Bankers, so legend goes, have a traditional antipathy
towards accountants. And part of the Johnson Matthey mess must be
attributed to the effect that this mood has had on bank-management methods.
There is, as a result, a delicious strand of irony running through the Bank of
England’s current efforts to beef up financial controls in the nation’s banking
Those very institutions that have been so keen to see well-trained people at
the helm of potential borrowers – armed with precisely worded business plans and
the latest in management accounts – have seemingly neglected the lessons that
they’re determined to see learned by their customers.
As the Bank of England committee said in its report last June on the system
of banking supervision: “Banks have been relatively slow to follow the example
of commercial companies and appoint finance directors to their boards.” While
the committee went on to say that this was understandable – “in the sense that
all the executive directors are ‘financial'” – it went on to spell out, in its
own brand of no uncertain terms, that it expected the situation to change. “We
believe … that there is an important role to be played by a finance director
who, apart from the managing director and the chairman, will be best placed to
take an overall view of the business. It is not an easy role, as the finance
director must be prepared to question and challenge the decisions of his
colleagues, but it can be a most important one. JMB had neither a finance
director nor an audit committee.”
In terms of having professionally-qualified financial managers, the Old Lady
herself has not exactly been a shining example. The same report notes that its
supervision department has only two qualified accountants working within it and
recommends “some increase” in that number.
To date, only two major banks in Britain have appointed outsiders to perform
the task of finance director. And only one of those made the appointment at
board level. Michael Julien, group finance director at Midland Bank, has
impressed the City with an open and scientific approach to financial management.
He is a veteran of chartered accountants Arthur Andersen and was previously
finance director of BICC, where he displayed exactly the questioning and
challenging qualities now sought by the Bank of England for Britain’s lending
BoE follows Midland
Part of the central bank’s new-found keenness for finance directors is
thought to emanate from Julien’s performance at Midland. While he was not
approached by the supervision committee, it did spent a lot of time at Midland,
discussing its troubled Crocker Bank subsidiary in California. “They spent a
fair amount of time with us, discussing how we controlled the business,” he
said. “I suppose that with hindsight they were trying to learn what we were
doing. One of the things they had never understood was how we were organised. We
explained our structure and showed them how we had built up controls and
Despite his professional background, Julien does not believe that chartered
accountancy is the essential training for a bank finance director, although
clearly that profession is going to be one of the recruiters’ main hunting
grounds. “There is too much emphasis on the accountancy qualification,” he said.
“The tradition in US banking is that there has always been a chief financial
officer. But this person could easily be a banker.” The fundamental quality of a
finance director as a sort of business interpreter to all of the different
departments in an organisation makes bankers look less likely as candidates in
the smaller houses.
Ian Martin, a bank auditor with Arthur Andersen, observed that most senior
bankers in this sector are lenders first and foremost, while banking as an
industry has grown into something more. Products like foreign-exchange dealing
are vying for attention with the more traditional business. And management s
tructure has not always kept pace. The outsider’s advantage, as Julien sees it,
is that he’s not “locked in”. A similar point of view is put by Julien’s
opposite number at the Royal Bank of Scotland, David Coulter. “A banker, if he’s
been with a bank all of his life, has never seen the outside world. There’s a
huge gap there.”
Coulter, who as chief financial controller at the Royal does not sit on the
board, knows that the skills he has acquired over his career could equip him for
a financial-management job in any commercial or industrial organisation. A
previous employee of BL, Nestle and Time Incorporated, Coulter has developed
that “second sense” for financial ratios that bankers do not always seem to
possess. “You could get a financial person in a bank producing a balance sheet
that could be off by £50m on both sides and he won’t realise it,” he said. ”
You’ve got to have that ability to sense that on a certain level of assets
you’ve got to expect a certain level of interest.” Bankers, needless to say,
don’t entirely agree.
FD or general manager?
Charles Green, who is general manager for finance at National Westminster,
has been with the bank, or one of the smaller institutions that created it in
the mega-merger of 1970, since he was 16. His career has seen junior
branch-work, export finance, long-range planning, corporate strategy and line
management as manager of NatWest’s Lombard Street office.
He was also managing director of Centrefile, NatWest’s data-processing
subsidiary, and general manager for business development before his present job.
Breadth of experience is the “great thing about big banks”, Green said. While
acknowledging that there is a case for specifically trained financial managers
doing the job, he added: “It depends on how you manage it. I am in the very
genuine sense a general manager, with lots of chartered accountants supporting
me.” Green sees no culture clash between financiers and financial managers. ”
The role of the general manager, finance, in our bank is to act as critic and
analyst of what the other general managers do,” he said.
And he added that a banker’s intuition in “thinking instinctively in terms of
exposures that banks have to expect” gives him an advantage over the outsider.
“An outsider would have to learn that,” he said. So what exactly do these bank
finance directors do? In Julien’s case, one of his first tasks at Midland was
the establishment of an internal audit function: “the custodian of the corporate
conscience”, as he put it. “When we sat down to consider the internal audit
function at Midland, we found that people didn’t know who was responsible for
it,” he said.
