Douglas Flint and his influence over the regulators

A politically engaged FD and one involved in shaping regulations and standard-setting is an FD with clout well beyond the finance function, as HSBC’s Douglas Flint knows.

In the past couple of years there has been a lot of talk about how finance directors can extend their reach beyond finance leadership and get the whole business to dance to their tune. Flint’s comments in a recent interview with Financial Director’s sister publication Accountancy Age were a good example of this.

The recipient of Accountancy Age’s gong for outstanding industry achievement award in 2009, Flint was chosen by the judges not only because HSBC has largely avoided the effect of the subprime crisis – and even seemed to escape any immediate pain from its exposure to the United Arab Emirates when Dubai’s principal investment vehicle, Dubai World, announced it was at risk of default – but because of his work with organisations such as the Accounting Standards Board and the International Accounting Standards Board.

Plugged in
This extra-curricular engagement with the standard-setters and regulators of the auditing, accounting and financial services industries serves a clear purpose for HSBC and as a member of The Hundred Group of Finance Directors, Flint will be well plugged into the group’s lobbying efforts behind the scenes on everything from IFRS, pensions mortality assumptions, audit choice and taxation. This approach is something all FDs should mull if they’re thinking about their sphere of influence and the impact movement in these areas has on their duties.

Flint has certainly made the effort to get HSBC a seat at tables around which decisions affecting the way it does business and accounts are made. He was chairman of the Financial Reporting Council’s review of the Turnbull Guidance on Internal Control between 2004-05 and has served on the Accounting Standards Board. Between 2001-2004 he sat on the advisory council of the International Accounting Standards Board.

He also served on the Working Group on Public Disclosure, an initiative composed of the heads of major banks established at the turn of the millennium by the US Federal Reserve’s board of governors and chaired by former Chase Manhattan chairman Walter Shipley, which lobbied the head of agencies such as the Securities & Exchange Commission on issues including how to report risk exposure.

Finally, he co-chaired a high-level report on the role of accounting systems and policy in management, Enhancing Public Confidence in Financial Reporting, from the Group of Thirty (a body of international finance heads and academics that boasts Nobel Prize-winning economist Paul Krugman, European central Bank president Jean-Claude Trichet and former US Federal Reserve chairman Paul Volker as members).

Flint took his activism to the press last November in a letter to the Financial Times discussing the European Union’s decision not to immediately adopt the International Accounting Standards Board’s IFRS 9, the controversial standard to measure the fair value of financial instruments intended to replace IAS 39. He didn’t hold back. “Many of the objectors to IFRS 9 sought to take the International Accounting Standards Board (IASB) to a position they knew it could never support, because their agenda was to create conflict with the IASB as part of a larger political agenda,” Flint said.

“Others sought to reach a position which offered them greater flexibility in how they accounted for financial instruments under their own definition of their business model – but this is untenable in an environment where trust between financial institutions and the public has been seriously damaged. The truth is that IFRS9 works well for the type of banking activities and financial instruments that regulators and politicians want to see predominate.

“It may not be attractive for some of the highly leveraged or structured instruments now being wound down, but if the accounting model favours simplicity over complexity, surely that is in keeping with the direction of travel that society now expects.” A CBE for his contribution to financial services grows the legacy his investment in regulation has created. More recently, Flint was consulted by the UK government as the planning for the banking bailout programme began in earnest.

Flint says he has seen an increase in demand for much more detailed information about company performance –and thinks the role of FD is becoming ever more “intense” – but he also sees his job as helping the users of financial information understand what they’re seeing. He is one of the few banking executives to have publicly acknowledged that things need to be done differently now and has called for better banking supervision – of course, being one of the banks that has not bellyflopped (perhaps it’s prudent to add the word ‘yet’), he could enjoy making such calls from a great height.

International standards and how they come about remain a keen interest for Flint. “It’s important that we don’t get bifurcated standards and it’s important that the standards that are proposed are workable. There will clearly always be interested parties who like some aspects of change and, indeed, if you had a set of accounting standards that everyone liked, they almost certainly would be missing the point,” he says.

Engaging in debate
Flint gave a taster of his interest in engaging with regulators when he spoke to Financial Director in an exclusive interview in 2002. He was plain about his feelings on doorstop annual reports and their “lawyerly obfuscation” of the facts, since worked on extensively by agencies such as the Financial Services Authority and the FRC. He was vocal, while acting as an advisory member at the IASB at that time, about the need to make IFRS happen and his personal involvement in their genesis. “We increasingly have a global marketplace for stocks and a global marketplace needs a global language,” he said. “The greatest challenge will be to craft a universal accounting language. There has probably never been a better chance to do it. There is no real defence for the argument that it is impossible to improve US GAAP.”

Coming from the group FD of one of the world’s largest banking businesses, the message carried weight and, as he says himself, he “enjoys making a contribution to the development of the accounting profession in the broader sense”. And as one highly placed regulator tells Accountancy Age: “He’s terrific. People listen to him.” But, as he told us then, he was torn between his desire for new accounting standards and his dislike of legislation for the sake of it. New standards were welcome, but only if they erred on the side of UK principles rather than US ‘codification’. “I believe that principle-based standards are meaningful and right and detailed codification of the rules creates circumstances where you get clever interpretations based on a casual word in ‘sub-paragraph b(i)’,” he says.

Gavin Hinks is editor of Accountancy Age

Inadvertent prediction?
In his 2002 interview with Financial Director, HSBC FD Douglas Flint made some comments on the enthusiasm from the banking industry for growth and where problems may lie with it. In retrospect, they’re eerily on the money.
• On the FD having to be the man that says no – “At a time like this there is a creeping willingness to embrace a higher risk profile because conventional sources of revenue are drying up. You can follow that path and be successful or you can manage the business tighter. We need to stay within the risk parameters where we feel comfortable”
• On the role of banks in economies – [Banks shouldn’t be at the] “exciting end of business. They should be predictable and shouldn’t produce surprises. If predictable means dull, I still think that is important”
• On risk management versus growth – “Markets are very volatile at the moment because people are worried about things that cannot be controlled. I don’t think there is anything you can do except build a financial framework on the basis that the unpredictable or unthinkable can happen”

For more interviews with leading FDs, go to www.financialdirector.co.uk/interviews