CFO Insights | Japan 2017 Q2

The CFO Program | Japan

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The CFO Program | Japan

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Contents

Japan Economic Outlook: Brexit and its impact P 3

Accounting News P 6

Tax News P 10

Navigating Difficult Work Environments P 13

Digital Finance: Avoiding the Pitfalls of Moving to the Cloud P 17

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Japan Economic Outlook: Brexit and its impact

Prime Minster Shinzo Abe’s reforms

seem to have put Japan’s economy on

the track to recovery, with exports,

employment, and inflation figures

looking rosier. However, Japanese

manufacturing and financial services

companies operating in the United

Kingdom could face some issues due

to Brexit.

Brexit fallout British Prime Minister Theresa May recently said, in reference

to Brexit, that “no deal is better than a bad deal.”1 Yet it turns

out that some Japanese business executives are

1 George Parker and Alex Barker, “Theresa May warns UK will walk away from ‘bad deal,’” Financial Times, January 18, 2017, https://www.ft.com/content/c3741ca2-

dcc6-11e6-86ac-f253db7791c6.

2 Leo Lewis et al., “Japan’s business lobby issues fresh Brexit warning to Theresa May,” Financial Times, March 28, 2017, https://www.ft.com/content/4959296c-13a3-

11e7-b0c1-37e417ee6c76.

uncomfortable with this sentiment. Indeed Japan’s Keidanren,

which is a powerful business lobbying group, issued a

statement asking that Britain give “deeper consideration” to

the impact of Brexit2. Japanese companies employ roughly

140,000 people in the United Kingdom, many in the

manufacturing and financial services sectors. They have long

seen Britain as a gateway to the rest of Europe. There is now

fear that, depending on the terms of Brexit, they could lose

their competitive advantages—especially as German

companies are also expressing concerns about remaining in

the United Kingdom. Nissan, the Japanese auto maker, was

able to get a commitment from the British government that it

would not face onerous consequences from Brexit. The

details of that commitment are not known. Nor is it known

whether Britain can afford to provide a similar commitment

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to every foreign company operating in the United Kingdom.

Moreover, if that commitment entails subsidies aimed at

offsetting any new tariffs, this would be seen as a violation of

World Trade Organization rules and could lead to legal action

by the European Union.

Japanese economic

performance Is Abenomics working? Recall that Abenomics is the name

given to the three-pronged economic policy of Japan’s prime

minister, Shinzo Abe. The three prongs, or arrows, were

monetary stimulus, fiscal stimulus, and structural reform.

Only the monetary stimulus has been implemented in a

significant way. It has involved massive asset purchases by the

central bank, combined with historically low, even negative,

policy interest rates. The result has been a weak Japanese yen,

low borrowing costs, rising asset prices, and a modest boost

to inflation. So, again, is it working?

The answer may very well be yes. The Japanese government

reports that, in the fourth quarter of 2016, real GDP grew at

an annual rate of 1.0 percent and that, for all of 2016, real

GDP was up 1.0 percent over 2015. In most countries, those

numbers would seem quite disappointing. But remember

that Japan has a declining population and, especially, a

declining working-age population due to the aging of the

population. Thus, real GDP per working-age population is

rising at about 2.0 percent per year—a reasonably good

number. Partly, this reflects rising productivity, but it also

reflects a rising level of participation of working-age people in

the labor force. That signifies a recovering economy. The

growth in the fourth quarter was driven largely by a rebound

in exports, itself likely due, in part, to the weak yen that

Abenomics has created.

Lately, however, the weak yen was the counterpart to the

strong US dollar, inspired by expectations about US economic

policy. Also on the positive side, there was a pickup in

business investment, a component of GDP that has until

recently been disappointing. There was also good growth of

government spending, likely due to the implementation of a

new fiscal stimulus program. Interestingly, a decline in

inventory accumulation cut 0.5 percentage points from

growth in the fourth quarter. This is potentially good news in

that it bodes well for expanded production in the coming

months.

“The growth in the fourth quarter was

driven largely by a rebound in exports,

itself likely due, in part, to the weak yen

that Abenomics has created.”

On the negative side, consumer spending growth was very

modest, as wages failed to accelerate despite a relatively tight

labor market. This is important as consumer spending is the

largest component of GDP. If it fails to recover, it will be

difficult to sustain strong growth on the basis of exports and

investment. It has long been Abe’s intention to boost the

growth of domestic demand. Moreover, although Japan

benefitted from expanded exports, there is concern in Japan’s

business community about the possibility of protectionist

policies on the part of the new US administration. Abe’s

recent visit to US President Donald Trump’s home in Florida,

including a few rounds of golf, was seen as critically important

in maintaining good economic relations between the two

countries.

“Although Japan benefitted from

expanded exports, there is concern in

Japan’s business community about the

possibility of protectionist policies on

the part of the new US administration.”

Meanwhile, here are the most recent data on Japan’s

performance at the start of 2017:

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Japanese exports were up sharply in February, rising 11.3

percent from a year earlier, the biggest increase in two

years. Exports to China were up 28.2 percent, while

exports to the United States were up only 0.4 percent. Yet

Japan’s trade surplus with the United States increased,

raising fears that this will lead to the US government

seeking trade restrictions. Meanwhile, Japan’s government

is eager to negotiate a bilateral free-trade agreement with

the United States in order to retain some of the benefits

lost with the end of the Trans-Pacific Partnership.

Negotiating such a deal, however, will be difficult if the US

administration is concerned about Japan’s trade surplus

with the United States.

