is made.To exercise prudence of judgment when dealing with estimation transactions, management needs to use the most up-to-date information about the transaction, select the most appropriate measurement method, and gather other relevant data in supporting the assumptions to be used in arriving at the estimate.To make the most reasonable estimate, management must also ensure that there are appropriate controls in place within the financial accounting and reporting process. The entire financial accounting and reporting process generates the financial statement amounts, making it necessary to establish the appropriate and sufficient controls to ensure that the output from processing estimation transactions is reliable. This process includes the necessary risk assessments and related activities necessary to ensure adequate financial statement disclosures. These estimated amounts largely drive what should be recorded in the books and disclosed in the financial statements.Management also needs to identify areas in the estimation process that are prone to error, and thus increase the risks of material misstatement and unreliable information in financial reporting. It must revisit the previous bases of accounting for estimates especially when the data and assumptions used are highly dependent on macroeconomic factors and thus are subject to frequent changes and would require regular reassessment. It will also need to be conscious of potential biases to ensure that it continues to objectively evaluate all required information when arriving at the estimates. It is likewise important to remember that anything that has been proven and accepted in the past may no longer be relevant considering the changing business landscape and business outlook.ACCOUNTABILITY FOR ESTIMATIONSTop management and those charged with governance bear the responsibility of formalizing and approving the estimation process. At times, management may need the assistance of experts particularly for more complex estimates. However, this does not relieve it of its responsibility to carefully evaluate the work of experts. The same is true in the selection of an appropriate financial accounting and reporting policy that will be used for such transactions, assessing the need to change from previous years’ assumptions and addressing the potential impact of the changes on certain financial reporting assumptions. The process to be used will depend on the level of risk and the nature of the estimate. Any significant changes in assumptions and models from previous years must be fully supported and the basis of the change should be documented.Management may further need to thoroughly document the rationale behind the selection of estimation models and assumptions among various alternatives. This is to respond to any questions from users of the financial statements by showing the bases and processes that led to the amounts and disclosures. The more complex the estimate is, the more structured the process and risk assessment is expected to be.WHAT’S NEXT FOR MANAGEMENT AND THOSE CHARGED WITH GOVERNANCEThe adoption of new and complex accounting standards as well as the evolving business landscape increases the demand for sound financial reporting that maximizes the use of available external information to produce reliable estimates. At the same time, management needs to ensure that it is still able to satisfy the information needs of stakeholders and users of financial statements. It will also need a robust assessment of all inputs used and strong justification behind the selection among various models in accounting for estimation transactions.Beyond just compliance, management must consider how the disclosures help users of financial statements better understand the relevance of the estimate and its impact on the financial statements — from having adequate to reasonable disclosures. A robust risk assessment for estimates should be part of entity-level controls as it will set the tone for how transaction level controls will be set. For more complex and significant estimates, management and those charged with governance need to revisit their processes and controls and address the related risks identified on the estimation transaction.Management must have its own stand-back approach to revisit and assess the effectiveness of the processes that are in place. This should enable it to accordingly revise the processes based on the evaluations done.RISING TO THE CHALLENGEThe use of reliable estimates in financial reporting has become increasingly complex because of the pandemic. It is quite likely for regulators and other users of the financial statements to scrutinize and challenge financial statement estimates, as the estimation of these values are judgmental in nature. Accordingly, this would require closer collaboration between management and those charged with governance to ensure reliable and transparent financial reporting. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Benigno F. Leongson is an Assurance Partner of SGV & Co.

