The second part of the interview with the chairman of the IASB, Hans Hoogervorst. Hans illustrates the implementation of new rules. What is the biggest obstacle you have faced while implementing a new rule? The main resistance we face from the business community is that we want to modify and stabilize their numbers and that we do not want to deal with a lot of economic volatility, which is an every day fact unfortunately. There is a lot of pressure to use historical costs and minimize the use of market prices. They also want more opportunities to spread their losses. We are just done with a political struggle releasing a new lease standard, which requires that obligations that were, to date, not visible at the balance sheet are presented correctly. There also have been other matters, for example; the pension liability and the costs of share programs for employees. They all have been political struggles because the businesses have difficulties in adapting to our requirements. Can you tell us something about the process of setting new rules/standards? It is a complex process. We start with writing a research report in which we discuss important matters. Then, this discussion paper is published and we ask the stakeholders to provide their reactions. The industry has three to six months to react and to give their opinion. When these opinions are processed, the board studies their reactions, after which decisions are made. This can take years, for example, we have been processing an insurance standard for ten years. We are close to the finish but it is a political minefield and technically it is very complicated accounting. Stakeholders are trying to influence the process till the very last phase. Even when the standard is ready, the process is not yet completed. We, as IASB, have no ability to impose a standard as required. All countries act in different ways regarding accounting standards. In Europe, adoption of a standard is a political process, and the IASB has no control over it. But, we should not complain. Fifteen years ago IFRS was established, now 116 countries have accepted and are executing IFRS standards. This is an enormous achievement and beneficial for the world economy. How do you feel about the research the AFM did concerning the accounting firms? When I was the Chairman of AFM, this investigation had just started. I handed out the first fines. This was a huge shock for accountancy firms. After major improvements, I heard that the AFM has again imposed new fines. This is a difficult process. This is because the accounting firms also have a commercial relationship with their clients and that causes obstacles for critical scrutiny. Although, the outside world does not really see what accountants prevent. The AFM could not intervene earlier because they did not have the ability and the rights to do this. The powers of AFM were extended only after the great scandal around Enron in America. What do you think about the developments of the accountancy over the last decade? The most important development of the last decade is that political groups now cast a critical view on the practice of accountancy. People expect more from accountants to protect the investors. Improvements should be made in regards to this. As an accountant, you should do your work with a critical view and also think about the consequences. My message to the new generation is that think about: “for who am I doing it?” You do your work to make sure that the investors, who provide their money to a company, get to know exactly what is going on in the company. In ten years, the profession will still exist, and hopefully the capital markets and listed companies will continue to grow. However, lot of work still has to be done to improve the quality of the services. Which achievements are your most impressive accomplishments at the IASB? So far, it is the publication of the lease standard. There were a lot of people who thought that we cannot do it, but we did. I think this standard has brought about huge improvements in the accounting of leases. What advice would you give to the students of Tilburg University? Have a critical view and be conscious about who you are accountable to for the work you are doing. I think it is very important to have a broad economic view as an accountant. It is an economic profession and you need to develop commercial thinking to perform the job properly. Do not just concentrate on the details, but also think about the bigger economic picture. This is not a given fact in the accountancy world, it is very focused on details and a very precise profession. It attracts people who think precisely, but keep in mind that it also requires judgement.