Auditors Ernst and Whinney were brought in to question people throughout the
group on who they thought they were accountable to. When no clear consensus
emerged, the financial management team set to work. “You could very simply
divide the finance director’s role into two,” Julien added. “Namely, defining
the policies and then establishing an internal audit function which checks
whether those policies are being put into effect.” Throughout the Midland Group,
he discovered about 450 people who were performing internal audit functions. But
they were not driven from the centre. Their functions were revamped, without the
need for a big recruitment drive, and a group-level team was established to
“The role of any bank’s chief financial officer must be to see that that sort
of function exists,” Julien said. In Midland’s case, internal-audit groups are
led by the chief executive, the chief financial officer and the chief credit
officer of each subsidiary. The group’s chief internal auditor meets them four
times a year. Midland’s policy was laid out in an internal document printed in
July last year. That document defines Julien’s role thus: “The group finance
director is responsible for establishing accounting policies and for the
standards of performance of procedures and systems affecting the Midland Bank
Group statutory accounts, management information systems and planning
North of the border
This responsibility is defined further as “establishing consistent and
compatible policies for accounting and internal control, approving procedures
which implement those policies and reviewing for adequacy the controls over
accounting systems”. The head of group audit has a similarly worded brief for
his own division, while internal control committees and audit committees are
responsible for confirming the adequacy of internal audit in each segment of the
group. These committees are also responsible for ensuring that management
responds to findings from internal-audit reviews.
A similarly rigorous framework was adopted by David Coulter at the Royal Bank
of Scotland. He was appointed at roughly the same time as Julien, in mid-1983.
The bank was going through a rough patch and his first job was to find out why.
That meant quickly establishing a system of monthly reporting to the board on
the back of a fast-response management-accounting system. Coulter now has a
30-strong team based in Edinburgh that performs this function.
At the same time as establishing new management methods, he tried to do away
with some of the less successful old ones: notably a fondness for committees.
While he still works on some, others have been ditched. “We had a taxation
committee when I joined,” he said. “My feeling was: we’ve either got a tax
problem or we haven’t. If we have, let’s get an adviser in to sort it out and
not sit around a committee table discussing it.” Banking is changing in so many
ways that the moves to strengthen the industry’s control function must be
welcomed. In his own opinion, the biggest challenge facing Charles Green right
now is working out ways to manage and monitor the whole new range of exposures
thrown up by changes in the London capital markets and the bank’s stronger
presence within them.
But it’s not just the City revolution that is straining the system. The
burgeoning market for fixed-interest securities presents mind-boggling demands
on risk management. Banks spread their cash through the money markets and
fixed-interest markets, matching interest rate for interest rate and taking
their profits on the spread. The US bank Goldman Sachs recently hired two
university professors, Jeff Yawitz and William Marshall, to head up a 30-strong
team of analysts whose sole job is to develop risk ratios for elements of the
bank’s exposure to certain fixed-interest securities holdings.
The technique, according to Marshall, is to treat the bank’s balance sheet
like an investment portfolio. The department then looks at specific segments of
it – holdings of corporate securities, treasury stock or whatever – and arrives
at an exposure ratio. He admits this does not allow for an exposure ratio on the
balance sheet as a whole, nor is it useful for assessing corporate loans made by
the bank. But it does serve to illustrate the degree to which scientific
analysis is usurping the banker’s traditional “feel” for risk.
Michael Julien’s sidekick at Midland, general manager for finance Frank
Fitzpatrick, summed it up. The old style of bank management failed to establish
a systematised and formal control ethic in the industry. “A lot was left to
trust, integrity and personal standards,” he said. Fitzpatrick, incidentally, is
also an outsider, brought in by Julien from BL last September. While no one
wants to see trust, integrity and personal standards make an exit from the
industry, everyone now seems to be realising that on their own they are just not
The article above originally appeared in the September
1985 issue of Financial Decisions, the magazine that became
Financial Director in 1990. When this magazine launched in 1984 (as
Financial Decisions), it was still uncommon for even the largest
clearing banks to have a finance director on the board. The once again deferred
retirement of Barclays FD Oliver Stocken presents us with an opportunity to
reprint an article first published in 1985. Almost 14 years later, it still
carries pertinent and interesting lessons about the role of the FD in industry
THE JOBS MIGHT BE THERE BUT WHERE ARE THE PEOPLE? The Bank
of England’s call for more finance directors in the industry could not have come
at a worse time as far as the recruitment market is concerned. Headhunters are
already scouring the field for potential recruits. But they are finding a number
of obstacles. First, the ever present City revolution is sucking
financial-manager material into stockbroking firms and the business end of
merchant banks, pushing salary levels up in the process.
One recent appointment, a finance director at a small to medium foreign bank
in London, carried a remuneration package of £40,000 to £45,000. That range will
probably go up in September when the hunt starts in earnest. In bigger banks, of
course, the salaries will be much greater.
Second, the accounting firms, a key hunting ground for the recruiters, are
going through a boom period. And most of them are introducing or have introduced
their own corporate-finance departments. This is providing an incentive for
accountants who might otherwise have left the profession to stay on in roles
that are becoming increasingly entrepreneurial.
Third, the Bank of England itself is seeking to increase the size of its
supervision department and to draft in professionally-qualified individuals. It
is refusing to give even rough estimates of the number of recruits it is
seeking. But some industry insiders are putting the figure as high as 40.
Bankers have already poured scorn on one idea to meet the shortfall – namely
seconding people in from the industry itself. The obvious objection is that a
bank such as Barclays does not want a supervisor from Nat West checking its