Easy targets

On 12 June, a short but telling statement issued by investment bank Lehman Brothers announced the departure of its chief operating officer Joe Gregory and chief financial officer Erin Callan. Gregory, it was speculated, resigned under pressure: he had been at Lehman man-and-boy and chief executive Richard Fuld counted him as a long-standing friend, but one of them had to go and it was easier for the bank if the number two jumped, which he obligingly did.

Additionally, it was Gregory who had championed Callan as the next CFO, elevating her to number three from number somewhere-in-the-middle: she had never managed a finance function and was to learn on the job just as the credit crunch was kicking in.

Callan faced a particularly humiliating departure from the board. Ruthlessly resubordinated, “Wall Street’s most powerful female” was demoted to her old stomping ground in the investment banking division she used to lead, into an undisclosed middle-weight role. No doubt demotion was better than dismissal for the CFO, keeping bad news safely in the control of the bank rather than free to run amok and erode the share price. But in hindsight, the whole set-up may never have had a chance of working out.

The fall guy
You’d think what with so much riding on the CFO choice, the bank, (hopefully) aware of the sub-prime fallout coming over the horizon, giving unproven but popular small fry a chance to shine instead of hiring a seasoned board-level number-cruncher would have been too risky.

Callan’s reputation for “deep financial acumen and strong client relationships” could have been the draw if the bank believed the way to survive the oncoming credit crunch was to sweet talk its way through bad news.

Or, she could have been hired as a fall guy, an unusual figure for the job such as herself buying the bank time by distracting the media and creating a visible public figurehead of the FD job.

Indeed, FDs aren’t normally known for enjoying a public role. But as it has expanded from shadow-bound, abacus-botherer to visibly engaged strategy architect, FDs’ interpersonal skills have necessarily been teased out and this has put them in the firing line for the first time.

But it seems not all FDs realise that a new responsibility has been bolted on to their expanded remit. FDs are unofficially expected to volunteer as patsy to protect the CEO when the board wants to make a visible show of action, since an admission of failure from the chief executive is deemed far more destabilising for the company than the swift removal of their numbers man.

Coming out of the shadows, FDs have emerged as the people on whom the onus is to identify and raise with the board inconvenient truths, share bad news, raise practical but unpopular concerns about strategy, bring up potential legal breaches and, worst, flag up moral or ethical breaches that get the newspapers slathering and shareholders calling for heads.

That has meant FDs have become much more accountable for corporate failings, even if those failings have little to do with the FD themselves.

“The FD is seen as the only person you can rely on to have integrity,” says one of London’s top executive headhunters, who has worked with several FTSE-100 FDs and speaks on condition of anonymity. “For that reason, the FD community is one of the only places where integrity and reputation is absolutely everything.”

Companies have wasted no time in capitalising on that to protect the CEO and chairman from paying for strategy errors with their jobs and professional dignities. Another leading headhunter for one of Europe's top executive search companies, who also prefers to speak off-record, agrees. “FDs are expected to speak up about concerns on strategy, but when they do, they find themselves the lone voice of dissent," the headhunter says. “Someone like [former Mitchells & Butlers FD] Karim Naffah, for example, has a lot of integrity, but leaving in the way he did, an FD is unlikely to go to another public firm." Naffah resigned from the pubs operator in January after reporting huge losses caused by a hedge that had been put in place for a deal that never came off. Many think he acted on bad advice and shouldn't have taken the blame alone.

But CEO Tim Clarke allegedly had his offer to quit refused by the board, leaving Naffah with no option.

This goes some way to explaining why most FDs who have left FTSE-350 companies in publicly acrimonious circumstances over the past decade have not resurfaced. Even top FTSE-100 FDs are not always prepared to manage a media onslaught and most have simply disappeared after a reputational beating.

Name’s mud
"Mud sticks," says one four-times FTSE-350 FD ­ who also wanted to remain anonymous. “Look at Ric Piper,” this former FD says. Piper had been FD of WS Atkins and was sacked from his new job as FD of Trinity Mirror days before he was due to start, following news of a profits warning issued by Atkins on the back of a failed systems integration project. “They [Trinity Mirror] said, ‘How can we take him on now?’" the four-times FD says.

“They didn't want someone who was tarnished. If that had been done quietly it would not have harmed his career, but he hasn't had another FD job since, and he was a good FD." Piper is now an adviser to AIM-listed growth companies and privately-owned outfits. Whether that is entirely by choice or in part a result of “mud sticking” is hard to say since Piper declined to be interviewed ­ but it's clear that the latter's effect can be devastating to previously well-regarded FDs.

The headhunters, advisers, corporate lawyers and ex-FDs we spoke to all agreed that once an FD has exited a FTSE-100 company having been dismissed, or resigned at the request of the company ­ and it has been discussed in the press ­ it is almost impossible to return to the listed world in the same capacity. After spending time out of public consciousness, some FDs [can] move into roles heading up the finance functions of privately-owned companies, family-run businesses, private equity-backed outfits or SMEs that are otherwise out of the glare of the publicly-quoted world and shareholder pressures.

But few ascend back to FTSE companies: Steve Hare, CFO for Invensys, is one rare example of someone who succeeded after he was forced to step down. Hare resigned from his role as FD of Marconi in 2002 following the controversial debt-equity swap that, while creating a rash of blisteringly negative press coverage at a time when the shares were tanking, prevented the company sinking altogether. Becoming self-employed for a year by co-founding a small business consultancy, he then joined FTSE-250 company Spectris in 2004 and, in July 2006, was appointed CFO of then-troubled Invensys, once a FTSE-100 star, but at that point languishing in the mid-caps. Under his financial tutelage, Invensys re-joined the FTSE-100 in June.