From History student till IASB chairman I
Could you tell something about yourself, your education and your career? I have had an interesting career. I started as a History student in Amsterdam (1974) and finished my doctorate in seven years. Since I was afraid of the limited choice of professions available in History, I went to specialize in International Relationships at the Johns Hopkins University (USA). I mainly studied international economics and I feel like an economist, but without the title. One day before I was to get back to the Netherlands, I was offered a job and worked for four years at a local bank in Washington DC. Afterwards, I thought this job was rather boring. Commercial work does not suite me, I am more interested in public cases. So, I took up a job at a department of the Ministry of International and Monetary Affairs at The Hague. This was just before the monetary union with the Europe. Nothing much happened there and after a year and a half, I started to feel bored again. Around this time, a position as an employee of the House of Parliament became available with the VVD. Just after I decided to go work there, the European Monetary Union started to become serious matter. At the VVD, I was mainly an advisor and speechwriter for Frits Bolkestein. One move led to another and I became a member of the House of Parliament. As Member of Parliament, I was mainly involved with the accession of The Netherlands to the European Monetary Union. Thereafter, I have been State Secretary of Social Affairs, then Minister of Finance for a short period of time and at last the last stages of my political career, I served as the Minister of Health. In this position, I reformed the provisions related to health insurance to what you know now. Then, I thought that I have had enough of politics and I ended up with the “Autoriteit Financiele Markten” (Authority Financial Markets, AFM). Here, I again got in contact with the profession of accountancy, which I experienced only at a rudimentary level during my time in America. At the AFM, I have been active internationally and came into limelight as the Chairman of the IASB. As former History student, I could not have suspected this. How do you remember your time in the House of Representatives and as chairman of the AFM? My time in politics was amazing. You are always busy with important things, such as health care insurance. These matters are important for all Dutch citizens and the design of the health care. There are complicated economic, political and income distribution problems. You have to keep an eye on everything, consider every detail and know really well which strategic direction you want to go. Otherwise you will lose track. This often happens in politics and the minister then becomes a puppet of the House of Representatives. There are interesting, problematic cases, but I really enjoyed this period. I did not like the politics by itself, but I liked arranging important things. A common thread in my diverse career is that I have always served on the public matters. At the AFM, I supervised the financial world. I started my job at AFM just after the financial crisis in 2007. This made my time very interesting. In fact, I have never had a boring job, except in the beginning. What does a normal workday look like for you? I do not have a standard working day. Since I am the Chairman of an international organisation, I travel a lot – about one third of my time. Mostly I make an intercontinental trip and one to Europe every month. When I am in London, I speak with officials, ministries, fellow auditors, stakeholders and companies. I also need to read a lot to prepare for my board meetings. Reading papers is still very complicated. When I started as Chairman, on half the occasions, I had no idea what my fellow board members were talking about since this is a very technical field. Now, I understand about 80%, the other matters are mostly details that I do not need to understand. It requires a lot of study that I did not do earlier, and now I am not able to catch up anymore. Even in my current position, there is a lot of politics. However, the accountancy is a very flexible profession and depends on economic insight and judgement. What is the working environment like in London compared to the Netherlands? London is a dynamic capital. People work hard and have less vacation than in the Netherlands. I am working in an international environment that is very different from a Dutch organisation. We are working with 150 employees of thirty different nationalities, it is a cohesive organisation. This is why I like my job. Office space in London is very expensive so we work a bit closer to one another. In the Netherlands people say things straight away. Do you have the experience that people in your international environment are less direct? Yes that is true. In politics I often told it as it is but this works only when you use this with intellect. Dutch people tend to be blunt, you have to prevent this. However, Britons are more cautious but we work well together.
Singapore, the pearl of Southeast Asia