12 July 2021

Anne Margaret E. Momongan

The need to properly close up

With the seemingly never-ending economic and public health uncertainty brought about by COVID-19, we have seen a number of greatly affected businesses incur continued losses. Several have even been forced to close down and cease operations. It seems that despite the grant of perpetual existence under the Revised Corporation Code (RCC), some corporations die natural deaths due to the unprecedented challenges caused by the pandemic.Unlike the joy and excitement of starting a business, ceasing to do business is a painful undertaking. However, will physically closing shop be enough to say that business operations are terminated? Unfortunately, from a legal setting standpoint, it is not as easy. Some business owners believe that for as long as the business conducts no operations, the business is successfully closed and need no further steps to take.Another inaccurate view some may hold is that for as long as the corporation ceases to exist in the eyes of the Securities and Exchange Commission (SEC), that suffices as business closure. This may be partially correct since the RCC provides that if a corporation becomes inoperative for at least five consecutive years, the corporation is placed under delinquent status. Thereafter, the delinquent corporation will be given two years to resume operations and comply with the requirements; otherwise, the corporation’s Certificate of Incorporation may be revoked. However, it should be emphasized that though the RCC provides for delinquency and/or revocation, the closure of the business does not end there. This is where problems usually arise; as a result, business owners tend to overlook the importance of properly deregistering the corporation.While a corporation may have achieved delinquent status in the eyes of the SEC, it is still considered to be in business in the eyes of the Bureau of Internal Revenue (BIR) and the Local Government Unit (LGU). This can cause headaches for business owners — simply because the business was not properly closed and deregistered with all the necessary government agencies. As a result, a corporation will be penalized heftily for failure to file and pay the taxes and returns due from it and/or obtaining the necessary permits. The solution is to ensure that the corporation goes through the proper deregistration processes with urgency.CONSIDERATIONS WHEN CLOSING SHOPSince business deregistration with various government agencies may take time — spanning years for some — it should be highlighted that during the process of deregistration, the corporation stays alive and maintains its separate juridical personality for dissolution purposes. During the dissolution process, the management and/or the Board of Directors (BoD) have several factors to consider, such as deciding which functions are necessary for the dissolution or at a minimum, during the deregistration process. The accounting and finance team may need to prepare various documents, financial statements, tax returns and schedules for submission to various government agencies. The human resource team (HR) must also handle final pay, separation pay, and others.The management and/or the BoD also need to weigh whether to outsource necessary functions to third parties or keep these in-house. More factors for deliberation include the cost of keeping salaried employees as compared to paying consultancy fees. This will depend on the skill set required, hours needed, and the level of control the management wants to exercise over the work performed. Another challenge is when employees jump ship to join another entity. As a result, a corporation may have no employees left to address the government agencies’ clarifications while in the process of deregistration. It is likely for this reason why some opt to hire business professionals/consultants to take care of deregistration matters and at the same time, safeguard business records for easy retrieval.Business owners also need to determine how long the business space needs to be maintained. This will rely on management intent or the availability of an agent or authorized person to receive notices on their behalf. Although the deregistration and dissolution process may take years, the corporation does not necessarily need to keep its business space and employees during this period.DEREGISTRATION WITH THE BIR, LGU AND OTHER GOVERNMENT AGENCIESEmbarking on the deregistration process may appear lengthy, costly and dreary. There is also a tendency to neglect a corporation that is no longer profitable and operative. Is it then worth going through the deregistration process? Will it not be worthwhile to simply be inactive for a long time and wait for the BIR and/or LGU to act? Just like with any other strategy, the impact of inaction or even delay can be frustrating and devastating. When visible and quantifiable, delays or failure to deregister may translate into potentially hefty penalties from the BIR and the LGU.To formally close a business in the LGU, a company needs to obtain clearances such as but not limited to Barangay Clearance; City Treasurer’s Clearance; and other relevant clearances particular to the LGU concerned. The LGU will also assess deficiency taxes and any unpaid annual permits.As for deregistration with the BIR, retiring corporations that have completely paid off their tax liabilities will be issued a Certificate of Tax Clearance. This confirms that the corporation no longer has any outstanding tax obligations to the government. The law is clear that corporations shall not be dissolved until cleared of any tax liability. It should be underscored that the processing of the tax clearance triggers a mandatory audit or assessment for the last three open years prior to the dissolution. Such an examination may result in a deficiency tax assessment unless the corporation has no operations during the periods under audit. Another matter worth emphasizing for the BIR deregistration process is the relevance of end-dating for tax return filing purposes. Prior to end-dating and notwithstanding the plan to dissolve, the company is still required to file returns, which can be nil returns if already non-operational, for reporting or compliance purposes.The corporation must also submit an application for the cancellation of registration or an equivalent notice document in order to formally stop its obligation as a contributing employer to SSS, PhilHealth and Pag-IBIG.It is worth noting that to engage in the deregistration process at the earliest time possible will also make it easier to retrieve accounting records and documents, smoothening coordination with the corporation’s employees who prepared these records. As the corporation ceases to be a going concern, is there an assurance that employees will remain to see through the dissolution process? Human nature can drive employees to look for other employment opportunities. When already employed by another entity, coordination on record-keeping and providing clarifications can be troublesome. Challenges in document retrieval and obtaining clarifications from previous process owners are usually encountered when years have passed before a corporation is properly deregistered.A PROPER GOODBYE THROUGH PROPER DISSOLUTION AND DEREGISTRATIONProper deregistration of a business may be a subject that business owners do not want to confront immediately, especially after the pain of loss. Despite the fact that dissolution and deregistration can be long and tedious, it can still be achieved fairly painlessly with the guidance and assistance of a trusted tax professional — especially when matters on assessments or audit findings come in.Furthermore, in consideration of penalties that may be imposed, it is important for the company to go through the deregistration processes with the assurance and comfort that, in the future, no unresolved matters will haunt the business owners.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Anne Margaret E. Momongan is a Tax Senior Manager of SGV & Co.

05 July 2021

Randall C. Antonio

A new world where transformation is a precondition

In the last decade before the COVID-19 pandemic, businesses were preoccupied with understanding, harnessing, integrating, and enjoying the benefits of the Fourth Industrial Revolution. Many progressive companies joined the conversation and launched their respective versions of their transformation agenda. Today, a quick look back shows how Business Transformation appears to have been reduced to a buzzword, an empty promise of most corporations trying to reinvent themselves. Articles and anecdotes suggest that during this period, most transformation efforts may have failed for a host of reasons — but while some were external and uncontrollable, most were internal and in fact, preventable. Often, it comes down to the lack of stakeholder support for the scope, prioritization, and scale the business needs to change.As we continue to make sense of the additional brick wall created by COVID-19, and without an end in sight, we need to ride the wave as we reimagine the post-pandemic world. Certainly, the landscape and market have changed, and technology has even more use cases than ever before. This poses the question: Is your company post-COVID-19-ready?TRANSFORMATION STARTS WITH RISK RECOGNITION AND ACCEPTANCETransformation starts when an organization reflects, collectively understands the risks and accepts that their ambitions and goals could get disrupted, or worse, that they could become irrelevant and quickly obliterated. Many organizations do not realize this until it is too late. This may sound simple but depending on a company’s culture and values, it could be very complicated — and sometimes even a painful process.While a transformation agenda, with all its imperatives and financial goals, is usually defined by management and well-supported by the board, the participation, engagement, and cooperation of everyone in the organization is an absolute must for it to succeed. A compelling story of change that resonates with everyone and inspires every member of the organization must be clearly communicated on a sustained basis.In each of the following steps to transformation, executives must consider these questions to determine their own transformation initiatives.BLUE SKYINGAfter a thorough assessment of headwinds and tailwinds, companies must ask themselves where they see the business, and where they want to play. Are there new or emerging markets they had not recognized before?Whether the direction is to complement an existing business or change the business model, the common goal is to stay relevant and profitable, now and in the future. Executives need to set the direction for their future vision for the organization and identify what needs to be done to get there.BASELINE AND KPI SETTINGDo the customers love the product or service offered by a company? Do they love the brand? Does the company meet all Service Level Agreements with their customers and partners? Does the company have a healthy profit and loss (P&L) with a stable source of revenue and an efficient cost management strategy? Does the company have the right people on board?Before anything can begin, companies must know exactly how things are, both internally and externally. This is the stage where all the pain points and improvement opportunities are identified. Once a future state has been defined, a roadmap is developed. Processes and systems are assessed, employee and customer inputs are heard, and clear next steps are drawn. The communication of updates, action plans, and time-based milestones are important to all stakeholders, from the Board and management team to the employees.BUILD OR OPTIMIZE?Whether the decision is to build or optimize, robust business systems are needed to carry the business forward into the future. This lies at the very heart of any transformation initiative. Customer data, supply chain and logistics, manufacturing and accounting are only some of the important business systems that must be put in place and integrated. While the customer is king, nowadays data is queen. Data now, more than ever, holds an important piece in predicting outcomes in this ever-changing world.The resource that must go into transforming a business or its systems is almost always a sore point, as it often hinges on the leaders’ investment principles and priorities. As the strongest and most credible sponsor of a transformation agenda, the CEO must push for any big-ticket expense attached to it.A dedicated, highly skilled and experienced transformation team must also be deployed. To effect change, this team needs organizational and business acumen, the passion to understand the business, its operations, and its customers from top to bottom. Information and data must be made freely available to them.Regular cadence meetings must be scheduled to report on progress and resolve challenges to allow the opportunity to pivot and re-calibrate plans if needed. Prioritizing transformation-related issues and making timely decisions must be paramount, and stalemate positions must be immediately resolved to meet commitments on time and on budget.DELIVERYTransformation will disrupt current operations. An experienced transformation agent is needed to architect and deliver a sound change management program to seamlessly steer the business from its current to its future state. This plan must also have the buy-in of top management, be equipped with the right resources, and get communicated as a non-negotiable priority to the entire organization.There are cases where a business seems to be on business-as-usual mode, and nothing seems to be going wrong. Should it then consider undergoing transformation? There are studies that prove that a parallel transformation — where the core business is free to operate as usual, as a parallel effort reengineers its version 2.0 — has seen some successes.Ultimately, transformation, with all the disruption, changes and opportunities created by digital technology, and more recently, the pandemic, is a precondition for any company that wants to stay relevant. Technology will only continue to develop at breakneck speed and force those who understand the risk of being disrupted to innovate at scale. Companies need to continuously innovate, pivot, and always be open to change — while executives must always be aware of the question, what will put me out of business tomorrow?This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Randall C. Antonio is a Consulting Principal of SGV & Co.