For the first time since 2015, core inflation has returned to

Japan. Consumer prices, excluding volatile food prices,

increased 0.1 percent from December to January. If food

and energy prices are excluded, prices were up 0.2 percent

in January versus a year earlier. Headline inflation was 0.4

percent, driven largely by rising energy prices. Yet, aside

from the impact of energy prices, economic conditions

may be fueling inflation as well. The unemployment rate in

Japan fell from 3.1 percent in December to 3.0 percent in

January—nearly a 20-year low. In addition, the ratio of job

openings to applicants remained close to a 30-year high.

This suggests an extremely tight labor market that ought

to generate wage acceleration. On the other hand,

household spending declined in January versus a year

earlier, while industrial output declined in January as well.

This suggests that demand may not be sufficient to fuel

further inflation.

Although inflation is starting to rebound in Japan, wage

increases have been disappointing. The government had

hoped wages would start to accelerate given tight labor

market conditions, but, in fact, wage increases this year

have been slower than in the past year. The problem is that

although the labor market is tightening, big companies

have large numbers of lifetime employees who are unlikely

to depart even if wage increases are modest. Thus,

employers don’t have a strong incentive to accelerate wage

gains. The government wants employers to boost wages in

order to increase consumer purchasing power, something

that’s needed to shift the economy away from a

dependence on exports.

Meanwhile, Japanese retail sales grew at a feeble pace in

February. Sales rose 0.2 percent from the previous month,

and only 0.1 percent from a year earlier. In addition, sales

at supermarkets and department stores, Japan’s main

general merchandise retailers, fell 2.7 percent from a year

earlier. At the same time, spending at petrol stations

increased sharply due to the rebound in oil prices in the

past year. In addition, spending on automobiles increased.

“Following the US election, it is clear

that the TPP is dead. Thus Abe, who

had expended some political capital in

order to obtain parliamentary approval

of the TPP, will now face a substantially

changed and more challenging

political environment.“

Acknowledgments The author would like to thank Nobuhiro Hemmi, partner

and head of Global Business Intelligence at Deloitte

Tohmatsu Consulting, Japan, for his contributions. Hemmi is

also a member of the Deloitte Global Economist Council.

CFO Insights | 2016 Q3

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Accounting News

IFRSs No new standards or interpretations were issued by the

International Accounting Standards Board (IASB) during this

Quarter. However, an amendment proposal arising from the

Post implementation Review of IFRS 8 and a Discussion Paper

came out from the IASB:

Amendments to IFRS 8 and IAS 34

The IASB has published the Exposure Draft (ED) ED/2017/2

Improvements to IFRS 8 'Operating Segments' (Proposed

amendments to IFRS 8 and IAS 34) for public consultation.

The proposed improvements in the ED include amendments

to the following areas of the standards:

Description of the chief operating decision maker

(CODM), to help entities to better identify the CODM

Identification of reportable segments.

Allow additional segment information under certain

circumstances.

Description of reconciling items including improvements

to the understandability of the segment reconciliation.

Change in the composition of an entity’s reportable

segments.

Comments on the exposure draft are requested by 31 July

2017. For additional information, see our related IAS Plus

project page (https://www.iasplus.com/en/projects/pir/pir-

ifrs-8-follow-up) as well as the IASB press release

(http://www.ifrs.org/Alerts/ProjectUpdate/Pages/IASB-consul

ts-on-proposed-improvements-to-IFRS-8-Operating-Segmen

ts-.aspx) and our IFRS in Focus newsletter (https:

//www.iasplus.com/en/publications/global/ifrs-in-focus

/2017/ifrs-8) on the amendments.

Disclosure principles

The IASB has published a comprehensive discussion paper

setting out the Board's preliminary views on disclosure

principles that should be included in a general disclosure

standard or in or in non-mandatory guidance on the topic.

Comments on the discussion paper are requested by 2

October 2017. Additional information can be accessed in our

related IAS Plus project page (https://www.iasplus.com/

en/projects/major/principles-of-disclosure) as well as the

IASB press release (http://www.ifrs.org/Alerts/PressRelease/

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Pages/iasb-outlines-steps-to-improve-disclosures-in-financial

-statements.aspx) and our IFRS in Focus newsletter (https://

www.iasplus.com/en/publications/global/ifrs-in-focus/2017/

dp-pod) on the disclosure initiative project.

U.S. GAAP The FASB has issued several Accounting Standards Updates,

including:

Accounting Standards Update (“ASU”)

2017-07—Compensation—Retirement

Benefits (Topic 715): Improving the

Presentation of Net Periodic Pension

Cost and Net Periodic Postretirement

Benefit Cost

This ASU amends the treatment and presentation of the

components of net periodic benefit cost for an entity’s

sponsored defined benefit pension and other postretirement

plans. The key provisions of the ASU require entities to:

disaggregate the current service cost component from

other components of net benefit cost (the “other

components”) and present it with other current

compensation costs for related employees in the income

statement;

present the other components elsewhere in the income

statement outside of income from operations if such

subtotal is presented and adequately disclose where

such components are included if not presented on

appropriately described separate lines within the income

statement; and,

only capitalize the eligible service cost component of net

benefit cost as opposed to the aggregate net benefit cost

under the current practice

The amendments in this Update are effective for public

entities for annual periods beginning after December 15,

2017 and other entities for annual periods beginning after

December 15, 2018. Early adoption is permitted for all

entities. For more information, see the see our related Heads

Up newsletter (https://techlib.deloitte.com/default.aspx?

contextId=18fa1371-bc8c-40c0-ac60-03747696deff#s=AgAA

ADJfMzgyNzA3LERvY1NlYXJjaA%3D%3D) and this ASU as

included (http://www.fasb.org/jsp/FASB/Document_C/Docum

entPage?cid=1176168888120&acceptedDisclaimer=true) on

the FASB’s website.