Hare declined to speak to Financial Director but his was the only case people we spoke to could think of when asked to identify FTSE FDs that had survived an acrimonious FTSE departure and the ensuring negative media attention. “Hare saved Marconi by negotiating very aggressively with the banks and the company wouldn’t be here today without him,” a top London FD headhunter says. “But because of that the banks didn’t want to work with him anymore and that made him untouchable. So he hid at Spectris for a couple of years and made sure he hit all his targets and kept his nose clean. Invensys was a basket case when he turned up - which gave him his opportunity.

The list of ‘where are they now?' FDs who were deemed good at their job, but who ended up as sacrificial lambs, is long. MFI's Martin Clifford King, sacked following a profits warning in 2004, briefly acted as a consultant to AIM-listed gambling outfit Leisure & Gaming plc before getting a lower-profile FD role in the private equity-backed retailer MK One, which went into administration in May. Likewise, Dominic Lavelle left Alfred McAlpine after a subsidiary’s accounting scandal in which he was not implicated, went self-employed as a management consultant, but redoubled his misfortune as FD of property services outfit Erinaceous when it entered administration in April.

Martin Stewart was forced out of his job as FD of record company EMI following its acquisition by Terra Firma, then found respectable, but rather different work on the London 2012 Organising Committee Board as chairman of the audit committee and a member of its remuneration committee. This latter move mirrors a common result of FDs working for a company that gets taken over by private equity: according to recent research by Grant Thornton and Directorbank, FDs have a one-in-four chance of being sacked after private equity invests in their company ­ and a 4% higher chance of getting the chop than the CEO.

Then there are the cases of FDs being shunted out on allegations of fractious personality, more common at board level. But rarely does the CEO make the jump. The very high-profile dismissal of Ian Perkin, former FD of St George’s Healthcare NHS Trust, fits the mould. Misconduct accusations against Perkin followed his being asked to resign after he brought concerns to the CEO about a member of staff who told him she had been asked to reduce to zero the number of cancelled operations being reported to the Department of Health. Those allegations were dismissed, but his dismissal itself was upheld following the accusation that Perkin was difficult to work with, had a negative attitude and refused to co-operate with staff from other departments ­ despite no complaints or warnings having been recorded in his long tenure. Perkin says he was made a scapegoat because he blew the whistle.

One top City lawyer who regularly advises FTSE-100 FDs and CEOs and who arbitrates acrimonious dismissal cases, says the majority of cases he receives are not about performance, but personality.

“Sometimes companies prefer to use personality as the excuse because it’s just easier than trying to find evidence that someone hasn’t done their job properly. Sometimes the FD and CEO just don’t see things the same way and I’ve seen many an FD shattered by the experience of being a fall guy in this way,” he reports.

Moreover, he says he is “struck by how few take proper legal advice before signing the contracts on which their career depends. People don’t think it will happen to them, or if they’ve been promoted up through the ranks it doesn’t occur to them to update their contract.”

Be prepared
He tells FDs to cover all bases in their contracts. “I advise employers to be generous with compensation because if it comes to litigation no solicitor is going to make a fuss that could go public,” our City lawyer says.

“We see liquidated damages clauses, which provides that a certain amount will be paid if the contract is terminated under specific circumstances; we see change of control clauses, so if a company is taken over and your line manager changes, you can treat yourself as terminated and receive a prescribed compensation package. FDs should realise that companies have a vested interest in ensuring you go away happy after a situation like that, without a chip on your shoulder,” he adds. “Who’s to say in a year’s time the company will have some problem that only the outgoing FD can help with, or that if news of a bad split gets out, it will weaken the company’s position with the rest of their staff?”

“The best advice for FDs is to not allow your departure to be played out in public,” the four-times FD says.

“Get it resolved quietly and internally, and in getting a settlement, get an undertaking to give a robust reference to counter any negative sentiment,” the four-times FD says. “When something like that happens it isn’t a good idea to try and get another job in the heat of the storm ­ you’re just battling media noise.

People think an FD shouldn’t try to go back to the same level because they didn’t cope with it before, so why go back for more?”

A handful of FTSE-350 FD departures in the past four years have sparked painful, protracted media coverage that has damaged all parties. One recent example is the departure of Alison Reed, former FD of Standard Life, who in April received a payment of £1.13m for lost bonuses and payments following a year-long legal battle. Reed resigned from her job in September 2006, months after floating Standard Life on the stock market ­ but was said to have been pushed into leaving. One person close to Reed said they believed she did clash personally with her chief executive and chairman, but that the company briefed the press that she had resigned and then lined up a successor without informing her, leaving her no choice but to resign some days later. These are, as yet, totally unproven allegations. But the press coverage of the story and the claims regarding her management style and communication skills with the City have made a damning imprint on an otherwise illustrious career, having joined Standard Life from a long tenure as Marks & Spencer’s FD.

“The risk is that everyone is damaged if news of an acrimonious split gets out. Once it’s in the media you’ve lost control,” the City lawyer says. “With a good contract in place from the start, if things go wrong, a good lawyer and a good financial PR can ensure everyone can come out smelling of roses and the FD, in particular, can come through with their integrity intact.”