28 June 2021

Wilson P. Tan

Lessons from Mr. SyCip

Washington SyCip, Founder of SGV & Co., would have been 100 on June 30 this year. Well into his ’90s, Mr. SyCip stayed vital and many were confident that he would reach his centenary effortlessly because he had remained active — both physically and mentally — throughout his prolific life. When he suddenly died on board an airplane on his way to scheduled meetings in New York City, there was a collective reaction of disbelief, even if he was already 96 years old at the time.For us in SGV, Oct. 7, 2017 would be “the day the music died” because in so many ways, Mr. SyCip was our rock star. He had a great following, he could command thousands to listen to him, he would get thunderous applause after he spoke, and there would be kilometric lines of people hoping to get selfies with him. However, the analogy ends there because Mr. SyCip’s career was obviously not in music; he was a business icon who contributed immensely to professionalizing Philippine accountancy and to advancing national development.Mr. SyCip is the only person I know who had met all the Philippine Presidents from Manuel L. Quezon to Rodrigo Duterte. He met President Quezon as a young boy when he accompanied his father on a certain occasion. He had been a witness to milestones in Philippine history for nine decades, which included his active service during the Second World War in India as a cryptographer. He returned in 1946 to Manila, a city in ruins, and immediately set up his accounting firm because he knew that reconstructing the economy would require sound financial services. He was only 25.A FATHER FIGURE WITH VISION AND PURPOSEFor the next 50 years of his life, Mr. SyCip saw the phenomenal growth of SGV from a one-person office to a multinational entity called The SGV Group, which had member firms in several countries. He helped establish the leading accounting firms in Taiwan, Thailand and Indonesia, among others. In the 1980s, when he saw that IT would heavily influence the office of the future, he made sure that SGV would have the necessary resources by collaborating with a global professional services firm. His mind, it seemed, was at least 20 years ahead of the present time; he had this unique gift of envisioning the world and how to make it a much better place.With Mr. SyCip’s passing, we were orphaned but not abandoned — because as a father figure, Mr. SyCip had made sure that even without him, SGV would be able to maintain its stature. From the very start, he had already articulated his purpose for SGV and that is for the firm to aid in national development. One of his most frequently quoted statement goes, “SGV can only prosper if the nation prospers.” He instilled a discipline that fostered integrity, excellence and quality work. In turn, these became values that evolved into a culture that also includes meritocracy, inclusiveness and stewardship. Mr. SyCip ingrained in each of us that the firm was not owned by a single person and, for SGV to thrive, its current leaders must take good care of it for generations yet to come.Propitiously, a year before his demise, SGV had undergone an institutional exercise in revisiting and articulating its purpose in terms that can be better understood by a younger generation. When all had been said and done, we reverted naturally to Mr. SyCip’s vision of contributing positively to national development. The updated 21st century articulation of that vision led to SGV’s Purpose Statement: To nurture leaders and enable businesses for a better Philippines. This is how we continue to carry out Mr. SyCip’s legacy in everything that we do.However, it is not always an easy task to live that purpose. As simple as it sounds, there are multifarious and complex behaviors, skills, and relationships that impinge upon our Purpose. In trying to live that Purpose, I draw on four life lessons that Mr. SyCip impressed upon us.The first lesson is to WALK FAST.In a personal encounter I had with him, he told me to STEP ON THE GAS! The statement connotes speed, which is something that Mr. SyCip emphasized — to work quickly and diligently but with precision and accuracy. Time was valuable to him and wasting even a second was unacceptable. You had to be punctual and he practiced what he preached. Most of the time he would be the very first person in the office and when he called partners in their offices at 8 a.m. (the official start of work hours), they had better be there to personally answer his phone calls.In the office, he would chide staff members if they took their time entering and exiting the elevators. In a calm but forceful voice he would say, “You are delaying the progress of the nation!” For him, there was never enough time to meet with people and read his issues of The Economist and voluminous reports. He led a frenzied work schedule with his calendar filled up for at least a year and a half; he would even have trips scheduled three years in advance. For Mr. SyCip, time was gold.The second lesson is to EMBRACE CHANGE.Needless to say, in his 96 years he had experienced the rise and fall of governments, trends in fashion, the evolution of technology and others. The accounting profession has traditionally been a conservative one but upon his retirement, Mr. SyCip discovered new things that awed him — like denim jeans, for example. He was in his 80s when he was presented his first pair of jeans which he found comfortable and suitable for traveling. In time, he took to wearing them to the office in bright colors too. He likewise owned a pink iPod following the recommendation of a granddaughter and would listen to his playlists of classical and Broadway musicals.He enjoyed speaking with young people to find out what kept them preoccupied. He went to bars that they frequented and attended the concerts of Madonna and Taylor Swift. Mr. SyCip once dressed up as Jedi Master Yoda for an SGV event but only after he received a mini lecture on Star Wars and what it meant to be one with the Force. He loved the fact that Yoda was over 800 years old and still fighting menacing characters! For Mr. SyCip, one had to accept change in order to thrive in an ever-changing world.The third lesson is to LISTEN TO OTHERS.By listening to others, Mr. SyCip didn’t just listen to clients, government officials, diplomats and other business leaders. He also listened to the plight of the poor and uneducated, he listened to the problems of farmers and fishermen who could barely send their children to school, and he listened to struggling women who had difficulty making ends meet. It was in listening to others that Mr. SyCip was able to acquire the knowledge he needed to give sound advice. Hearing from others provided him with the wisdom that people sought.Mr. SyCip was known to be an excellent speaker and while his voice was soft, I have witnessed how an entire auditorium would be hushed in complete silence once he started. Perhaps he was simply returning the favor of listening when he wasn’t the one doing the talking. For Mr. SyCip, listening was essential to human connectedness and problem solving. It was also basic good manners.The fourth lesson is to NEVER STOP LEARNING.The training program in SGV is legendary and it was Mr. SyCip who early on determined the need for continuous learning for staff members to progress in their careers and personal lives. He encouraged potential partners to pursue graduate school and earn MBAs either in foreign universities or at the Asian Institute of Management, which he co-founded. He would test partners of their knowledge of current events and if he found it lacking, the partner would be gifted with a subscription to The Economist. His advocacies later focused on education, particularly in advancing basic public education. He believed that it would be education that would eventually eradicate poverty.Mr. SyCip had an unquenchable thirst for new knowledge because that kept him in touch with current issues. He would also use the information in giving advice to others. When a staff member’s son contracted dengue fever, he asked questions on its cause, care and recovery to the last detail. Why? So that he would understand its severity and why the staff member had to take a leave to personally care for her child. He found joy in gadgets even if he never learned to send text messages. Why? Because it made his assistants more accessible and saved him time. He relished all knowledge, whether it affected the global economy or a teenager’s fragile health. For Mr. SyCip, learning was a lifelong passion.A LEGACY THAT GUIDES OUR PURPOSEOn his centenary, I now reflect on the enormous impact Mr. SyCip made on my life, and the lives of thousands who were fortunate to have known him. It is daunting to have been given the responsibility of leading almost 6,000 professionals amid the pandemic in a precarious moment in human history. I am indebted to Mr. SyCip for his lessons and his legacy that serve as guideposts toward our Purpose. It is now our turn to remind the next generation to walk fast, to embrace change, to listen to others and to never stop learning.Thank you, Mr. SyCip.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Wilson P. Tan is the Country Managing Partner of SGV & Co.

