Compliance is not enough.

Corporate governance is probably one of the top-three concerns that any finance director has to consider, but many FDs are not convinced that either they or their board of directors have a strong enough grasp of the subject, or know how to deal with such issues as they arise.

This is one of the most significant findings from a survey conducted in February by Richmond Events, consultancy Article 13 and Financial Director, in which we sought the views of the delegate FDs who will be coming on board the Aurora in June for the Finance Directors’ Forum.

More than 60% of respondents say the board has overall responsibility for corporate governance, but a third say the FD has specific responsibility.

Almost 40% of FDs say they spend between 10% and 25% of their time on corporate governance matters.

Ironically – given how the current corporate governance bandwagon got rolling in the first place – 96% of FDs say they find out about all the new rules and regulations from their auditors. (Specialist publications and periodicals are the next favourite source, ranked even ahead of the company secretary.)

When asked how they ensure that the people in their organisation understand their role in corporate governance, a third admit they aren’t sure their people actually do understand their role. Internal audit and control are the most common means of keeping everyone on board. Training programmes and workshops are mentioned by some FDs, while one says that everyone must read and sign a declaration that they have understood their personal responsibilities. Few admit to any serious concern that material, price-sensitive information might not be relayed to the board in a timely fashion – demonstrating a degree of confidence that is hopefully not misplaced.

Almost all companies have a financial risk-management system in place, and most have risk systems for commercial issues. But barely half have regulatory risk systems and only a third cover reputational risk.

And yet risk and compliance top their list of corporate governance concerns.

Reputation and “commercial effects” are ranked next. One FD says that the most important issue is the need to find the right non-executive directors.

“Opportunity” is cited by just 11% of respondents as a key corporate governance issue, suggesting that FDs feel the corporate governance environment is more concerned with preventing the destruction of shareholder value, and has little to do with fostering its creation.

More than 60% say corporate governance costs time and money while less than half believe there is a clear link between good corporate governance and commercial success. Indeed, more than 40% say corporate governance regulations are becoming “too extreme”, and more than half think their auditors would charge more as a result. Almost two-thirds say they are paying more attention to the question of auditor independence than they used to.

In a broader sense, the concerns of FDs appear to fall into two camps.

First are those who want to ensure they are fully in compliance with the plethora of new rules and regulations – from the American Sarbanes-Oxley legislation to the UK Higgs and Smith reports. Simply keeping up to date and not falling foul is a difficult enough task in itself.

But at a higher level, FDs want to ensure that compliance doesn’t degenerate into box-ticking. Some FDs say they are trying to not let things get “out of proportion”, seeking a “commercial balance” between the board’s role as a value creator with that of a policeman. Others say they are trying to prevent “boilerplate responses”. One FD says the single most important issue is getting “the right people to drive the right behaviour, not the checklist.” As one FD puts it, once a company has notionally “complied” it will be hard to keep corporate governance at the top of the agenda at all times.

Interestingly, FDs appear somewhat more concerned about the risk of fraud than the possibility of their own strategy being blown off course by rapid changes in their markets, so they are still more worried about being the next Enron than the next Marconi.

Article 13 director Jane Fiona Cumming will be holding a series of workshops, chaired by Andrew Sawers from Financial Director, on corporate governance and the value-creation agenda at the Richmond Events Finance Directors’ Forum, 11-14 June 2003. www.fdforum.com.