Shaping up for a challenging year ahead

There is going to be an election. That is certain. It could change the government. Is everyone going to face tax increases? Are dividends going to be regulated again? Few know the answers and as a result political risks are rising with companies ratings being reviewed.

Some companies are steeling themselves to the possibility of a so-called windfall profits tax but people have little idea what the tax could be and how it could be levied. Windfalls are supposed to occur randomly but profits rarely behave like that. Does it mean that some companies will face statutory limits on their rates of return? Or will the tax be a simple confiscation of cash? Some of the companies that may be affected are now ultimately owned in the US where lawyers are no doubt looking forward eagerly to the fees generated by the inevitable challenges.

The economy is doing well. Generally FDs are seeing some good results and share prices are at record levels. But investment banks earning record fees from takeovers and defences so companies who are not doing so well are dusting off their defence files.

The fee structures of banks and advisers are being scrutinised by their clients who are taking an increasingly jaundiced view of the extremely high rewards of investment banks and other advisers. Such firms are reporting record profits and rewarding their people with staggering sums that are quite out of the reach of the staff of the clients and have little to do with the cost of providing the service. Companies are paying heavily for the accumulated experience and wisdom of the bank. FDs are trying to introduce performance related elements to the fee structures rather than pay a percentage of the value of a transaction on its completion.

One example is a bonus element which could be awarded, at the sole discretion of the board, depending on the quality of the service provided by the adviser during the course of the transaction. Banks find this tough to accept because it introduces an element of uncertainty into their final reward but at least it gives the board some control over the final cost and a qualitative incentive.

One consequence of the sensational salaries and bonuses being paid to bankers is that our best graduates are once again rejecting careers in manufacturing and commerce in preference to a loot-loaded career in banking.

This is not good for the economy where the wealth creating sectors need their appropriate share of the best minds coming out of our universities.

After all, we may be blessed with a world-class financial services sector, but if the good people forsake companies that make things who, ultimately, will the financial services sector service?

The disclosure requirements that have resulted from the work of the Cadbury and Greenbury Committees, the Accounting Standards Board, the International Accounting Standards Committee et al have combined to substantially increase the volume of data now required in companies’ reports. While most of these reforms were very necessary after the scandals of the past they have combined to produce company reports which are becoming specialised reading for the enthusiast only, except for the extensive pages covering directors’ pay. Work is being done in several places to see if this situation can be mitigated. The Hampel Committee, encouragingly, has asked for ideas for reduction. The ASB, working with the Hundred Group, is trying to rationalise interim reports and will soon tackle preliminary announcements. Maybe the answer is for companies to publish a summary set of accounts and the OFR in the annual and six-monthly reports relegating all the other disclosures to a data bank on the lines of the US form 10k, published on discs for the enthusiasts.

This thinking is all very welcome but there are considerable concerns at the growing influence of the International ASC. Their agenda is somewhat different. The driving force here is the markets. Companies see internationally acceptable financial reporting as the key to raising capital at the best rates and projecting themselves as global players. The IASC and IOSCO, the body representing the world’s stock exchanges, have announced a joint strategy targeted on completing an acceptable set of core standards by March 1998. While no-one will argue against harmonisation, it is like motherhood and apple pie, there is a price to pay. Not only will disclosures increase but also some methods used in the UK for accounting, particularly for tax and pensions, may have to change in a rather worrying way. The tax proposals could affect some capital-intensive companies with big investment programmes very dramatically, reducing substantially their distributable reserves and, possibly, their ability to pay dividends, especially if foreign-owned. The pension proposals also could change fundamentally the way pension funds invest. Accounting standards should not have that effect and the Hundred Group is working with the ASB to see if we can find a way to achieve international harmonisation without major harmful effects on UK companies.

The big issue in Europe concerning FDs is the currency question. Since most big companies operate internationally or, if not, use international banking and capital markets it does not matter much whether the UK is in the EMU or not. We are going to be affected. Some companies are well advanced with their planning, especially the banks and retailers, although still well behind companies in, say, France or Germany. The answers to many questions are still missing and the Hundred Group is working to set out some answers for UK companies in a report due out in March/April.

So as you contemplate the future please spare a thought for the FD. He may be about to face a crucifying windfall tax, fight a takeover bid, pay his bankers sensational fees, see his distributable reserves wiped out and his earnings per share reduced by big tax provisions, have to price his product in at least two different currencies and discover his pension fund has been invested in the wrong things all along.

Brian Birkenhead is chairman of the Hundred Group.