21 June 2021

Marie Stephanie C. Tan-Hamed

Time for CEOs to redefine their growth paradigm (Second part)

(Second of two parts)In the “new normal,” it is imperative for CEOs and business leaders to consider how they should reimagine, redesign and redefine their growth strategy. The COVID-19 pandemic has triggered widespread and systemic disruptions in every country, industry and sector, and has resulted in significant economic downturns globally. However, as countries begin the road to rebuilding and recovery, there arises an opportunity for companies to likewise transform and redirect their energies to purpose-driven growth.In the first part of this article, we discussed the current environment and some of the considerations as discussed in a recent article on ey.com, The CEO Imperative: Rebound to more sustainable growth. We began the discussion on some key themes that CEOs may wish to consider as they lead their organizations into post-pandemic recovery. We started off talking about the importance of trust and sustainability. Now we will discuss other aspects, such as trade, technology and people.TRADE IS VASTLY DIFFERENTWhen the pandemic began spreading, it exposed underlying vulnerabilities in the areas of trade, supply chains and logistics. This situation has been compounded by turbulent geopolitical conditions that further hamper how CEOs can manage their global business operations in the face of complexities they cannot control. Examples include the tensions between the US and China, post-Brexit complications between the UK and EU, and unrest and severe COVID numbers in parts of Asia and East Asia.With the heightened uncertainty, CEOs and business leaders are under constant pressure to revisit their supply chains, talent development and other enterprise resilience considerations. Where previously globalization was considered inevitable to drive business growth, several countries seem to be becoming increasingly nationalistic as they close borders to both trade and travelers to limit the spread of the virus in their respective demesnes. Some governments are also encouraging the reshoring of investments into certain key activities and for domestic companies to invest in self-sufficiency, particularly in the areas of basic pharmaceuticals, vaccines, energy and industrial materials.Given this, CEOs may need to put a greater emphasis on managing supplier risk. Numerous organizations are already trying to find ways to shorten their supply chains by identifying more near-shore or even on-shore sources. As supply chains become increasingly fragmented and geographically diverse rather than globally integrated, CEOs need to consider how to make supply chains more resilient to weather geopolitical events as well as the limitations created by the pandemic. This will be particularly important when economies reopen. Companies with a purpose-led growth strategy can more agilely adjust to new opportunities, including possibly reducing or consolidating asset portfolios and exploring new technology-driven directions to growth. With a clear purpose, CEOs can better decide whether to transform/develop existing assets to support entry into new market opportunities, or whether to acquire assets for faster entry.WILL TECHNOLOGY SWING THE BALANCE?When the pandemic struck in 2020, many companies were caught off-guard and found themselves scrambling to not only acquire sufficient technology assets to support a dramatic and unexpected business transformation, but many also had to hastily evaluate whether their digital infrastructure was strong enough to support the business. Having to suddenly transition to remote working also made many companies re-evaluate their operational agility and resilience. Moving forward, companies will need to consider whether their post-pandemic operations will return to traditional on-site work conditions, retain remote working, or develop a hybrid of both. Regardless of the format, future working conditions will make it even more imperative to be purpose-led — which means leaders will also need to identify how to effectively and consistently inculcate their purpose into their people and align them to the company’s long-term goals.Because of what happened last year, which is still happening today, CEOs are now considering data and technology investment as priority areas for the coming year. Many have been suddenly forced to consider how technology and innovation can support their business — and many are also suddenly seeing the benefits of incorporating digital throughout the enterprise.One very important consideration to investing and upgrading technology, however, is to evaluate the human-technology interface in one’s operations. There has been increasing public awareness of the ethical, privacy and security risks of technology, and many customers still do not trust companies with their personal data. CEOs will need to not only consider whether they need to upgrade the technology competencies of their people, but also how to build up the trust of their customers in their digital ecosystem while ensuring the safety and security of their digital systems.PEOPLE AT THE CENTEROne thing that remains true regardless of whether we look at the “old” or “new” normal is the reality that people are still central to any strategy. This is particularly true for purpose-led growth strategies where actions need to constantly be measured by their impact on people — not just on employees, but also customers, stakeholders and partners. Even businesses that are almost wholly digital still need the right people, talent, and competencies to thrive. Human values will always be needed to underline and drive ethical, purposeful innovation. This is a critical consideration in today’s environment when the pandemic may be forcing some organizations to consider taking shortcuts to ensure business viability.CEOs and leaders need to understand the value of empathy towards people, not only putting themselves into the shoes of their employees and customers, but also sincerely engaging with people by applying emotional intelligence, compassion as well as adherence to shared values. They also need to understand the experience and motivations of their clients and customers, and how their personal and consumer behaviors have changed due to the pandemic.WHAT WILL YOUR NEW GROWTH PARADIGM LOOK LIKE?As the world continually moves toward eventual resurgence and recovery, CEOs and business leaders need to understand that new opportunities to build a sustainable future will likewise arise. By focusing on building trust, emphasizing sustainability and ESG considerations, understanding new trade challenges, evaluating technological opportunities and always keeping people central to every action plan, companies can be prepared for a strong, purpose-led drive to recovery. Certainly, the time is ripe for organizational reflection.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Marie Stephanie C. Tan-Hamed is a Strategy and Transactions Partner of SGV & Co.

