Corporate governance: Blunt message

As FDs can attest, when you’re at the sharp end of corporate governance the blunt approach can be best

23 Apr 2007

By Robert Bruce

Robert Bruce

There is a growing perception that life in the world of the finance director is becoming ever more complex. And there is a danger that this will steadily close out many of the most valuable attributes of what used to be seen as the traditional finance professional. Once upon a time people in the finance world stuck close to their training. That training, leaving out the technical stuff, was founded on one great truth; the ability to look at the figures, then stand back and think, and often follow this process with a low whistle and a remark that something isn’t quite right.

Often, tradition ascribed this sort of characteristic to Scottish accountants, who were thought to be better trained at the sharp end and blunter people when expressing their opinions. I was reminded of this when, earlier this year, Sir Robert Smith, a famously blunt man, gave the first annual lecture in memory of Aileen Beattie, who for almost 20 years was at the heart of technical policy at the Institute of Chartered Accountants of Scotland.

Sir Robert talked about sustainability and business. He has always been at the heart of corporate governance. It was his report, allied with the Higgs report, which brought us the reinforced system for audit committees. But he interspersed his talk with anecdotal asides. And many of these were exemplars of the ability to make a connection which was not from the textbook.

At one point he recalled his days at Deutsche Bank in the early 1980s. Norman Murray, these days ICAS president, introducing Smith at the lecture, was then a comrade-in-arms of Smith at Deutsche Bank. They were in California raising a fund for the bank. “We had no fund, no employees and no customers,” he recalled. “As we tucked into a sumptuous meal in the expensive Bel Air hotel in Los Angeles, Norman looked across the table at me and said, “Robert, who is paying for this?” It is precisely the sort of point that finance people ought to make, but often don’t. It is the remark which brings you back to the fundamentals of what you are doing. It is the type of remark which shows that you are not being swept away by the hype and still understand the basics which underpin how the finance side works.

Sir Robert has an advantage, of course. He did his training in Glasgow, a place with a business culture half made up of chancers, who try their arm at every opportunity, and half made up of the sort of accountants who are gimlet-eyed and have a decisive way with words. The lecture produced more than a few of these out of the bag. “Forty-three years ago,” recalled Smith, “when I was an apprentice accountant in Kirkintilloch writing up the books of a client, a customer came in to pay in cash and when I went to write a receipt the director of the company told me not to and he also told me not to make an entry in the cash book. I spoke to the partner and he said everything should go through the books.” The result was that the partner came round for a chat with the client. Blunt words suggesting even blunter actions which might follow were this advice to be ignored gave, in Smith’s words, “the director a metaphorical spanking”. Actions like that act as a corrective and remind everyone involved that much of what is now known as corporate governance is based on very simple rules of conduct and their emphatic enforcement.

Smith produced another example. “I was preparing the year-end accounts at the Paisley Gazette,” he said. “There was an entry on the last day of £500 in and £500 out. I asked what this contra entry was. The answer was that the £500 in was for the sale of newspapers and that the £500 out was for us buying them. At one penny per paper and 240 pence to the pound this was a lot of newspapers. On enquiry, I was told that everyone does this.” It was another example to Smith of how the fundamentals of newspaper circulation figures could be created. And it was another of those hold-on-a-minute moments.

His training was the key. “I think I already understood the difference betwee n right and wrong,” he said, “but seeing this applied in a business context, attesting to figures on which others would depend as true and fair, became vital for a future career in business.” Then he added a caveat. “My training was at a time when every debit had a credit with perfect symmetry and logic, and questions of judgement could conveniently be covered by the Principle of Conservatism,” he said. Also, these were the days when “audit partners seemed to be paragons of virtue and their authority never questioned and an accountant in a professional office was highly regarded by society.”

Times change. But the underlying fundamentals do not. The implementation of international financial reporting standards is often looked upon as a system which has produced over-complex and opaque financial reporting. There is a danger in the finance director community that they will, in terms of explaining corporate affairs, be set to one side as those figures which no one understands. This would be a disaster. People with a financial training need to look to the fundamentals and express opinions in as blunt a fashion as possible.

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