ASU No. 2017 - 08 – Receivables Non-

refundable Fees and Other Costs

(Subtopic 310-20): Premium

Amortization on Purchased Callable

Debt Securities

Under the current guidance, entities generally amortize the

premium as an adjustment of yield over the contractual life

(to maturity date) of the instrument. As a result, entities do

not consider early payment of principal and any unamortized

premium is recorded as a loss in earnings upon the debtor’s

exercise of a call on the instrument.

Under this ASU, entities must amortize the premium to the

earliest call date. Therefore, they will no longer recognize a

loss in earnings. This ASU does not require any change for

debt securities carried at a discount as these should continue

to be amortized over the contractual life (to maturity) of the

instrument.

The amendments in this Update are effective for public

entities for annual periods beginning after December 15,

2018 and for all other entities for annual periods beginning

after December 15, 2019. Early adoption is permitted for all

entities. For more information, see the see our related Heads

Up newsletter (https://techlib.deloitte.com/default.aspx?

contextId=18fa1371-bc8c-40c0-ac60-03747696deff#s=

AgAAADJfMzg4MjgyLERvY1NlYXJjaA%3D%3D) and this ASU as

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included (http://www.fasb.org/jsp/FASB/Document_C/Docum

entPage?cid=1176168934053&acceptedDisclaimer=true) on

the FASB’s website.

ASU No. 2017-09 – Compensation –

Stock Compensation (Topic 718);

Scope of Modification Accounting

This ASU provides guidance on which changes to the terms

or condition of a share-based payment award require an

entity to apply modification accounting in Topic 718. An entity

should apply modification accounting unless the following

criteria is met: the fair value, vesting conditions and the

classification of the instrument of the modified award is the

same as the fair value, vesting conditions, and the

classification of the instrument of the original award

immediately before the original award is modified.

Additionally, the current disclosure requirements in Topic 718

are applicable regardless of whether an entity is required to

apply modification accounting.

The amendments in this Update are effective for all entities

for annual periods beginning after December 15, 2017. Early

adoption is permitted for all entities. For more information,

see this ASU (http://www.fasb.org/jsp/FASB/Document_C/

DocumentPage?cid=1176168934053&acceptedDisclaimer=t

rue) as included on the FASB’s website.

Japanese GAAP and other

local developments

ASBJ issues Practical Solution on

Operators’ Accounting for the

Concession-based Private Finance

Initiative Projects

In May 2017, the ASBJ issued PITF No.35 Practical Solution on

Operators’ Accounting for the Concession-based Private

Finance Initiative Projects. The PITF No.35 provides guidance

on operators’ accounting for their acquisition and

maintenance of the public facilities. The PITF No.35 is effective

for the annual periods and the quarter periods ending on and

after May 31, 2017.

ASBJ issues Practical Solution on the

Tentative Solution Regarding the

Discount Rate Used to Measure Post-

employment Benefit Obligations When

the Bond Yield is Negative

In March 2017, the ASBJ issued PITF No. 34 Practical Solution

on the Tentative Solution Regarding the Discount Rate Used

to Measure Post-employment Benefit Obligations When the

Bond Yield is Negative. The PITF No.34 provides guidance that

permits an entity to either use a negative interest rate or set

a limit on an interest rate at zero (i.e. an interest rate floor).

The PITF No.34 is effective from the annual period ended on

March 31, 2017 to that ending on March 30, 2018.

ASBJ issues Revised Practical Solution

on Unification of Accounting Policies to

Foreign Subsidiaries, etc. for

Consolidated Financial Statements and

related Practical Solution

In March 2017, the ASBJ issued the following Revised Practical

Solutions (collectively, the ‘Revised PITFs’):

PITF No.18 Practical Solution on Unification of

Accounting Policies Applied to Foreign Subsidiaries, etc.

for Consolidated Financial Statements

PITF No.24 Practical Solution on Unification of

Accounting Policies Applied to Associates Accounted for

Using the Equity Method.

The Revised PITFs expand their scope to include domestic

subsidiaries and affiliates that prepare their financial

statements applying the designated IFRSs or Japan’s Modified

International Standards (‘JMIS’). Current PITF No.18 and PITF

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No.24 include in their scope only foreign subsidiaries and

affiliates. The revised PITFs are effective on and after the

annual periods beginning April 1, 2017. Early application is

permitted after the issuance of the Revised PITFs.

ASBJ issues Accounting Standard for

Current Income Taxes

In March 2018, the ASBJ issued the ASBJ Statement No.27

Accounting Standard for Current Income Taxes (the

‘Statement’). The Statement maintains substantially the

existing requirements relating to current income taxes. The

Statement is effective after its issuance.

ASBJ releases the Exposure Draft of

Practical Solution on Stock Acquisition

Rights Granted to Employees

In May 2017, the ASBJ released for public comments the

following exposure drafts (collectively the ‘EDs’):

Exposure Draft of Practical Solution on Transactions

Granting Employees and Others Stock Acquisition Rights,

which Involve Considerations, with Vesting Conditions

(Exposure Draft of PITF No.52)

Proposed Amendments to Guidance No. 17 Guidance on

Accounting for Compound Financial Instruments with an

Option to Increase Paid-in Capital (Exposure Draft of

Guidance No.57)

The objective of the EDs is to clarify the accounting treatment

for the transactions that grant employees certain stock

acquisition rights in exchange for considerations. The EDs

propose that the existing accounting requirements for stock

options would apply to the transactions.