14 June 2021

Marie Stephanie C. Tan-Hamed

Time for CEOs to redefine their growth paradigm (First part)

(First of two parts)In the current business environment, we keep hearing the term “new normal” being used by business and government leaders to provide context to the sweeping changes that have disrupted the global business ecosystem due to COVID-19. The question is, how can CEOs today realign their businesses to thrive in this “new normal?”Reimagining and redefining the company’s growth strategy has become a new imperative for CEOs. As discussed in a recent article on ey.com, The CEO Imperative: Rebound to more sustainable growth, CEOs need to accept that a post-COVID growth strategy simply cannot rely on previous assumptions and principles. In order to create long-term value as the global economy recovers, CEOs need to shift their business paradigms to both redefine their strategy as well as focus on new platforms that are anchored on a clear purpose-led vision.WHAT’S CHANGED?With the numerous restrictions implemented by governments to help manage the pandemic, businesses’ growth has been severely and negatively impacted. But even as we plan for and work towards a global recovery, companies recognize that the basics of their business have changed. Even more so, companies also understand that their stakeholders — their employees, investors, regulators and especially, their customers, have developed a different perspective on the role of companies. Market forces have also changed, with governments taking more active and interventionist positions in creating policies, stakeholders increasing their scrutiny on sustainability programs — notably on the environment, social and corporate governance, customer behavior changes, more competition to find or develop the right talent to drive post-pandemic recovery, and an increasing need to invest in technology to sustain business continuity.With these changes, it becomes even more imperative that organizations revisit their purpose in order to meet changing expectations. For some companies who have not yet firmly established their organizational purpose, this may mean a complete reboot.PURPOSE AS AN ECONOMIC IMPERATIVEBeyond financials, companies are now seeing that being purpose-led can have significant benefits such as stronger people and customer engagement and fostering a culture of innovation in the organization. In terms of metrics, studies have shown that companies with a focus on ESG can better find ways to lower their cost of capital, as discussed in a 2020 MSCI report, as well as promote long-term engagement.It is worthwhile to note that establishing a purpose is a continuous and long-term journey for most companies. It goes beyond simply creating a purpose statement; there is also a need to drive fundamental organizational change to lay a solid foundation for purpose-led transformation.For example, the SGV Purpose to nurture leaders and enable businesses for a better Philippines has been deeply embedded into our culture, programs and long-term strategy focusing on internal people development as well as external programs and activities to support business development, with a long-term vision of participating in and supporting national socio-economic development.DRIVING PURPOSEFUL, SUSTAINABLE GROWTHTo drive a truly purpose-led strategy, CEOs may wish to consider incorporating these considerations into their programs, with an overarching emphasis on keeping people at the center of every decision.TRUST AS AN ASSET WITH AN EMPHASIS ON SUSTAINABILITYWhile trust has always been critical in the business-customer relationship, the disruptions driven by the pandemic have created fundamental changes in this relationship. With more people being online and expecting faster, near real-time responses to their needs, building and sustaining trust becomes even more important. In a sense, trust has also become a form of intangible currency for many companies.What is also significant is that many sectors see the COVID crisis as an opportunity for large companies to reinvent themselves, with a shift to purpose-driven metrics on people, customers, communities and the environment. In fact, a number of business leaders believe that the pandemic has increased the expectation on businesses to drive, measure and report on social impact, sustainability and inclusive growth.At the core of this need to strengthen trust is the need for greater transparency. There is now a stronger need for corporate reporting to include non-financial metrics, especially since doubt in corporate reporting has grown in recent years.In the Philippines, the Securities and Exchange Commission in 2019 had mandated that companies produce an annual sustainability report to promote wider adherence to the principles of corporate governance. The benefit to companies of this requirement is the ability to disclose to the wider public their non-financial assets — including culture, intellectual and technology assets — and how they are used to create long-term ESG value under a purpose lens and not just a matter of compliance.In a nutshell, for CEOs to gain the trust of stakeholders, they may wish to integrate more in-depth non-financial or sustainability reporting into their strategy while paying attention to the changing needs of their stakeholders and being transparent in articulating their purpose-led strategy.In the next part of this article, we will discuss the other areas for CEOs to consider as they explore how they can redefine their companies’ growth paradigms. These include trade, technology, and people.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Marie Stephanie C. Tan-Hamed is a Strategy and Transactions Partner of SGV & Co.