Choosing your destination when going on exchange might be the most important choice. I was sure that I wanted to go to Australia, so I applied for three different universities in Australia. Unfortunately I didn’t get accepted, so I had to look for other destinations. This is when I first considered Singapore as my destination. I started looking into this amazing and unique country. I applied for it and got accepted, and in hindsight I am very happy that I ended up in Singapore. At the end of July the day had come, I arrived in Singapore to study at the Nanyang Technological University in Singapore for one semester. I arrived a week early, to explore the city and meet fellow exchange students. I was immediately impressed by the country. Singapore is very small, to illustrate it is only 40 km from east to west and 25 km from north to south. This makes moving around extremely easy, which is also made possible by the amazing public transport system which is very reliable. During the first week I saw most of the city centre, and explored the nightlife. I had read about drinks being expensive but when you have to pay €10,- for a beer you realize you are not in Tilburg anymore. Then it was time to move to where I was going to stay for the rest of the semester; the NTU campus. I stayed in a dorm which I shared with a local Singaporean student. This student received study credits to stay with an exchange student. He however never asked me anything about myself, my university or the Netherlands. This was unfortunate, but apart from this living on campus was a nice experience. NTU has approximately 35.000 students of which more than 10.000 live on campus. This meant that the campus was more like a small village surrounding the university. The biggest pro about living on campus was the cost. Singapore is expensive, especially housing prices have gone through the roof in the last decade. The money I saved by living on campus immediately went to what every exchanger seemed to get more and more obsessed with as the semester progressed: travelling. During the semester travelling was mostly limited to weekends. However as I only had lectures on Tuesdays and Wednesdays my weekends counted five days. I travelled to Malaysia twice, Cambodia, Hong Kong and during recess week I went to Bali Indonesia for ten days. I am glad I was able to visit all of these countries, and every time arriving back in Singapore made me appreciate the convenience of living there. In the meantime I did have to study, while enjoying my stay in Singapore to the fullest. Even though I only had lectures on two days of the week the workload was higher than in Tilburg. Lectures were mandatory and four hours straight, including a short break. This sounds like a living hell but the teaching system is different than what I was used too. I only had lectures in small groups of up to 40 people, while still being taught by renowned and capable teachers. I chose mainly finance courses which were pointed out by teachers to be challenging. We had to do a lot of presentations and group assignments, which proved to be quite time consuming and challenging. But in the end passing courses was not very difficult. In Singapore grading is performed on a relative scale compared to your peers. This means that your grade depends not only on your performance but also on the performance of the rest of your class. This results in a competitive environment, as easy tests are not easy anymore. To get the best grades you have to outperform everyone in every test. Luckily failing is very uncommon in this system, and as Tilburg University now carries out a pass/fail system grades did not matter as much and I passed all of my courses. Apart from studying I experienced what it feels like to live in another country. I got to know Singapore on a broader and deeper scale than tourists do. In September I was present at the 50th National Day. This was Singapore’s celebration of 50 years of independence. Watching the fireworks and airshow in front of the skyline makes you realize how insane it is that this country has only existed for 50 years. Another highlight was the Formula 1 race which is held annually in the city centre. My parents visited me during this weekend and it was nice to show them Singapore. Building a country like this in 50 years is impressive, but it does require a specific vision. The Singaporean government is focused on progress, at whatever cost. When people hear about Singapore what pops into mind often are the strict laws. This is an example of the cost of progress, the people in Singapore however see this as completely normal. This also results in my opinion in a more serious society, Singaporeans are less creative and outgoing and more focused on money and success. Unfortunately the semester had to come to an end. But my adventure in Southeast Asia did not end just yet. Immediately after my last exam I flew to Bangkok, for 6.5 weeks of travelling through Thailand, Laos and Vietnam on my own, during which I met a lot of amazing and interesting people to share my adventure with. I can only recommend travelling while you are on exchange as most likely you will never get this opportunity again. This was the perfect end to my exchange. Arriving back in the freezing cold on flip flops made me realize how great my exchange had been.
A successful, young entrepreneur speaks (3)
Image As said, there are more companies than ever, and the choices to make are more complex than they’ve ever been. On top of that, we have more to do than ever before. This creates an interesting paradox: it’s impossible to make a more difficult decision in less time but end up with an equally good choice. For that reason, companies can no longer win with arguments. In other words, it’s not just about ‘being the best’. Short-lived associations can be much more powerful than being a good company. Think of car brands for example. Ask anyone who makes the safest cars and many would answer Volvo. This is mainly because they were the ones who introduced the seatbelt. But if you ask them if they’ve ever driven a Volvo, not all of them can say they have. So people don’t actually know whether it’s really the safest car there is. The power of public perception is unmistakable. It’s all about creating positive associations in people. This all starts with expectations. Earlier we discussed travel agencies that claim to be the best but often fail to deliver in practice. For low budget organisations, things are different. The plane will be uncomfortably packed, there will be no food or drink on board, your luggage will be weighed down to the milligram, et cetera. It’s basically just awful. And yet, these organisations are