The comments are due on July 10, 2017.

Issuance of the Amendments to ‘Japan’s

Modified International Standards’

In April 2017, the ASBJ finalized the amendments to Japan’s

Modified International Standards ( JMIS): Accounting

Standards Comprising IFRSs and the ASBJ Modifications that

were released for public comments in December 2016. JMIS

are standards and interpretations issued by the IASB with

certain ‘deletions or modifications’ where considered

necessary by the ASBJ. The ASBJ issued JMIS in June 2015 and

has examined the accounting standards issued by the IASB

since then. The ASBJ undertook the endorsement process on

the standards issued by the IASB from January 2014 to

September 2016 that are effective before December 2017.

No deletion or modification to the standards issued by the

IASB.

Japan updates list of ‘designated’ IFRSs

In April 2017, the FSA announced the update to the list of

‘designated’ IFRSs that are issued by the IASB from July to

December 2016. The ‘designated’ IFRSs are for use by

companies that voluntarily apply IFRSs in Japan. IFRIC22

Foreign Currency Transactions and Advance Consideration is

added to the list.

The FSA published the Audit Firm

Governance Code

In April 2017, the FSA published the Principles for Effective

Management of Audit Firms (the ‘Governance Code’). The

draft of the Governance Code was released for public

comments in December 2016. The Governance Code is

developed by the Council of Experts on Audit Firm

Governance Code and is for use by audit firms that voluntarily

apply it. English translation of the Governance Code is

available on the FSA website (http://www.fsa.go.jp/news/28/

sonota/20170331-auditfirmgc/3.pdf).

For more information, please visit: IASPlus.com (IFRS) or USGAAPPlus.com

(U.S. GAAP) or speak to our Deloitte experts Takafumi OSEKO, Partner

(takafumi.oseko@tohmatsu.co.jp) or ALEJANDRO Saenz, Senior Manager

(alejandro.saenzmartinezgeijo@tohmatsu.co.jp).

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Tax News

Impact of Customs Duty on

Businesses

From a financial perspective, customs duty, which is a tax

imposed on the importation of goods, may have a significant

impact on the cash flow and profitability of a business.

Customs duty savings, however, are often overlooked on the

grounds that the duty is (in many companies) under the

control of a department other than finance. This leads to duty

being viewed as an unmanageable portion of the cost of

goods sold in the financial statements.

Potential Problems

Companies can experience potential problems at every stage

of the customs process, such as: customs valuation, transfer

price (“TP”) adjustment and tariff classification issues.

(1) Customs valuation of royalty and license fees

All goods imported into Japan, should be valued in line

with the international treaty of the WTO Agreement on

Customs Valuation. This agreement stipulates that

“customs value” is primarily the transaction value of the

imported goods, plus certain adjustments for costs and

charges. Examples of such costs and charges include:

goods and services provided free of charge or at reduced

cost, commissions, royalties and license fees, etc.

From a customs valuation perspective, royalties and

license fees (“royalties”), related to imported goods, may

be dutiable, and it is important for companies to assess

whether or not this is the case. At the time of a post-

customs clearance audit, if the customs authorities

identify dutiability royalties which were not correctly

added into the customs value, then unpaid duties will be

assessed together with penalties and interest.

(2) TP adjustment

Companies also need to consider the impact of TP

adjustments (made to achieve an arm’s length price from

an income tax perspective) on customs procedures. If an

upward retrospective TP adjustment (i.e. importer is

required to make an additional payment) is identified at

the time of a post-customs clearance audit, the customs

authority will often request that the company

retroactively amend the customs value of all import

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declarations impacted by the TP adjustment. Since

import declarations are made on a daily transaction basis,

the preparation of amended customs declarations may

cause a significant amount of administrative paperwork

and cost, in addition to the payment of unpaid taxes,

penalties and interest.

(3) Tariff classification

For customs declaration purposes, imported goods need

to be classified by Harmonized System (“HS”) code – a

process called tariff classification. HS codes are

internationally standardized codes developed by the

World Customs Organization. The first 6 digits are

standardized globally, with the following digits differing

based on country specific classifications. Customs duty

rates are applied based on the HS code assigned to the

good. In some cases, proper tariff classification is difficult,

because it requires deep knowledge of product

specifications and professional expertise. As a result, if

goods are not classified with the correct HS code,

companies may overpay or underpay customs duty. In

practice, the correct code may also vary according to

product ingredients and manufacturing process. To

illustrate, importers of a tomato sauce for pasta will need

to determine whether it should be classified as a sauce

or a tomato product (which will in turn have a material

impact on the applicable duty rate):

— HS code 2103.90-130 (sauces and preparations):

most favored nation (“MFN”) duty rate 7.2%

— HS code 2002.90-290 (tomatoes prepared or

preserved): MFN duty rate 9.0%

Risk Mitigation

It is important for companies to routinely prepare relevant

documents in advance of a post-customs clearance audit, in

order to reduce the risk of time consuming and costly

disputes with the customs authority.

(1) Customs valuation of royalties

Royalties are not always dutiable from a customs

valuation perspective. Royalties not related to the

imported goods and condition of sale could be regarded

as non-dutiable payments. Furthermore, the whole

amount of a royalty is not always dutiable. Therefore,

companies need to make clear which part of the

payment is dutiable, and which part non-dutiable, with

facts validated by relevant contracts and other

commercial documents. Where dutiable royalties need

to be included under daily import declarations, an

advanced approval application (for a specified period of

time), should help to avoid the need for amended

declarations and related payments of penalties and

interest.