07 June 2021

Akhil Hemrajani

Digital ecosystems: A frontier for digital competition

After more than a year of COVID-19 impacting the global economy, organizations around the world are still struggling to pivot to a more sustainable digital strategy. A central theme for this objective is the ecosystem play, which maps out how a platform can help acquire new customers more efficiently whilst enabling and incentivizing them to continue transacting within said platform.THE ECOSYSTEM PLAYOrganizations are quickly realizing that it is not enough to onboard a new customer — they also need to consider how to organically encourage consistent transactional behavior from the customers to build ongoing dependency on the organization and its system. This can help protect organizations from losing their customer base to competitors. Hence, it is imperative to adopt an ecosystem strategy to increase the “stickiness” of customers to a platform.There are three kinds of ecosystems for companies to consider.Closed loop. A closed loop ecosystem only allows an organization and its affiliates to participate in the offering of products and services to its customer base. This kind of ecosystem is usually in response to a fierce competitive landscape.Open loop. An open loop ecosystem enables a company to increasingly collaborate with not only its partners, but also other competitors in the space. The motivation behind a company’s interest in maintaining an open platform is so that it can still participate in transactions that it typically would not have engaged in through platform fees and other payments.Hybrid. A hybrid ecosystem takes components of both previous types of ecosystems, allowing most players in the space to participate and the organization to have an “unfair advantage” over certain product and service offerings.BUILD VS PARTNER: A CRUCIAL QUESTIONAn increasing number of organizations are competing in the digital sphere. They face an inherent question — do they build features and products themselves or do they partner with other companies to maximize their online presence? Each option comes with its own set of advantages and disadvantages.Building a new platform could prove to be capital intensive, yet this would enable an organization to capture end-to-end customer value. On the other hand, embedding the products and services of other companies into the ecosystem through a purely partnership model helps the organization be more flexible with its resources. This model means, though, that the organization will need to forego a certain amount of revenue in the form of commissions or fees. Certain organizations have also adopted a hybrid model where they build certain verticals (or customer niches) themselves and then partner up with others to fill the gaps.For example, some local delivery service providers do this effectively by creating their own grocery marketplaces and onboarding other vendors, thereby creating a balance of competition and collaboration within their respective platforms.CUSTOMER AT THE CENTEREcosystems are primarily established in order to efficiently cater to as many customer demands as possible. This incentivizes organizations to focus on the digital delivery of not only products and services, but also a robust customer experience journey. Consequently, this enables organizations to either consolidate their market leadership positions or help the chasing pack make inroads to narrow the gap to the prevailing incumbent. For example, startups such as Grab and Uber originally started operating only in the ride sharing space, but then established other verticals such as food delivery to capture a larger piece of the digital services pie. In the B2B segment, banks are expanding their digital presence by moving beyond simply lending to providing enablement services to small and medium enterprises. By helping these enterprises scale their businesses, banks create additional demand for the banks’ loan products.THE IDEAL CUSTOMER JOURNEY: A BALANCING ACTAs more organizations look to create digital ecosystems, they face an important challenge: how to capture maximum value and how to go about providing a robust customer journey. Digital ecosystems are great tools to increase customer value, but they are at times done at the cost of customer experience. The challenge for any organization looking to establish or further its digital ecosystem play would be to strike a balance between sustainably providing an array of products and services on its platform while making it easy for its customer base to use. An additional layer of gamifying certain tasks to provide additional rewards can also increase the level of complexity of the ecosystem. Providing such features and maintaining a clean and precise user interface can prove to be critical, especially in hyper competitive sectors such as e-commerce and finance. To make customers “stick” to a platform, it is imperative that the platform be both simplistic and engaging — a challenging, but not impossible, task for any platform owner.During the pandemic, the desire and need for a robust digital ecosystem has increased at an accelerated rate. As platform owners enter new verticals, the propensity of competition with incumbents increases. The ever-changing competitive landscape among various platforms will prove to be an interesting watch. Only time will tell who will come out on top.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Akhil Hemrajani is a Consulting Senior Director of SGV & Co.

31 May 2021

Christian G. Lauron

Corporate Banking Circa 2030: 7 hypotheses (Second part)

Second of two partsPreviously, we discussed how banks can leverage ecosystems to organize integrated networks and how they can expand services beyond banking to help clients focus on their core activities. These are among the seven hypotheses on how banks will transform to build the next generation of businesses. The second part of our two-part article continues by discussing how banks can provide leadership on critical societal issues to strengthen trust with the next generation of clients.PROVIDING LEADERSHIP ON SUSTAINABILITY AND COVID-19 RECOVERYReduced trust in financial services poses a serious threat, pushing some banks to prioritize making a credible and high-profile commitment to helping businesses address their challenges and risks. This may be achieved through establishing and executing a clear social purpose and creating measurable non-financial value. These efforts extend beyond expanding environmental, social and governance (ESG) investments and enable the growth and development of profitable operations, benefiting stakeholders beyond a bank’s bottom line. This way, sustainability becomes more than a public relations or branding exercise — it becomes a cultural mindset.The mindset shift will require substance and depth in the banks’ sustainability agenda, which may currently revolve around the prioritization of ESG-minded business practices to ensure operational resilience, the development of forward-looking multi-year roadmaps with interim targets and intergenerational narratives, and the implementation of responsible banking targets, categorized mainly into climate action and provision of social equity. These roadmaps should include solutions for societal challenges, particularly to help restore socio-economic growth in the aftermath of the COVID-19 pandemic. On the climate action agenda, banks can prioritize investments in, and extend credit to, sustainable companies so that those ventures can scale. Banks can help provide direct incentives for clients that commit to and meet sustainability targets, and in the process offer robust and intuitive solutions for businesses to track and report on carbon consumption and other metrics while developing exchanges and marketplaces for the trading of carbon credits. Mark Carney, former head of Bank of England and now a UN Special Envoy, has suggested that “the transition to net zero is creating the greatest commercial opportunity of our age.”It is estimated by the International Energy Agency that $3.5 trillion of annual global investments would be needed to build the infrastructure of a green economy, requiring the coordinated management of finance and investments during the transition phase of climate change mitigation and sustainable development. During this phase where forests are replenished, oceans and supply chains cleaned up, clean technologies replacing dirty power plants, banks will have to face the financial risk and capital implications of stranded assets in their portfolios, particularly to clients exposed to fossil fuel reserves becoming stranded resources. The regulatory stress testing exercises and the launch this year of a sustainability standards board by the International Financial Reporting Standards Foundation are twin developments that are expected to accelerate the surfacing of these issues.Depth is a characteristic that banks will need to embrace on the other agenda of sustainability, which is the provision of social equity. While this can be a highly ideological issue, stakeholders often find common ground on jobs generation, a concrete manifestation of participation by individuals and communities in socio-economic growth and recovery post-COVID. Banks need not go far — they can look at the supply chain for instance, where banks can play a role in deepening the supply chains notably for the following sectors that face varying levels of distress or flourish — construction and real estate, industrials and manufacturing, semiconductor, energy and utilities, agriculture and technology. In these supply chains, there is often a high proportion of underserved suppliers with poor or opaque creditworthiness. At the current state, and as reconfigurations take place, supply chain participants have greater financing needs to enhance resilience, fund reshoring and diversification, and in the process, generate jobs. Banks have for some time been strategizing along supply chains, with capital allocation being driven into SMEs through direct credit enhancements of anchor buyers while employing advanced analytics to identify early warning (and conversely, recovery) indicators. Some of these involve spatial, sentiment and mobility indicators to supplant lagging financial indicators. The increasing visibility on movement of cash between and across tiers of companies in the supply chain correlate with an increase in penetration of underserved SME segments, with FinTechs upping the ante on competition with their adoption of emerging technologies across the value chain. The blurring of the line between the physical supply chain (e.g., sourcing, production, shipping and tracking) and financial supply chain (e.g., ordering, contracting, payment and settlement) is being accelerated especially with the rise of networks and platform solutions like the electronic invoicing utility. One can easily be swamped by these developments, and this is where the banks should discern their purpose, assessing which sectors and value chains to focus on and correspondingly, finance based on size, fit and feasibility, while distilling the value proposition and business case and contributing to whole-system transformation — whether in manufacturing, services or even housing. Banks are critical in the development of inclusive capitalism, and they can create clear market differentiation by expressing and maintaining a clear social purpose. The rising generation of small business owners and entrepreneurs, as well as consumers, prefer to do business with companies that share their values on sustainability, and banks can exert clear leadership by revisiting their social contract and acting upon societal issues, particularly climate action and reduced inequalities, to foster client loyalty.FUTUREPROOFING FOR WHAT’S NEXTThe way forward in a transformation journey, though unique for every bank, starts with a clear and client-focused strategy, strong vision and purpose, sophisticated technology, and a strong and flexible operating model. In many cases, this will require uprooting structures and processes built around a model largely unchanged for a century. While business case development and strategic planning are necessary, banks should not delay action. Securing future market leadership will require addressing the difficult questions in managing transformation; defining clear, long-term business strategies and innovative, client-centered solutions; and sustained execution. By recognizing the opportunities in the present and taking bold action, banks can better capitalize upon what the future holds for the banking industry and thrive in it.Much has been said about banking functions remaining necessary, but as to whether they will continue to be performed by banks is another story. Banking — notably corporate banking — will inevitably have to undergo transformation that goes beyond the technology dimensions. These functions will become not only commoditized — they are becoming complex, networked and distributed, to mirror the continuing need for relevance and utility to bank clientele. Banks may want to take a leaf from the etymology of corporation — corpuratus, to form into a body — why were these groups or bodies formed? They are bound by common aims and aspirations that resulted in a sense of being and action. Corporate banks who find a way to rediscover their purpose will find a wellspring of transformation from within and provide the energy to sustain their transformation journey.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Christian G. Lauron is a Financial Services Partner of SGV & Co. He also leads the Firm’s Government & Public Sector.

