Role of the FD: Banks need finance direction

Auditors Ernst and Whinney were brought in to question people throughout the group on who they thought they were accountable to. When no clear consensus emerged, the financial management team set to work. "You could very simply divide the finance director's role into two," Julien added. "Namely, defining the policies and then establishing an internal audit function which checks whether those policies are being put into effect." Throughout the Midland Group, he discovered about 450 people who were performing internal audit functions. But they were not driven from the centre. Their functions were revamped, without the need for a big recruitment drive, and a group-level team was established to drive it.

"The role of any bank's chief financial officer must be to see that that sort of function exists," Julien said. In Midland's case, internal-audit groups are led by the chief executive, the chief financial officer and the chief credit officer of each subsidiary. The group's chief internal auditor meets them four times a year. Midland's policy was laid out in an internal document printed in July last year. That document defines Julien's role thus: "The group finance director is responsible for establishing accounting policies and for the standards of performance of procedures and systems affecting the Midland Bank Group statutory accounts, management information systems and planning procedures."

North of the border

This responsibility is defined further as "establishing consistent and compatible policies for accounting and internal control, approving procedures which implement those policies and reviewing for adequacy the controls over accounting systems". The head of group audit has a similarly worded brief for his own division, while internal control committees and audit committees are responsible for confirming the adequacy of internal audit in each segment of the group. These committees are also responsible for ensuring that management responds to findings from internal-audit reviews.

A similarly rigorous framework was adopted by David Coulter at the Royal Bank of Scotland. He was appointed at roughly the same time as Julien, in mid-1983. The bank was going through a rough patch and his first job was to find out why. That meant quickly establishing a system of monthly reporting to the board on the back of a fast-response management-accounting system. Coulter now has a 30-strong team based in Edinburgh that performs this function.

At the same time as establishing new management methods, he tried to do away with some of the less successful old ones: notably a fondness for committees. While he still works on some, others have been ditched. "We had a taxation committee when I joined," he said. "My feeling was: we've either got a tax problem or we haven't. If we have, let's get an adviser in to sort it out and not sit around a committee table discussing it." Banking is changing in so many ways that the moves to strengthen the industry's control function must be welcomed. In his own opinion, the biggest challenge facing Charles Green right now is working out ways to manage and monitor the whole new range of exposures thrown up by changes in the London capital markets and the bank's stronger presence within them.

But it's not just the City revolution that is straining the system. The burgeoning market for fixed-interest securities presents mind-boggling demands on risk management. Banks spread their cash through the money markets and fixed-interest markets, matching interest rate for interest rate and taking their profits on the spread. The US bank Goldman Sachs recently hired two university professors, Jeff Yawitz and William Marshall, to head up a 30-strong team of analysts whose sole job is to develop risk ratios for elements of the bank's exposure to certain fixed-interest securities holdings.

The technique, according to Marshall, is to treat the bank's balance sheet like an investment portfolio. The department then looks at specific segments of it - holdings of corporate securities, treasury stock or whatever - and arrives at an exposure ratio. He admits this does not allow for an exposure ratio on the balance sheet as a whole, nor is it useful for assessing corporate loans made by the bank. But it does serve to illustrate the degree to which scientific analysis is usurping the banker's traditional "feel" for risk.

Michael Julien's sidekick at Midland, general manager for finance Frank Fitzpatrick, summed it up. The old style of bank management failed to establish a systematised and formal control ethic in the industry. "A lot was left to trust, integrity and personal standards," he said. Fitzpatrick, incidentally, is also an outsider, brought in by Julien from BL last September. While no one wants to see trust, integrity and personal standards make an exit from the industry, everyone now seems to be realising that on their own they are just not enough.

The article above originally appeared in the September 1985 issue of Financial Decisions, the magazine that became Financial Director in 1990. When this magazine launched in 1984 (as Financial Decisions), it was still uncommon for even the largest clearing banks to have a finance director on the board. The once again deferred retirement of Barclays FD Oliver Stocken presents us with an opportunity to reprint an article first published in 1985. Almost 14 years later, it still carries pertinent and interesting lessons about the role of the FD in industry and commerce.

THE JOBS MIGHT BE THERE BUT WHERE ARE THE PEOPLE? The Bank of England's call for more finance directors in the industry could not have come at a worse time as far as the recruitment market is concerned. Headhunters are already scouring the field for potential recruits. But they are finding a number of obstacles. First, the ever present City revolution is sucking financial-manager material into stockbroking firms and the business end of merchant banks, pushing salary levels up in the process.

One recent appointment, a finance director at a small to medium foreign bank in London, carried a remuneration package of £40,000 to £45,000. That range will probably go up in September when the hunt starts in earnest. In bigger banks, of course, the salaries will be much greater.

Second, the accounting firms, a key hunting ground for the recruiters, are going through a boom period. And most of them are introducing or have introduced their own corporate-finance departments. This is providing an incentive for accountants who might otherwise have left the profession to stay on in roles that are becoming increasingly entrepreneurial.

Third, the Bank of England itself is seeking to increase the size of its supervision department and to draft in professionally-qualified individuals. It is refusing to give even rough estimates of the number of recruits it is seeking. But some industry insiders are putting the figure as high as 40. Bankers have already poured scorn on one idea to meet the shortfall - namely seconding people in from the industry itself. The obvious objection is that a bank such as Barclays does not want a supervisor from Nat West checking its books.