(2) TP adjustment

Upward TP adjustments are not always dutiable. The

circumstances surrounding TP adjustments need to be

analyzed and assessed from a dutiable/non-dutiable

perspective. If the TP adjustment is regarded as dutiable,

voluntary disclosure to the customs authority and

submission of self-amended customs declarations

would be helpful in mitigating the risk of penalties.

Furthermore, it might be possible to obtain advanced

approval of protocols for dealing with future

retrospective TP adjustments, which might reduce the

time and cost of preparing amended declarations.

(3) Tariff classification

The Advanced Classification Ruling Request (“ACRR”) can

be a helpful tool for determining appropriate HS codes.

Importers can request clarification of a specific HS code,

and the applicable duty rate, by filing an ACRR with the

customs authorities. The response from customs

authority should be honored upon subsequent customs

examinations, thereby helping to reduce uncertainty

and the possible risk of additional duty and penalties in

the event of misclassification.

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Trade Automation

The automation of trade processes, through technology

known as Global Trade Management (GTM) systems, has

become a growing area of interest and investment for

organizations in recent years. Global Trade Management, as

a strategic function, enables corporate growth and expansion

strategies. Through the use of these systems, organizations

are able to automate many trade processes, resulting in

improved compliance, operational efficiencies, supply chain

optimization, and the centralization of trade management

operations.

Global Trade Management systems support businesses in the

areas of compliance management (sanctioned party list

screening, embargo checking, export control), customs

management (automation of customs document creation, e-

filing, duty calculation, bonded warehouse management), and

free trade agreement (“FTA”) management (automation of

origin determination, certificate management, comparison of

FTAs available). Not only do these systems help to eliminate

the risk of non-compliance and administrative costs, they are

used to make strategic supply chain decisions.

In conclusion, companies face potential problems at every

stage of customs processing. However, proper planning and

execution, with the right tools, should enable businesses to

minimize the risk of unforeseen duty costs, and maximize the

opportunities for customs duty savings.

For more information, please speak to our Deloitte experts Kazumasa YUKI,

Tax Partner (kazumasa.yuki@tohmatsu. co.jp), or David BICKLE, Tax Partner

(david.bickle@tohmatsu. co.jp).

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Navigating Difficult Work Environments

Occasionally, but not too infrequently, in Deloitte transition

labs, discussions focus on executives who confront vexing

relationships. Their environment and relationship issues

often sap their energy and lead them to question if they made

the wrong choice by joining a particular C-suite. The

difficulties frequently arise from how the CEO of the company

chooses to operate, how peer executives behave or a

combination of both. After committing to a new C-suite role,

these new executives often struggle with reconciling their

recent choices to commit to an organization with framing

their next course of action in response to difficult situations.

Following are some potential difficult and dysfunctional

situations and four responses every executive can consider.

Some Challenging Relationship

Situations

A number of different factors can drive difficult situations.

Sometimes it is the CEOs and how they create or enable

organizational dysfunction. At other times, it is the behaviors

of peer executives. While there are many pathways to and

types of difficult situations that occur in companies, the

situations below are among the more common challenges I

encounter in transition labs. While these situations are

difficult to predict ahead of time, careful due diligence ahead

of accepting a C-suite position can be helpful in avoiding them.

The Controlling CEO with Unrealistic Expectations

A CEO with unrealistic performance expectations can be

vexing. This is particularly difficult when the CEO centralizes

decision rights, while not listening to or giving executives

adequate permissions to deliver performance. This situation

often leads to a high turnover of executives in the C-suite who

fail to meet expectations and depart. The challenges are

doubled if the CEO’s management style is passive-aggressive.

Then the executives receive very little feedback before the

CEO suddenly blows up or turns on them.

The Conflict-avoiding CEO

Conflict avoidance can also leave in its wake dysfunction in

the organization. Conflict avoiders can enable silo and clique

behaviors across their leadership by not demanding team

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behaviors and collective performance. This can let leadership

teams fracture into competing groups that don’t share

information and resources and create very political

environments that drain efforts and executive energy. From

excluding an incoming executive in key meetings to put

downs and back stabbing behaviors by peer executives,

usually a conflict avoiding or narcissistic CEO is a key enabler

of these behaviors.

The Narcissist CEO

Similar to the conflict-avoiding CEO, a narcissist CEO can also

leave a trail of dysfunction. Typically, they surround

themselves with a group of sycophants who are unwilling to

challenge them and foster mediocrity over meritocracy.

Legacy Leaders Protecting Staff or Initiatives

Another vexing challenge for incoming executives is to find

their desired personnel moves blocked by the CEO or other

peer leaders who may have previously held their role. Let us

imagine an incoming CFO finds his controller is not capable

of handling the needs of a growing company. However,

replacing the controller is blocked because he is a favorite of

the CEO and the COO (who was previously the CFO). Leaders

outside your area who prevent you from building the team

you want undermine your success.

All of the above situations can lead otherwise high-

performing executives to reconsider their relationship and

commitment to their new organization. The remainder of

this article gives a response framework to difficult situations.

Four Responses to Difficulty

In 1970, the economist and sociologist Albert Hirschman

wonderfully framed three choices a customer or even an

employee confronts in a deteriorating and dysfunctional

environment. These are to exit, give voice to enact change, or

to stay loyal in a difficult environment. To this I have found

adding a fourth response of creating optionality valuable to

helping CxOs reframe their difficult situations and construct

solutions that help them get unstuck and move forward.