24 May 2021

Christian G. Lauron

Corporate Banking Circa 2030: 7 hypotheses (First part)

First of two partsDespite the disruption and challenges caused by the pandemic, the banking industry is more poised than ever for a fundamental transformation. The speed of technological advancements and the means by which banks harness emerging technologies such as artificial intelligence (AI), blockchain, intelligent automation and machine learning only accelerated over the past half-decade. However, though innovation has become more a common capability than an aspirational buzzword, there’s still much transformational work to be done. Banks in the past five years have only seen incremental investments in this direction, adopted emerging technology in a siloed fashion, and focused mostly on cost optimization.Organizations continue to become more global, with electronic marketplaces facilitating more international activity among SMEs and with multiple micro-sized supply chains spanning across different countries. Due to a combination of disruptive technologies, dynamic markets, and easily accessible capital, small and medium-sized firms find the path to becoming substantial commercial accounts — and in turn, huge corporate banking clients — significantly easier.An EY study released in November 2020, How will banks transform to build the next generation of businesses, shares seven hypotheses that reflect how the trends of today reshape the current market, and how they play out in the next 10 years. These hypotheses describe how corporate, commercial and small and medium-sized enterprise (CCSB) banks can rise above the challenges of 2020 and leverage opportunities for growth in 2030.These seven hypotheses discuss 1) how the expansion of banking services from large platforms and tech giants will shrink market share across CCSB segments, 2) how banks can redefine client-centricity in a segment-less world, 3) how they can evolve to become trusted advisors by leveraging data to shape client business strategies, 4) how the subscription model can revolutionize commercial banking, 5) how banks can leverage ecosystems to organize integrated networks, 6) how banks can expand services beyond banking to help clients focus on their core activities, and 7) how banks can provide leadership on critical societal issues to strengthen trust with the next generation of clients.This two-part article will focus on the last three hypotheses, highlighting the importance of transforming banks to better capitalize upon the future of the banking industry. In this first part, we discuss how banks can leverage ecosystems to organize integrated networks and how they can expand services beyond banking to help clients focus on their core activities.ORGANIZING INTEGRATED NETWORKS IN THE AGE OF ECOSYSTEMSToday’s businesses maintain relationships with different banking providers, because there are no single banks that offer a truly comprehensive range of services nor an integrated platform. The convenience of a single interface offering a unified experience for all banking needs will become a baseline in the future, with regulations such as open banking now nudging the development of ecosystems to serve clients better. Because multiple providers will drive this ecosystem for clients to access an expanded menu of products and ancillary services, tomorrow’s leading banks will be simultaneously integrated, open and secure.Top-performing banks will still own client relationships but will also create their own ecosystems curated with products and services from third party partners through integrated platforms. This gives them an edge by focusing and excelling at their core competencies, innovating through open banking technologies, application programming interfaces (API), and attracting preferred third-party partners through niche offerings. Banks can utilize this advantage by developing macro and micro ecosystems to cater to client demand and major geographical markets.Banks can take another path to market leadership in three ways: by capitalizing on their scale; providing profitable niche services to multiple ecosystems; or specializing in products and services for specific industries. Other banks may even capitalize on their technological capability, experience with complex payments services, risk management experience and scale to provide ecosystem connectivity. The services these ecosystems can provide could also include for instance real-time payments and instant lending to SMEs.Banks need to thoroughly assess their strengths and weaknesses and embrace design thinking and agile working strategies. Plans must be made to heavily invest in cybersecurity, vendor management and strategies to build trust across their own ecosystems. Ecosystems are just one of the many new models that open banking regulation has paved the way for. Integrated partnerships provide the means to move forward, as proven by collaborations between banks and third parties such as FinTechs — and even with other banks and organizations that cater to niche markets, such as microfinance. This would mean determining which partnerships will be necessary to develop and scale integrated ecosystems and operationalizing said relationships.ENABLING BUSINESSES BEYOND BANKINGWith company success driven by focusing on core activities, more companies will need help with non-core activities, particularly those relative to key growth milestones. Banking providers can further deliver value by allowing their clients — especially SMEs — to focus on their businesses, strengthening client relationships by bringing in advisory, risk management, legal and other financial management capabilities in an accessible manner.Harnessing the power of ecosystems allows banks to launch integrated services, such as Chief Financial Officer in a box, corporate treasurer, financial risk and asset-liability manager, on-demand tax and legal advisor, payment and electronic invoicing utility, and model platforms. These would be particularly useful for firms planning mergers or acquisitions, geographic and cross-border trade expansion, supply chain restructuring, IPOs or funding rounds, or even insolvency and liquidation. Ecosystems will also allow banks to carve out niches in specific areas such as healthcare, connectivity, and infrastructure project finance. Offerings will no longer be limited to banking services but can even include the entire financial operating system to manage the business. For example, healthcare providers can engage banks to manage insurance, liquidity, billing and payments, in addition to traditional financing services and investment advisory. A more complex example for banks would be on the emerging case of cities, companies and communities embarking on sustainable and smart city strategies that would require innovative financing and investment structures as well as development strategies aided by integrated and logical frameworks, citizen and community engagement and geo-spatial location intelligence.Banks must be capable of deep integration into client corporations, institutional clients, supply chains and value networks to survive and flourish, as large corporations and institutions with established service providers will expect an integrated experience and seamless collaboration among banks, suppliers and vendors.In the second part of this article, we discuss how banks can provide leadership on critical societal issues to strengthen trust with the next generation of clients.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Christian G. Lauron is a Financial Services Partner of SGV & Co. He also leads the Firm’s Government & Public Sector.

