Ken Lever (Tomkins):
There are many, many issues if you look back over the past three or four
years, in terms of the changing role of the finance director. The one I want to
highlight is the increasing complexity of accounting and financial reporting.
This increasing complexity is something that is difficult for most people to
wrestle with – even technically qualified people – let alone the man in the
John Humphrys: I gather that at a little get-together last
night you were also a little agitated about certain remunerations of certain
people and a lack of transparency. I think ballistic is the word.
Lever: The point I was trying to make was that I have no
particular problem – being the director of a public company – that my
remuneration should be disclosed for all the world to see, so that my friends
and relatives can see, and so that all the shareholders can see.
The issue I have a bit of a hang-up with is that we don’t see disclosure of
remuneration of fund managers, for instance, and we don’t see the disclosure of
remuneration of people in hedge funds or, indeed, private equity. Equally, we
don’t see the remuneration of partners of major accountancy firms and law firms.
I am all for disclosure, and all for making sure people get paid a fair
amount of money for a good job well done if it applies generally across
everybody who is contributing to this value-creation process in our capitalist
Humphrys: Your average punter, someone who has 500 quid in
Marks & Spencer, is not going to look at the annual report and read it in
great detail, but there will be people who will understand all 160 pages or 350
pages and actually make use of that information.
Jonathan Symonds (AstraZeneca): It becomes a compliance
document. If I look at the way AstraZeneca plc communicates to the market, we
report 26 days after the year-end and we try to communicate to our shareholder
base then with what we regard to be the relevant information. If when we publish
the annual report somebody says, ‘There is a material statement in there that we
weren’t aware of’, then I think we would have felt that our communication of our
results had failed. So, to some extent, there should be no new information in
Humphrys: What do you make of that, Michael, from your
Queen (3i): Contrast the requirements of a public company
reporting with, for example, the companies that we invest in: you have to think,
‘What do I want from them? Do I want a 150-page report? Absolutely not.’
As a very active shareholder in those businesses, I want the key issues to be
as simple as possible so that I can make clear decisions based on those issues.
So I do think the annual report has become more of a governance tool than a
Symonds: In fact, we are likely to make it worse over the
coming years because of the demands of Sarbanes-Oxley. Annual reports are going
to be full of information that people think they had better put in, rather than
take a judgement just in case it opens them to liabilities.
Lever: The new proposals on the operating and financial
review are trying to move forward the level of qualitative disclosure about a
business and also try and make sure that it is presented in a more even-handed
way. There is a danger that something like that is going to add to the volume of
the annual report but not necessarily add to the quality.
Symonds: I am accountable for fair disclosure and
communication of performance but I think the operating and financial review now
is starting to add other things to it – environmental reporting, social
responsibility, managing human capital – which I think will keep obscuring what
the fundamental investment proposition or fundamental performance of a company
is. There are elements of fair communication – clear transparent reporting –
that is an essential parts of the business, but if I think of the way my own
time is spent, governance is now starting to dominate the agenda.
Humphrys: As against what? What is more important than
Symonds: Managing the performance of the organisation and
delivering the value inherent within a business. I accept that balancing that
with good governance is perfectly appropriate, but I think the scales have
tilted. It’s not just added complexity in the way Ken’s talking about it: it’s
governance in terms of internal controls, managing risk processes.
I am now in the process of turning upside down most of my organisations
around the world, documenting processes for managing payment cycles, order
cycles in companies like Belgium, Puerto Rico, Japan, South Africa. I get some
valuable information out of that. In other words, do we manage our businesses
effectively there? But, actually, I am not sure from a shareholder’s proposition
that it really adds a great deal of value to them. Taking it down to that level
– because that is what Sarbanes-Oxley requires – doesn’t add much value.
What we have really seen over the past couple of years with every event is a
desire to close the door on that event so it doesn’t happen again, and we now
have constructed a matrix of governance which I actually think is beginning to
lose the plot a little bit.
Lever: I think one of the issues is really to do with
culture: ultimately what you effectively provide is a prescriptive, bureaucratic
process which stifles flair and entrepreneurial spirit, and I think you need the
flair and entrepreneurial spirit to actually create the opportunities in a
business to hopefully grow.
It’s important to get the balance right. One of the things we have tried to
do within our organisation is to get our managers to act like owners and to try
and get them to focus on what they would do if they were running their own
Queen: We are a financial institution and regulated by the
FSA, so we see a huge level of regulation from a quoted company standpoint. But
then when it comes to actually setting the standards in terms of governance that
we want in the companies we invest in, we adopt a different approach.
I don’t think any of us are saying we disagree with strong governance. The
way I look to deliver strong governance is to ensure we are backing high-quality
people and that their incentives are in line with the shareholders’ interests. I
don’t take too much comfort from me actually being able to go in and re-perform
all of their bank reconciliations.
If I put a quality CFO into a business and he confirms to me that the
financial controls are in place and we have gone through a normal audit process,
I am pretty comfortable with that. I would like that guy to be thinking about
how he can add value to the performance of that business.
Humphrys: And what effect do you think this increase in
regulation and regulatory requirements is going to have on the capitalist system
in the very, very bigger sense?
Queen: 3i has seen the CEOs of virtually every top 350
company in the past couple of years come along to talk to us about moving into
the private equity arena – or doing a management buy-in, in other words.
Humphrys: What? Virtually every one of them?
Queen: Yes, virtually every one of the top 350 companies. We
have seen either the CEOs or members of those boards wanting to move into the
private equity arena.