Exit

This is one of the most extreme steps an executive can take

when the work environment and relationships are

dysfunctional. As I mainly work with CFOs, I find the primary

reason for them to choose to exit early in their tenure are:

—Unrealistic expectations or behaviors that are unethical or

push ethical boundaries. This includes discomfort with the

financial promises made by the CEO and other leaders to the

market, as they are unattainable or because attaining them

may require unethical practices. In this case, exit is probably

the most effective long-term strategy to preserve

professional reputation, especially if the leadership is not

open to modifying their behavior.

—Betrayal of opportunities. For example, a CFO may be

recruited with the promise of being engaged in critical

strategy choices, but is instead not invited to or permitted by

the CEO to engage in these conversations.

—Peer exclusion and resistance. The incoming executive is

excluded from key forums by peers and their cliques, and the

incoming executive’s decisions are collectively undermined or

constantly resisted by peers.

All of the above dysfunctions can disappoint and drain the

energy of executives, motivating them to leave despite the

costs of exit for both the departing executive and the

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15

company. The costs for the departing executive include the

time, expenses, energy and potential loss of reputation from

entering and departing prematurely from the role; for the

company it is primarily the opportunity cost of an executive

not succeeding in the role and the costs of replacing them

from a time, expense and effort perspective. Exit can often be

a lose-lose option for all concerned.

Voice

Choosing to give voice to what is wrong in the relationship

and working to improve the dysfunctional environment is

another option. For some executives, giving voice to what

they really want or expressing organizational problems in a

way that drives better relationships can be a challenge. This

is especially the case if a CEO is a conflict avoider and permits

dysfunctional political behaviors across the leadership team.

Voicing problems or concerns can propel a latent issue out

into the open and precipitate conflict in the leadership group.

Simply put, this can be a challenging and potentially risky

strategy that generates more open conflict before resolution.

The first challenge for executives is to determine the

likelihood that giving voice to a problem will result in positive

outcomes for themselves and others concerned. If this is

reasonably feasible, it allows for the executive to exercise a

voice strategy to influence change. The second challenge with

a voice strategy is framing the conversations that drive

change—by whom and in what sequence voice should be

exercised and how the conversations will be structured to

shape change.

As Douglas Stone, Bruce Patton and Sheila Heen outline in

their book, Difficult Conversations, there are three basic

challenges to hard conversations. First, the conversation

about the situation itself can be difficult and there can be

disagreement on what happened. There is a risk that the

other party simply has different and equally valid views on

what happened, has different intentions than you have

attributed to them with regard to the situation, and feel

blamed about the situation which puts them in a defensive

versus collaborative spot to jointly enact change.

Second, the conversation triggers feelings that make it

emotionally charged and difficult to continue. Third, the

conversation about the situation can challenge their identity,

their competence and self-worth. To mitigate these

challenges, Stone et. al. recommend “learning conversations,”

where the discussion is structured to jointly explore the

situation without assigning blame, explore and acknowledge

feelings before problem solving, and work with a recognition

of the identity issues at hand, so that participants go beyond

the all-or-nothing protection of self-image to jointly create a

better situation for both parties.

Simply put, a voice strategy requires careful consideration to

execute well. One recommendation I make in some labs is to

explore how you will have the difficult conversation with a

friend or an ally at work, so that you practice it to be aware of

how you might be heard and can frame the most constructive

conversation you can have. For rational, hard-charging

executives, the voice strategy can be difficult to execute well.

Loyalty

This moderates the likelihood of exit or voice. It can be a

strategy not to respond to the situation and wait it out.

Imagine you have been promoted to CFO after a long tenure

with a company that you like. Shortly thereafter, an interim

CEO is appointed as the board undertakes a search and you

find the interim CEO insufferable and making decisions that

you do not agree with.

Yet, as you know the board is searching for a CEO, you may

be willing to await the appointment of a new full-time CEO

before deciding on your next course of action of either exit or

giving voice to your disagreement. Loyalty or the wait strategy

may help you gather information and clarify the situation over

a period of time. However, unless there is change driven by

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16

some other factor, loyalty by itself is not likely to improve the

situation.

Optionality

This is another constructive strategy an executive can

undertake in a difficult situation. Optionality refocuses

executives away from the difficulties in the organization to

what is constructively feasible and personally rewarding for

them to do in the organization. Let us say they are blocked

politically by some peers and by the CEO from engaging in a

number of things that they are competent at or capable of

doing.

An optionality strategy is for them to refocus on where they

can demonstrably add value in the organization, do it, and

grow their relationship with peers who are supportive of

them. This strategy takes them away or minimizes their

interactions with the negative aspects of their work

environment, continues to deliver value to their organization,

and potentially frames a series of wins visible to peer, board-

level and external stakeholders. Focusing on creating

optionality permits them to maintain a positive focus, build

future options to exit to a better opportunity, build coalitions

to enhance the likelihood of exercising a voice strategy, and

provides a constructive strategy in contrast to a passive

loyalty strategy.

As both exit and voice can be personally costly strategies,

creating optionality over a fixed period of time can provide

the executive both with positive opportunities to make a

difference and prepare better for exit or voice strategies.

The Takeaway

Some time in their careers, executives are likely to face a

difficult work environment. Exit, voice, loyalty and optionality

are useful ways of framing responses to such a difficult work

environment. Careful due diligence of CEO working styles

and the leadership before taking on a new role can help

executives potentially avoid dysfunctional environments.