17 May 2021

Roderick M. Vega

Prioritizing the integrity agenda in times of uncertainty (Second part)

Second of two partsThe difficulties of dealing with the pandemic have aggravated current integrity issues while presenting new ones for emerging markets all over the world. The emerging markets perspective of the EY Global Integrity Report, which surveyed more than 1,700 employees across all levels of large organizations in 21 emerging market countries, reveals that corruption and fraud remain major threats to long-term success for businesses in the wake of remote working conditions and regulatory scrutiny following the New Normal.The Global Integrity Report, conducted by global market research agency Ipsos MORI, presented relevant insights into the ethical challenges the organizations faced. By considering how the respondents dealt with areas of risk, businesses may gain insights about how to overcome some of the challenges to post-pandemic recovery.In the first part of this two-part article, we discussed the first of four key areas identified by the Integrity Report: prioritizing corporate integrity and encouraging the use of whistleblower channels. In this second part of the article, we discuss the need for an increased focus on data protection and cybersecurity, and the need to address integrity issues in third party service providers.INCREASING FOCUS ON DATA PROTECTION AND CYBERSECURITYRemote working during the pandemic has heightened the risk of cyber breaches, with more cyber criminals exploiting weak networks and targeting unsuspecting employees. The year 2020 saw a spike in ransomware and cyberattacks, infecting networks with malware and even selling fake COVID-19 treatments through phishing e-mails.Data breaches can result in devastating financial and reputational consequences for an organization, making it imperative to prioritize data protection. The EY report encouragingly shares that 55% of emerging market companies address this by offering employee training on how to prevent security breaches, a higher value than the 45% of companies doing so in developed markets. Should a security breach occur, 42% have an incident response plan in place. Moreover, as much as 86% even share confidence that they are doing everything they can to protect the data of their customers.With such high stakes, organizations should consider building a data privacy and protection framework guided and supported by the board. The increasingly sophisticated nature of cyberthreats and strict regulations result in the need to implement industry-leading practices and raise the bar to protect sensitive data. Companies can improve vigilance and identify issues by utilizing the latest technology, strengthening their virtual infrastructure, and raising cybersecurity and digital risk awareness among stakeholders. In addition, companies must consider developing thorough diagnostics scans, strong monitoring frameworks and incident response strategies.ADDRESSING INTEGRITY ISSUES IN THIRD-PARTY SERVICE PROVIDERSThough it is no mean feat to uphold integrity within an organization, external factors such as third-party partners can undermine existing efforts. The reputation of a retailer, for instance, will suffer greatly if one of its suppliers engages in malpractice, exploits loopholes, pays bribes, or engages in other similarly unethical behavior. These acts tarnish the reputation of the partnered retailer and subjects them to the high likelihood of financial loss, heavy penalties, or legal ramifications.The integrity report reveals that emerging market companies are aware of this particular threat, but with only 35% showing confidence that their third-party partners operate with integrity. Businesses cannot afford to place just their supply chain partners under scrutiny — sources of third-party risk can be found in distributors, joint-venture partners, contractors and consultants. However, despite the added challenge of restricted operations, remote working and limited mobility, 31% of emerging market companies address this risk through training and processes that highlight third-party due diligence.These challenging times pose an increased possibility of lapses in conducting due diligence, impeding internal reference checks, physical site visits and informal discussions that help identify potential gaps in conduct. However, this also gives companies the opportunity to reframe how they assess third-party risk. Digital solutions can be leveraged to streamline the assessment process, such as using data analytics to automate risk scoring and using automated dashboards for more efficient monitoring.CHAMPIONING A CULTURE OF INTEGRITYRisks to integrity have existed before and will persist beyond the pandemic. Employees may be tempted to risk the easy path regardless of accountability, cyberthreats increase in complexity and potential to expose vital data, and third-party risk creates more points of vulnerability in growing ecosystems.The report proves that emerging market companies recognize these threats and are making progress in addressing them, but there is still much to do. Businesses must expand their scope of focus past traditional aspects of integrity such as fraud, corruption and bribery, and must include measures in environmental, social and governance (ESG) criteria. With more customers prioritizing businesses with ethically sound practices, it is more important than ever to champion a culture of integrity not just because it is the right thing to do, but to also create long-term value.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Roderick M. Vega is a Partner and the Forensic and Integrity Services (FIS) Leader of SGV & Co., and Dennis F. Antonio is an FIS Senior Manager of SGV & Co.