What they see in the private equity arena is a much greater understanding of
what the drivers are of the business. Also, they are not subject to the glare of
publicity, so you won’t read about their salaries being published or the
ultimate amount of money that they make. But I think the real thing that
attracts them to the private equity industry is the fact that they can actually
do what they thought they were getting into business to do, and that is to add
value to a business and drive their business forward.
Humphrys: But if they want capital in order to drive their
business forward they want to go to the shareholders.
Queen: There are not that many UK companies – certainly none
outside the FTSE-100 – that couldn’t be taken over and run by private equity
firms. In fact, probably the bottom-half of the FTSE-100 could be taken over by
private equity firms. There is a huge pool of capital out there.
Humphrys: Are you suggesting that in the foreseeable future
some of the really big boys will want to take their companies private?
Queen: Whether they want to or not I don’t think will be the
issue. It’s whether the private equity firms believe there is additional value
that could be extracted from that company by taking it private.
Ten years ago, I would encourage the companies that I’m invested in to
achieve a listing on a stock market as a goal for that business. Today, it’s
only the very, very rare company that I would say it’s appropriate for this
company to achieve a listing.
Humphrys: Is that purely because of regulation?
Queen: That is purely because of the additional cost that
that company will have to bear through being a listed company, and also because
I don’t think the stock markets are particularly good at understanding the
inevitable fluctuations that exist in the performance of growing businesses. So
the management will spend all their time explaining why the last quarter’s
figures were 3% down on what the market was expecting, whereas what they should
be doing is generating additional sales.
Lever: What we are really seeing is an increasing percentage
of investors’ capital being invested into an area that is outside of the
Humphrys: That is interesting, even though it’s the same
money. Well, what that would mean is that the government will change the rules.
Lever: Probably, in due course.
Symonds: When they catch up with it. Markets always
overreact, and I think Sarbanes-Oxley is an overreaction. But I believe that as
people start to understand that instead of trying to protect shareholders it’s
actually in the process strangling the source of value that they have invested
in, then I think it will balance back.
Humphrys: So you don’t expect AstraZeneca to be a private
company in the next five years?
Symonds: Well, if Michael has got 50 or 60 billion pounds on
Humprys: Do you want to write a cheque now?
Symonds: … then I might be able to take it to my board.
Queen: I will come see you with a group of friends.
Humphrys: Join in, ladies and gentlemen. Questions?
Comments? Shouts of rubbish? Pile in.
Delegate: Increasingly in some of the scandals that have been featured
recently there hasn’t been a chartered accountant at the top: do you think the
qualification that this institute offers is increasingly or decreasingly
relevant, and why?
Queen: I think it’s increasingly relevant. I think it’s a
first-rate qualification and the ICAEW has gone a long way to ensure that the
qualification keeps up with the business environment. One of the things I would
actually like to see is more chartered accountants training in industry. 3i has
gone through the process of becoming an authorised firm for training chartered
accountants in industry and I would like to see a lot more organisations do
Symonds: The professional reputation of all of us has been
hit hard over the past couple of years and I think if we are to repair that
position then there has to be a mark of quality – something you can trust,
something that has integrity within it.
Humphrys: Thank you. Yes.
Delegate: What is the panel’s view on the international move away from
principles-based accounting to rules-based accounting?
Symonds: The reality is that every time you step beyond a
simple principle someone wants to fill it in a little bit more and say, ‘What do
you actually mean by that?’ It’s very difficult not to turn a principle into a
set of rules. Because of Sarbanes-Oxley, again, everybody wants something to be
able to point to.
Lever: When the Enron scandal developed, everyone sat back
and said, ‘Of course, it couldn’t happen here as we have a principle-based
environment rather than a rules-based environment.’ The reality is, the
distinction is extremely grey and you can just tell by the thickness of the
accounting standards that come out now that they are increasingly going down
Queen: Enron complied with all the rules. The more you move
down the rules-based approach the more you will get people who can legitimately
find a way around the rules. But if you stand back from it, the principles or
ethics of what they are doing are totally wrong.
I don’t care what the International Accounting Standards Board says, their
standards are significantly more rules-based than what we have seen in the past.
What that will mean is that anybody in a CFO-type role will have to know those
rules inside out, and I fear that a larger proportion of the CFO’s job will be
the application of rules as opposed to a broader commercial role in business,
which is where the chartered accountant is best suited.
Delegate: From Enron to Equitable Life to Shell there has been a series of
disasters, many of which seem to have their origination in the culture of the
boardroom. What steps do you think can be taken to shed some light as to what is
actually taking place in the boardroom and what the interaction is between the
various executive directors?
Lever: It’s a very interesting point because I have a view
that a number of the so-called scandals have been generated by a culture of
greed and people trying to really enrich themselves – not necessarily
considering the general good of the company or, in fact, society as a whole.
When you have that sort of culture, what inevitably happens is that people will
deliberately use the rules to benefit themselves as individuals.
Symonds: Had Sarbanes-Oxley preceded Enron they probably
would have checked the boxes on that, too. That is why I personally feel sad
about Sarbanes-Oxley. It has driven me down now to the grass roots and actually
doesn’t provide any additional reassurance on the question, ‘Are there the right
I think the supply of people that are willing to take high-profile positions
in some of the big companies will start to dry up. We recently sourced a
chairman and it’s a very, very long process these days. I suspect other
companies find that too.
Humphrys: Thank you very much indeed. Thanks for those
questions and thank you – all three of you.