If there is one thing we are all supposed to have learned from the credit
crunch, it is that short term is bad and long term good. Or, to put it in a
rather more sophisticated way, while short-term measures may temporarily lift
the spirits of your investors and your remuneration package, it is the long-term
stuff that enables you to remain in the market big-time and avoid being
consigned to the administration and insolvency heap of history.
As ever, though, the temptation is to take the currently fashionable path,
while ignoring the actions that will ease the chances of long-term survival.
Deloitte’s latest CFO sentiment litmus test makes clear what is in the forefront
of the FD’s mind at the moment. Its subtitle tells you everything: Priorities
for 2009, it reads: “Cash, confidence, costs.”
And the story it tells is blunt. It says: “The dominant themes for the fourth
quarter 2008 CFO Survey are a shortage of credit and weakness in the economy.
CFOs see these threats as posing the greatest challenges to their businesses in
2009. When we asked about the greatest concern for their own business, the words
liquidity and cashflow kept recurring in the responses. Looking ahead, CFOs are
contemplating the possibility of extreme outcomes. One CFO wrote that his main
concern was that ‘this is going to be like the 1920s or ’30s rather than the
early 1990s’; in answering this question another CFO cited ‘the lack of
visibility about when the up-tick starts’.”
But the problem with this is that it suggests finance directors are,
understandably, reverting to fire-fighting and crisis management as remedy. In a
perverse way, they find this comforting. No one is going to be fired for
shouting that the only way to avoid being shipwrecked is to have all hands on
deck. Investors and board members are going to clock the increased level of
activity and presume everything is being done to both survive and remain afloat
when calmer waters return. There is nothing like frantic activity to encourage
the belief that all will be well.
“The overriding aim for most CFOs in 2009,” says the survey, “is to
strengthen their balance sheets and that there are three priorities which CFOs
are focusing on to achieve this: maximising cashflow, bolstering investor
confidence and curbing costs.”
This is an admirable return to previous days, to what John Major, when he was
prime minister, would have referred to as a “back-to-basics” approach. It is
something that has been emphasised quite rightly by regulators and
standard-setters for years. When it comes down to it, cash is what should
underpin corporate thinking and disclosure. It is just that corporates took to
the short-term and ignored it.
The trouble is that, just as the awful days now upon us are due to an
emphasis on leverage alone, then unforeseen problems ahead may equally spring
from an emphasis on cash alone.
While FDs are running about like blue-arsed flies gathering in piles of cash
to boast about to their investment community, they may not be noticing, to
continue the shipwreck analogy, that another corner of the main-sail the one
representing corporate governance, the world of the audit committees and so on
has come loose in the gale and is going to bring them to grief.
You can see how this comes about. No one has forgotten risk in these
difficult times, as Deloitte’s survey makes clear. “Faced with a downturn and
exceptional uncertainties,” it says, “CFOs have become significantly more risk
averse: 98% of CFOs surveyed believe this is a bad time to be taking additional
risk onto the balance sheets, twice the level of a year ago. Their overriding
aim is to strengthen balance sheets.”
That is the inevitable short-term correction to the previous strategy. But
the lesson that needs to be learned (or perhaps, re-learned) is not just that
cash is king. It is also that any heavy emphasis on only one answer is another
way of saying that we are still enmeshed in the honey trap of the short-term
mindset. Lack of cash, while catastrophic at present, is far from the only risk.
FDs need to look up from their newly enlarged counting houses and take note
of all the other risks around them. They should not forget, in all the
crisis-management of the cash and the nitty-gritty of the figures and the bank
covenants, that regulators and, to a lesser degree, auditors, are going to come
pitching in and shouting about who knew what and when and why safeguards were
No one is suggesting that something as blatant as a Madoff scandal or a
Satyam-sized fiasco could happen in the UK though you might ask why not. There
are signs that consistent emphasis on corporate governance over a 20-year period
is paying off. But it doesn’t mean that lesser such events will occur and unless
you can show, with hindsight, that the controls were in place, investors and
regulators are going to tear you to shreds when it happens.
And that is the shortest-term event of all.