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The CFO Program | Japan

17

Digital Finance:

Avoiding the Pitfalls of Moving to the Cloud

As cloud computing continues to come of age, it is playing a

foundational role in the digital transformation efforts of many

organizations. CFOs who still regard moving to the cloud as

primarily an IT opportunity, however, may miss out on the

chance to help their companies leverage cloud’s many

advantages.

To some extent, senior financial executives understand that

cloud has serious momentum: In the Q3 2016 CFO Signals™

survey (https://www2.deloitte.com/sg/en/pages/financial-

advisory/articles/global-cfo-signals.html) of 122 North

American CFOs, cloud computing easily outpaced other

emerging digital technologies in terms of its deployment, with

80% of respondents saying they use cloud in some form, and

30% saying they use it broadly (see Figure 1)3

But as cloud moves from the cutting edge to the mainstream,

from applications that primarily augment core systems to

3 North American CFO Signals, Q3 2016, US CFO Program, Deloitte LLP

4 “Finance Moving to the Cloud: The Steps to Take and the Benefits You Can Expect,” Gartner, Inc., August 2016.

cloud-based applications that replace core systems, it is

important that CFOs move beyond a basic conceptual

understanding and take a closer look at the cloud’s nuances.

One reason: financial applications—which, by and large, were

not a major part of early cloud migration—are quickly

becoming common. In fact, according to one estimate, by

2025 cloud-based solutions will account for 65% of total

market spend on financial management applications4.

While cloud computing offers many advantages, it is not a

panacea. Although large organizations may have had success

in pilots and smaller scale adoption, they may nonetheless

encounter both unpleasant surprises and missed

opportunities if they do not proceed with adequate caution.

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18

First, the Upside

The basic concept behind cloud computing is not new. Cloud

is essentially a form of outsourcing in which client

organizations use the Internet to connect to a variety of

applications, storage services, hardware resources, platforms

and other IT capabilities offered by cloud service providers.

Companies can buy as much or as little as needed, typically in

a per-user/per-month subscription model often dubbed

software as a service (SaaS). The cloud service provider owns

the required hardware and other resources needed to

provide these services and employs the staff necessary to

support them.

The potential advantages do not stop there. By subscribing to

everything from basic e-mail to larger applications, such as

customer relationship management solutions, human

resources suites and enterprise resource management

systems, companies can avoid both the one-time expenses

associated with buying such software outright and the cost

(in staff and computing infrastructure) needed to maintain

those applications.

In addition, by obtaining such services in a cloud model,

companies do not have to worry about when and whether to

upgrade to the latest version of the software; the cloud

service provider takes care of that, as well as routine

maintenance chores. Service-level agreements include pre-

determined levels of uptime and responsiveness, may

provide clients with recourse should the software not

perform as intended.

Moreover, the time needed to implement new software is

usually faster for a cloud model, because rather than

requiring on-premise installation at each company site (and

the possible accompanying need to buy hardware), a new

client simply accesses the software over the Internet. That

can reduce database migration, update and backup times,

testing and other installation tasks. (It should be noted,

however, that the upfront work of determining application

requirements, design, configuration and other needs is no

shorter for cloud than for on-premise software.)

Another major advantage of cloud-based applications and

services is the flexibility to increase or decrease capacity as

needed. This can be a boon, particularly at a time when

companies anticipate increased M&A activity. In the past,

companies often overinvested in IT infrastructure in the event

they had to add hundreds or thousands of new users or a

large number of legal entities following an acquisition. In the

cloud model, an organization can add capacity relatively easily,

and let the service provider worry about increasing the

underlying resources to support them. On the flip side, a

client can decrease capacity, say in the event of a divestiture,

and see its associated IT costs decline, depending on the

terms of the contract (many run one-to-three years, so

instantaneous adding or dropping may not be an option).

Reality Check

Combine these potential cost savings with flexibility,

scalability, faster implementations and simplified

maintenance, and it might seem that moving as much of your

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19

technology infrastructure to the cloud as quickly as possible

would be the proverbial no-brainer.

If only it were that simple.

To make the most of cloud computing, CFOs need to

collaborate with CIOs and other senior leaders to ask plenty

of questions—not only of cloud service providers, but

internally as well, to assess whether and to what degree cloud

is right for their company.

Does cloud consistently save money? Are implementations

always smooth? Will the company give up certain capabilities

that make up its “secret sauce”? By addressing both near-

term, tactical considerations and more strategic and

structural issues, CFOs can help their organizations move

more confidently into the new digital reality that is

increasingly reliant on cloud-based services. Some of the

specific issues to explore include:

Will Cloud Really Cost Less?

Cost has been a main driver of the cloud decision from the

nascent days of the technology, when new vendors pitched

niche applications to smaller companies with limited IT

budgets, to the present, when virtually every technology

provider offers a cloud option and companies of multiple

sizes regard such solutions as viable. Cloud-based

applications and services often do cost less, but it is

important to do a careful analysis to be sure.

Organizations that opt for on-premise software and don’t

spend significantly on upgrades over a 10-year period may

find it less expensive to buy, although they may pay an

opportunity cost in the sense that they are less nimble than

organizations that rely on continually updated cloud-based

applications. Similarly, some companies may find it

advantageous to buy software outright and depreciate it

rather than absorb the costs of cloud solutions as operating

expenses (although implementation costs associated with

cloud applications may still provide a depreciation

opportunity). These are analyses that finance departments

are well-suited to provide.

Is It Secure?