gaining popularity. Because they can deliver what they promise. When you have the image of a company that can deliver on its promises, people will only remember the positive aspects, i.e. that you’re affordable. When you try something but fail to achieve it, people will only remember negative associations, i.e. that you’re overpriced. So once again, it all starts with being honest to yourself. Can we deliver what we promise? If you consistently do, and keep exceeding expectations in a good way, consumers will remember a positive association. This requires patience. Many companies don’t have time for this and want it to change immediately. But that often only leads to bigger mistakes. Data are becoming more and more important to creating a credible image. Our society is very changeable but at the same time consumers are more predictable than ever, due to the traces we leave behind as individuals. You don’t necessarily have to take advantage of it if you know something about your customer. If you put it to use in a good way, you’ll know what to do today to become trustworthy tomorrow. What consumers like at this moment is simplicity and relevance. Suppose the supermarket would say: we promise that without violating your privacy, we will deliver exactly the groceries you need every other day. We’d say: sure. We’d be more than happy to give up our data for that. A company like Google has become so relevant that we trust them — whether we ought to or not. You’ll get a good image by doing well for a long time and continuing to fulfil your promises. This is increasingly becoming a matter of keeping your customers’ personal information safe. Entrepreneurship Entrepreneurs need to follow developments from an international perspective. A British newspaper is going to report the same news in a different way than a German or Dutch one. This is where our current education system often fails: it teaches us only to think from a Dutch perspective. We look at other countries, but never from an international perspective. I didn’t finish high school myself. That had to do with my clashing with the system. I wanted to do things myself. Later on, by means of an entrance exam for 21+ year olds, at the age of twenty I was admitted into the University of Amsterdam, where I started studying jurisprudence. I also took up subjects at other faculties, in the areas of psychology, communication sciences and economy. Separate disciplines as we know them now, guarded by gatekeepers, programme managers and associate professors, will disappear in the future, because disciplines subsume each other more and more. Think about the doctor of the future, for example: will that be a doctor with a specialisation in IT and robotics, or an engineer with a high level of expertise about the human body? People continue working until a much later age than they used to. In order to take on the future, the most important skill is to be able to constantly reinvent yourself. You need to try to become autodidactic. In other words, you need to be able to teach yourself new things. The world has changed tremendously in very little time. In the future it will be no different. If you want to play a role in that world, you will need to do things that have a high probability of failure. If you do that ten times, one try will work out. This is what most entrepreneurs dream of now: that one brilliant idea. But in practice, they look outside to see what’s being done and then they just join in. The key is always to create more value compared to the status quo. You need to ask yourself: how could things be better? You need to be able to be what connects individual consumers. Entrepreneurs are increasingly becoming experts. It used to be easy to get by just ‘moving boxes’. In the future, it’ll be more about handling knowledge, data and technology. Just being a company is no longer enough in this age. Companies need to keep reinventing themselves. Every year, they should ask themselves the question: if we would start all over tomorrow, would we do things the same way? There are many large companies that haven’t asked themselves this question for too long.
A&F Investments prepares for a turbulent year
During the last quarter of the year, four new stocks were purchased and three existing positions were liquidated or phased out. Our first purchase was related to the European construction market. Strong growth potential in this sector was forecasted by one of our teams, especially in the residential and commercial construction. Fundamental analysis concluded that one of the discussed companies in this market was undervalued. After the purchase it quickly moved in our favor, gaining more than twelve percent in two weeks. Meanwhile, a quarter of the committee participated in the Studytour of A&F, travelling across the state of California, so the second meeting of A&F Investments was not very crowded. The food market and master limited partnerships (MLP’s) were discussed. The majority of MLP’s are pipeline businesses, which earn a very stable income from the transport of oil or gas. Companies with a MLP status have favorable tax treatment and provide stable yield because of their nature. We decided not to invest in it, because the demand of energy might further decrease and a rise of the interest rates could be harmful for these companies, due to the fact that MLP’s generally borrow money to fund new projects. Furthermore, the agricultural inputs industry was discussed, especially the attempt of Monsanto to acquire Syngenta. Our team wanted to pick up some stocks when it was trading for a lower price, however the stock was quickly surging after this decision. Unfortunately the limit order was set too low and we missed this opportunity. Another team has analyzed a British homebuilder and property developer. Its stable earnings growth, return of equity, stable financing plan and high dividend yield made