Corporate governance: Survival instinct

There are times when what looks like a stupendous strategic
coup is actually something altogether simpler. In fact, the best of strategies
are often the result of a combination of events and accidents along the way.

Take the last few years in the world of the financial director, in particular
the past 12 months or so. It has been a time for which the journalist’s cliché
of ‘roller-coaster’ could have been coined. At its outset, financial directors
were on the back foot. They had only just surfaced from underneath a coating of
public opprobrium post-Enron et al. They were being hit by the prospect of
implementing international financial reporting standards, at the same time as
the egregious nonsense of Sarbanes-Oxley.

Good useful goals could be discerned in the IFRS programme. Through a pair of
binoculars a distant land, where financial reporting statements around the world
could be expressed in the same language and be broadly comparable, was visible,
but a long way off. The same could be seen to be partly true of Sarbanes-Oxley.
Beneath the huge hay bales of process the occasional needle of insight could be
found.

The problem was that this all came at a huge cost to any corporate
organisation. And huge costs with no obvious and demonstrable short-term
benefits are exactly what financial directors do not like trying to explain. The
result was a lengthy series of arguments, ranging from the irritable to the
furious, in every sizeable company.

The next stage was inevitable: a plague of grumbles, grouches and noises of
outright rebellion was unleashed. Financial directors and CFOs took every
opportunity they could grab to say how upset and annoyed they were at the effect
of both IFRS and Sarbanes-Oxley on their businesses. Everyone from European
bureaucrats to local Chambers of Commerce was lobbied.

This extensive public display of disgruntlement was effectively a smokescreen
and very effective it was. Boards of directors, for whom it was deployed,
appreciated it greatly. The CFOs and financial directors could be seen to be
pulling their weight.

Next, and this is where we are at the moment, comes a period of relative
quiet ahead of publication of the next tranche of serious financial reporting.
This period is being mostly used to ensure that the analyst and user community
truly understand what is about to happen next. There were worries that the
analysts were slow in coming to terms with precisely what the implementation of
IFRS would produce. Traditionally, analysts tend to take a look at changes and
new elements in the mix about a morning before the transformed and newly
published accounts are about to come across their desks.

This time it has been better – but not much. Analysts will cope with the
headline figures. But the sheer wall of complexity and intricacy, which will be
seen as the hallmark of IFRS accounts, will have many an analyst wrong-footed.
Gone will be the certainty of earnings per share, for example. So, behind the
scenes there is much explanation going on. This will have an important impact on
the final stage of the strategy that is unfolding.

In mid-year, enough companies will have reported for there to be a consensus
emerging. For financial directors it is extremely important that the consensus
is benign. There are two reasons for this. The first is that during this period
the US regulator, the seemingly all-powerful Securities and Exchange Commission,
will be making its own private assessment of the figures being published. It
will then opine in its own inimitable American way on the integrity of the
published figures. On this hinges the likelihood, or not, that it will give a
thumbs up and allow some kind of mutual recognition of IFRS accounts in the
future, rather than the current laborious and wasteful reconciliation with the
ponderous rule-induced precision of US GAAP.

The second reason why financial directors wish the consensus to be benign is
to keep public opinion, and their boards of directors, onside. This is the point
when financial directors need to go on the offensive.

All through the preceding year or so they have either grumbled or kept their
heads down. Mid-year will be the time when they burst out of their offices and
take the world by storm. This is the moment when the financial director needs to
get out and about and show the world how brilliant, how ingenious and how
successful they have been in coming through this difficult time and producing
the fruits of the implementation process for the good of all corporate mankind.

In short, they will be seen as the leaders once more. People will tell them
what great strategy they have employed. And, in the privacy of their offices,
financial directors will remind themselves of how helpful hindsight can be.