When cloud computing first came along, companies were

concerned such solutions would make them more vulnerable

to cyberthreats than on-premise applications that are tucked

behind firewalls and layers of security. Cloud vendors

responded by devoting more resources to security, often

positioning such investments as part of their value

proposition. Although companies have become more

confident in cloud security, it remains an area that requires

strong due diligence, particularly for companies in highly

regulated industries (see “Seven hidden costs of a

cyberattack”: https://www2.deloitte.com/us/en/pages/fina

nce/articles/cfo-insights-seven-hidden-costs-cyberattack.

html). Thus, boards of directors may need to be convinced

about the security measures put in place by the providers,

and some companies may choose to be late adopters

expressly because they want to see whether their earlier-

adopting peers encounter security issues.

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20

Will There Be Integration Issues?

As sophisticated applications such as ERP migrate to the

cloud, integration with other systems becomes a bigger

concern. Will a cloud-based application from one vendor be

able to work with an application from another provider? Is the

company’s IT infrastructure suited to share data with multiple

cloud-based applications? Was the application designed as a

cloud-based service from day one, or is it a modified version

of software originally designed to operate in a traditional on-

premise model?

As companies turn to the cloud for ever more of their IT

needs, questions regarding ease of integration become more

important. Some companies are finding that platform as a

service (PaaS) cloud offerings provide simplified application

interface options that enable them to be more future-facing.

But for those organizations that require tighter point-to-point

integration (often involving multiple homegrown systems),

careful assessment of cloud capabilities is essential.

Source: North American CFP Signasl, Q3 2016, page 24; US CFO Program,

Deloitte LLP. © Copyright 2017 Deloitte Development LLC. All rights reserved.

Source: North American CFP Signasl, Q3 2016, page 24; US CFO Program,

Deloitte LLP. © Copyright 2017 Deloitte Development LLC. All rights reserved.

Will We Miss the Ability to

Customize?

The turnkey nature of cloud-based applications is one of their

prime selling points, but it can also be a drawback.

Companies that want or need customized applications

(sometimes the case for customer-facing applications such as

order management) may find that the provider cannot or will

not accommodate those preferences; after all, the cloud

model depends on providing essentially a standardized

solution across the provider’s client base. Many companies

are happy to forego customization in return for the rapid

implementation and other advantages that cloud-based

applications offer. Some cloud vendors even provide “highly

configurable” applications. But companies that need true

customization will need to shop carefully since these

capabilities vary across packages and bring considerations

regarding the public cloud versus the private cloud into the

frame. After analysis, some companies may find that, at least

for certain applications, cloud is not an option.

Will We Be Giving Up Any Strategic

Advantage?

Closely related to the standardize-versus-customize decision

is the issue of strategic advantage. The cloud model

essentially positions applications and cloud-based services as

utilities available to anyone who signs on. While this is often a

fast and cost-efficient way to acquire a given capability, for

companies that have invested heavily in IT systems that set

them apart from their competitors, moving to the cloud can

mean walking away from an important point of differentiation.

Retailers who have invested in sophisticated supply chain

capabilities, for example, may find that there is no cloud-

based system that allows them to interface effectively with

dozens of different suppliers, each of whom requires a

customized connection into the retailer’s system. As

companies move more applications to the cloud, they should

take a long view on whether they want to retain certain in-

house applications and what that may mean for their

increasingly virtual IT infrastructure.

What Are the Implications for IT?

Cloud vendors do not just provide software, they also provide

the staff to implement and maintain it. Moreover, they often

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The CFO Program | Japan

21

do not pitch their services to the CIO, but directly to

whichever department their particular offering pertains to,

potentially disintermediating IT. At the same time, the rise of

the “superuser,” who can generate reports or handle other

data-intensive tasks that once required IT assistance, is

impacting roles traditionally played by IT. But even as old IT

roles fade, new ones emerge: integration across cloud

applications and between core system and cloud applications,

data integrity, managing new vendor relationships, and more

suggest that in-house IT is not going away, but will need to

shift to its originally intended role in the organization—a

strategic business partner.

There is no doubt that companies are feeling more bullish

than ever about moving to the cloud. The confidence gained

from early pilots and the adoption of less-than-critical cloud-

based applications is now prompting companies to “lift and

shift” core systems to the cloud, including finance systems

that were once widely seen as too mission-critical to move

outside the organization.

But as the movement toward cloud gains ever more

momentum, now is the time for finance, IT and other

departments to do a reality check on the issues listed in this

article. By ensuring that the move to the cloud makes

economic sense, that systems integration will not pose a

major roadblock, that the systems are secure and that no

competitive advantage is sacrificed, companies can position

themselves to re-architect around the cloud without worrying

(too much) about unpleasant surprises lurking down the road.

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The CFO Program | Japan

22

CFO Insights | 2016 Q3

23

The CFO Program for International Companies

Deloitte’s Chief Financial Officer (CFO) Program brings together a multidisciplinary

team of Deloitte leaders and subject matter specialists to help CFOs stay ahead in

the face of growing challenges and demands. The Program harnesses our

organization’s broad capabilities to deliver forward thinking and fresh insights for

every stage of a CFO’s career - helping CFOs manage the complexities of their roles,

tackle their company’s most compelling challenges and adapt to strategic shifts in

the market. Deloitte’s vision is clear: To be recognized as the pre - eminent advisor to

the CFO.

The CFO Program in Japan hosts regular events for executives of international

companies to provide insights and networking opportunities.

Contact: Tom Hewitt | tohewitt@tohmatsu.co.jp

Website: http://www.deloitte.com/jp/en/cfo

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