us excited for a purchase, where a strongly correlated company in our portfolio has been phased. Afterwards this decision paid off as we have seen the stock climbing over fifteen percent within two weeks. An interesting event during the quarter was the IPO of ABN AMRO. One team member was very excited to participate in it and convinced the rest of the committee to give it a shot. It was a first for A&F Investments to join an IPO. Meanwhile the portfolio was increasingly harmed by the falling oil prices and the team tried to figure out a hedge for this oil problem. One team has worked on it and provided the rest of the committee some solutions. The first step was selling positions in an ETF of which the prospects we unfavorable. However, this is not enough to fully cover our portfolio and other teams moved on thinking about new investment opportunities. Value investing opportunities have been considered, comparing companies with different debt structures. One of the teams has investigated this, questioning what these companies exactly do, due to which event the company is mispriced and how likely it is that it will maintain its high level of profitability. Moreover, valuations of the winning three of the selection have been made, varying from a sports betting company to a designer handbags retailer. In the middle of December, Janet Yellen announced a 0.25% increase of the interest rate after seven year of near zero interest. The Federal Reserve reacts to considerable economic advances, such as a rapidly recovering labor market and clear improvements in wage development. During our last meeting of the year, we have discussed our portfolio performance over the quarter and made prospects for the next year. Although the FED state that the oil price’s decline is a temporary phenomenon, we should be beware of potential harmful effects on our portfolio. Sounds of economic slowdown in China combined with uncertainty about the oil price development will be a huge challenge for the committee the first quarter of 2016. We will doubtless follow the decisions of Mario Draghi and Janet Yellen, as we have experienced their influence in the overall stock market. Finally, at the end of the last quarter of 2015, our portfolio gained a very healthy return and I think that we can congratulate ourselves on that.
A successful, young entrepreneur speaks (2)
Authenticity For an organisation, authenticity should be a constant variable. There was a Facebook conversation involving the Dutch airline KLM that appeared in the news, for which KLM was lauded for its authentic reaction. ‘KLM my man, I need you bro!’ That is a rough equivalent of how Willem Nout started his message on the Facebook page of KLM, writing in Dutch street slang. He wanted to fly to San Francisco, making a stop in New York to go ‘chill’ there. Willem wanted to know how to get there as thriftily as possible. The airline replied with style. ‘What up, Willem! The Big Apple is mad awesome for sure.’ KLM recommended booking an extra flight within the country. That is nicely done, of course. But in order to call it authenticity, you should also be able to make a post in the Frisian dialect and get a reply in Frisian back. Or in The Hague’s regional slang, et cetera. Only when this is done by default can you call it authenticity. In order to implement that properly, messages in slang or dialect should actually be sent to a department where there are employees who speak that language. Incidentally, when I sent them a message in street slang a week later, I received not only almost a hundred likes from people who saw it — but also a reply from KLM written in standard Dutch. It is interesting to see how various terms like trust, transparency and authenticity used to be mainly used for people, but now we judge companies in the same ways. At the moment, companies primarily see this as a commercial opportunity. However, the consumer discovers more and more often that it is just a trick, which makes them consider those companies unauthentic. That is detrimental to trust. In order to be authentic, you need to be autonomous. Being autonomous means being free in your actions. It means not being restricted by a strict system. So it starts with the freedom of the employees that make up the company. But the company should guide it. If an employee working at a funeral insurance company would reply with ‘what up, Willem’, it wouldn’t have the same effect. Meaning Meaning is an immediate answer to the question ‘why’. Why should people become customers of our organisation? Many organisations still think customers like being customers. Think of the financial sector for example. We do not like being customers of a bank at all. We have to be customers of a bank. If you really want to be meaningful as an organisation, then you need to contribute to someone’s life in a positive way. People need to feel that they want to be your customers. But there is more and more competition. Think of airports for example. Twenty years ago, there were three major companies renting cars. Nowadays, there are twenty of them in a row. They all offer the same type of car for roughly the same price. The only difference is that one might be just one euro cheaper than another or use pushier marketing tactics to compel their customers just that little bit more. These companies have become interchangeable. They have lost their meaning. On top of that, feeling the pressure of the 24 hour economy, the average time a consumer is willing to spend thinking about a decision has dropped drastically. That is why it is important for an organisation to be emotionally meaningful to its consumers. Functional meaning is not that important to us any more. Anyone can provide that. We just do not have time to think about that any more. That is why these days people feel more personally connected with a company like Apple than a chip manufacturer like Intel.