Consulting » Decisions – Back seat driver

There is growing evidence that the financial complexity of running company cars, the health and safety issues of running a fleet, and its importance in keeping key staff motivated is encouraging company departments other than traditional fleet managers to take a closer interest in fleet matters. Two of the most common business areas that are getting involved in running company fleet are finance and human resources. A recent study reveals that finance directors especially are playing a much greater role in making fleet decisions, reflecting the huge financial cost and perceived benefits of a company car fleet.

Contract hire and leasing company LeasePlan surveyed the HR and finance executives of 350 companies and found that 97% of the departments questioned deal with at least one aspect of running a fleet, with 75% handling individual driver queries, 71% deciding how a fleet is managed, 59% shortlisting potential suppliers, and 57% negotiating with suppliers and are involved in the final selection process. Other areas of involvement include insurance and accident management, tax-related issues, and health and safety management.

Finance and HR executives are even taking on more day-to-day involvement in fleet issues. A total of 11% surveyed have recently been involved in answering driver queries, 10% in the general running of company cars, 8% in policy, negotiating with suppliers and selecting vehicles, and 6% have recently had to deal with general fleet management and purchasing issues in their companies.

This hands-on approach from departments that may lack the relevant expertise in day-to-day fleet management brings its own particular problems. For example, when drivers contact their fleet department, it is rarely about finance and more likely to be regarding a specific problem with the car.

Finance departments need to take this into account when considering whether they should become involved in the fleet. After all, the finance director will want to tackle funding issues, not field queries from drivers trying to find the nearest fast-fit company, or needing advice on which oil to put in the engine.

The lesson for companies is simple: know what you are getting into before you take the plunge. This includes areas where staff in the finance department, including FDs, could offer their relative expertise. For example, LeasePlan discovered that when it came to funding, on average, three-quarters of the fleets were leased.

However, in larger fleets, up to one in 10 use employee car ownership schemes, which offer a tax-efficient equivalent of a company car, where the ownership passes to the driver, meaning they don’t have to pay benefit-in-kind tax. Yet there is little evidence to suggest there is the expertise within these departments to tackle car-related financial issues.

Another recent survey claims that more than half of human resource and finance executives involved in fleet management had no idea what an employee car ownership (ECO) scheme is in the first place. And those who are aware of how they work relied on fleet management suppliers and the press to inform them.

A total of 46% answered ‘no’ to the question, ‘Do you understand what an ECO/structured employee car purchase scheme is?’ while 5% answered ‘not sure’ and 1% did not answer. This lack of knowledge is not surprising as the finance department will have a lot more to do than just focus on the company car fleet.

As a result, it may even have turned to an outside organisation to provide support, such as a fleet management company. This would allow the company to focus on its core strengths, such as running the rest of the company’s finances.

But under the new health and safety spotlight, it is no longer possible for employers simply to try to outsource their way out of the administrative burden of running a fleet. Companies are expected to show they have a clear understanding of the risks their drivers face on the road and provide evidence that they are doing something to keep them safe.

The problem is that company directors are proving the weak link in improving safety for employees on the road because of ‘serious gaps’ in their knowledge of work-related road safety. For example, an overwhelming majority of businesses do not have a risk management strategy in place, while many executives are unaware of the fleet safety ‘bible’, Driving at Work, which the Health and Safety Executive published more than a year ago to help fleets tackle at-work road safety.

“Directors appear to have a paucity of knowledge of fleet operations and a delegation of the responsibility to the fleet executive, or another middle manager. Given the new ethos of care and the business car, such an attitude may need to change quickly,” says industry expert Peter Cooke of the Centre for Automotive Industries Management at Nottingham Business School.

“While it has been assumed that most large fleet organisations have taken active steps to develop and implement fleet safety policies, research shows some disturbing gaps in board awareness of fleet safety. In the case of many smaller organisations, the implementation of fleet safety policies is often lacking,” says Cooke.

His comments, made as part of an in-depth investigation into fleet safety, published in Profit Through Safety last year in association with Kwik-Fit Fleet, added weight to a long-running call for fleet managers to be given a position in the boardroom. As far back as 1998, global industry expert Garel Rhys was suggesting that fleet management was a responsibility for director-level employees because of the value of the vehicles involved and the risks it brought.

Cooke said that if other directors were to control fleet issues effectively, they had to be better informed of the key issues involved. He recommended eight key areas for improvement, starting with a commitment to undertake a company car policy review annually at board level. Firms should also nominate a board director to take responsibility for fleet, develop a strategic risk register for the business car and establish a board-level policy regarding employee-provided cars on business.

“Firms should record and report car safety incidents at board level on a regular basis, establish key performance indicators for the executive in charge of the fleet, ensure there is a sustainable reporting and monitoring mechanism regarding the business car and provide board communication to all company and business mobility car users,” Cooke added.

Running a fleet is a significant responsibility, particularly given the risks that drivers face when taking to the road on business. Of the estimated 3,500 deaths a year on Britain’s roads, one-third are thought to be work-related.

Government ministers have become involved in calls for the fleet industry to do more to improve safety for drivers, or face the possibility of legal action. Indeed, moves to introduce more effective corporate killing legislation, designed to make it easier to prosecute companies that fail in their duty of care, are already well under way.

Government attempts to urge wider use of legislation to punish fleet and company executives who ignore their duty of care to drivers are likely to fail, claims former Conservative minister Steven Norris. Despite this, Norris expects many people in business to give up directorships because of concerns about possible charges. “Corporate killing legislation is likely to be less of a success than ministers hope. That’s because it is necessary to prove that a corporate decision caused the death, which is extremely difficult,” says Norris.

But why take the risk? Norris cited a wealthy property developer who, until recently, was a director of 33 companies but is stepping down because of the legal situation. He holds six directorships at the moment but within two years will not hold any, although he will still own his main business.

So are finance departments making a mistake by getting involved in the maze of legislation and mountains of administration that comes with operating a fleet? That depends on how prepared and focused they are on a department’s strengths. Ensuring that the FD isn’t fielding calls from staff worried about, say, their vehicle’s air-conditioning is a first vital step. This then leaves the way open for examining the key issues fleets face where finance experts can make a difference. For example, it is possible some employers may have to rethink their fleet policies under international accounting proposals that oblige companies to record contract-hired vehicles on their balance sheets. But that may not happen for a few years, if at all.

“The only change from next year is that most European-listed companies will have to use International Financial Reporting Standards, including IAS 17 Accounting for Leases,” explains Chris Burlton, senior financial accounts manager at leasing giant Interleasing.

“At that time, operating leases will still remain off balance sheet for both listed and non-listed companies. There is a planned refinement to the leasing standard that could move assets obtained under an operating lease on to the balance sheet. “This is not expected to take place until 2007 and is likely to be followed by similar changes in the UK.”

The International Accounting Standards Board may eventually recommend that any asset – be it leased or purchased – worth more than a certain value and used by a business for longer than a specified period should be registered on a company’s balance sheet. Alison Chapman, tax partner at Deloitte, believes fleets are still a long way off recording contract-hired vehicles on their own balance sheets. “This research project is still in its early stages and developments could be years off,” she says.

Businesses have traditionally been attracted to contract hire because it allows them to remove vehicles from balance sheets, appearing instead on the balance sheet of the leasing company. “Being off balance sheet is just one of the benefits that contract hire has. For many businesses it will continue to be the best solution. Fleets need to consider their motivations for fleet funding,” adds Burlton.

“Is being off balance sheet their key reason for choosing contract hire or do they get other benefits? They should also be talking to their leasing company about what funding solution best meets their needs, and it may be that contract hire is still the best choice for them.”