Corporate governance: Safety first

Who would have thought it. Certainly not the boards of most companies a mere few months ago. The early days of any year-end wrap up of the report and accounts is going to have to concentrate solidly on whether or not the enterprise is a going concern (as discussed in last month’s accounting column). A going concern? Any time in the last 20 years and this bit of the routine would have been skimmed over. Of course we are a going concern ­ – even if there is a bit of local difficulty, bankers and shareholders would quietly sort it out.

Now it is a less safe assumption. You may be a going concern on Friday, but who knows what may happen by Tuesday? Suddenly, the directors’ mind is concentrated as it has not been for a generation.

As the Financial Reporting Council, somewhat understatedly, advised them recently: “The difficult economic conditions being faced by many companies will necessitate careful consideration by directors when assessing whether it is reasonable for them to use the going concern basis of accounting, and whether adequate disclosure has been given of going concern risks and other uncertainties. Addressing these challenges well before the preparation of annual reports and accounts may help avoid a last-minute problem that might unsettle investors and lenders unnecessarily.”

So what companies need to do first is mind their backs. This means an inordinate amount of paperwork showing just how exhaustively everyone has worked to reach a decision about whether or not the business is a going concern. This has two benefits. If everything goes to hell in a handcart, directors will have roomfuls of paper to wave at enraged and possibly litigious stakeholders and, who knows, the exercise itself might focus directors’ minds even more sharply than before.

The FRC underlines this need for documentation. “The general economic situation at the present time does not of itself necessarily mean a material uncertainty exists about a company’s ability to continue as a going concern,” it suggests. “However, it is important that annual accounts contain appropriate disclosure of liquidity risk and uncertainties as such are necessary in order to give a true and fair view.” In other words, book those lawyers now and just grin and bear it when you estimate the fees they will cost you.

It needs no urging from me to suggest that your bankers now need looking after like no other time in our living memory. Despite their protestations to the contrary, banks still do not really want to have too much risk anywhere. Now that they view all companies as risks above and beyond what they would prefer, that means everyone. The FRC issued a warning about this reluctance. “In the present economic environment bankers may be reluctant to provide positive confirmations to the directors that facilities will continue to be available,” it says. “This reluctance may extend to companies with a profitable business and relatively small borrowing requirements.” That means any business in the country.

One way to alleviate your pain could be to play the audit committee card. This is precisely the time when they can assume the role of fall guy. Or, if you prefer to put it another way, they can really earn their crust. The FRC has already put audit committees on notice. In another piece of advice, late last year it said: “Audit committees are likely to examine in more detail the rigour with which the analysis supporting the going concern judgment has been made and the integrity of the disclosures about going concern in the financial statements and other market communications”. Note the use of “are likely” there. The translation: “They will ­ – or they will be dead in the water and sued blind.”

If you are a finance director, any other director, or a member of an audit committee, you would be well advised to cancel that skiing holiday. The next few months will require an astonishing amount of grinding work and time spent doing routine, but now vitally important things. Remember the days when you earned your bonus by hitting a fairly easy share price target? Hopefully, you salted those gains away so they can act as balm now. Because from here on in, it will be awful.

In the meantime here is a footnote. Journalists often get it in the neck for failing to warn their audience of impending doom. So here, at the outset of 2009, I thought it worth checking back what had been said in the recent past. And I make no apologies for quoting the last paragraph of this column in January 2008, on incentive payments, or bonuses, built into the remuneration structure.

Here we go: “The recent Little Blue Book of Governance Pitfalls, published by Independent Audit, has a simple risk at the top of its list for the remuneration committee. ‘Weak alignment with strategy,’ it says, ‘triggering the wrong behaviour’. And wrong behaviour in 2008 is going to be punished much more severely by economic circumstances than it was in 2007.”

And so it was.