FOR SUCH A CHEERFUL and open character, it’s difficult to conceive that Schroders CFO Kevin Parry manages the finance and risk for a 208-year-old business with £200bn of assets under management.
He joined in January 2009, when the Bank of England cut the interest rate to 1% and the UK entered recession. Things had been bad, were bad, and are still bad.
Schroders has not been immune to what have been five years of financial services gloom. Chief investment officer Alan Brown stepped down, with four divisional investment heads now reporting directly to boss Michael Dobson. The firm saw its March quarterly profits and funds under management figures disappoint the City.
But tarred with the same brush as other financial institutions and investment banks, accused of profiteering and lacking morals? Not Schroders. Its share price is higher now than September 2007, when it stood at 1,296p. It trades at 1,564p, valuing the firm at £3.5bn, having dipped to 635p at the height of the crisis.
Parry’s bright disposition certainly doesn’t mean he’s ignorant about his role. As he points out: “It’s my job to worry.”
Serving as chairman of the group’s risk committee has seen him put more rigour into the business: “You have to have many layers of defence against things going wrong.”
Beyond the management team and its subordinates, an extra layer “dedicated” to risk management is needed, with internal audit as a third line. And then they all have to figure what to worry about.
Schroders uses buckets to do this – metaphorically, of course. They have ‘buckets of risk’ to compartmentalise the day-to-day business – investments not performing; credit and counterparties; operational problems; and emerging risks. Parry and the firm’s risk managers don’t consider the likelihood of one disaster happening over another. They try to plan for all eventualities, no matter how unlikely.
Take the eurozone. The firm has planned for the likes of Greece leaving the euro, as well as Germany or France doing so.
“I don’t have to conclude which of those is right – you just plan for each. If anything similar to [our scenario planning] happens, then you tweak it and hope to control the risks,” explains Parry. “What you mustn’t do on risk is say, ‘That will happen; that won’t happen’ – because most things are not [zero likelihood]; they are in that grey zone.”
But it could be argued there is a risk in focusing on what could be grouped as negative events. How much involvement does Parry have in helping the business gauge and control risks so it can grow?
“Making sure there’s enough capacity to grow is important,” says Parry.
He also needs “exquisitely good people” in his finance function. They must be good communicators – revealing any bad calls before they spiral out of control.
“Businesses make money because they take risks, so mistakes will be made,” he says.
One area in which the firm is considering taking a punt is property lending. Providing debt finance to property developers sounds risky but it is not too far removed from Schroders’ day-to-day business.
Asset managers buy bonds, which is lending to companies on a large scale. Property development is often a reason for lending. As banks look to shrink their balance sheets, it gives the opportunity to other funders to fill the gap.
Parry, however, points out it requires a “different skill” to investing in equities. The firm would set up credit management procedures, and client investments would be going straight into property lending. So it may be possible to attract investors looking for a higher return than by leaving the money in a bank account. The difference would be that there would be little leveraging of Schroder’s balance sheet to grow – it would be client investment and little else.
But there are credit skills in the asset management industry and some expertise of property lending. However, Parry believes those bankers jaded with their industry would see asset management as attractive.
A new business line would mean “more numbers to drive us potty”, he laughs.
The finance function would need to place a greater emphasis on credit risk and making Schroders’ clients fully aware of the risks they are taking in choosing property.
Explaining this to analysts shouldn’t be a problem, explains Parry: “The onus is on it being another type of fund – as long as we’re doing it through a fund structure.”
As you would expect, Schroders has a well-manned finance function. It consists of 130 staff, with Parry looking to increase that number in “key locations”. Smaller functions operate outside of its main centres.
While finance technology is important to Schroders, traditional finance disciplines are managed in-house. But IT has been used with “huge emphasis” in the last 18 months to gain efficiencies. Less onerous consolidation, through widespread use of IFRS, has helped that process.
However, there is a great deal of discussion about the lack of consolidation that exists within IFRS – local versions and carve-outs that dilute the benefits of a common language. When asked if these are relatively minor, Parry’s response is unequivocal: “It’s probably 99% the same.”
With the CFO of a major financial services player, conversation naturally moves to the issue of mark-to-market accounting – blamed for exacerbating the excesses of many investment vehicles. Parry is a “fan” of mark-to-market: “It brings out the truth at the first opportunity – the truth can, of course, be an inconvenience.”
He does raise concerns, citing pensions accounting, where problems can take “decades to sort out” but companies have to resolve deficits in timescales that “are unrealistic”.
“The message is right, but blame the application for the outcome,” he says. “There’s some room for better thought processes.”
And he should know, having spent 16 years at a Big Four firm, followed by 13 in business.
Parry is comfortable talking about the many vagaries of strategic finance, compliance or financial services, despite not having a classic CV for a FTSE 100 finance head. But his background stacks up, if differently to many of his peers.
He started off his career in the classic way – as an accountant at KPMG. But he was made a managing partner in his late 30s, “and that would be it” – had he not decided to do something else.
He left to run Management Consulting Group (MCG) in January 2000 – “New century, new job,” he chuckles – a role he held for eight years.
Staying at KPMG would have seen him have a “long period” in managing partner roles. The opportunity to work on turning around MCG was too tempting to turn down. Parry earned turnaround stripes with KPMG at glamorous advertising agency clientSaatchi & Saatchi when it got itself into a “financial mess”.
During his period at MCG, turning it into a profit-making business, Parry took on a non-executive role at Schroders in 2003. Six years later, he became CFO.
A lack of up-to-date technical accounting knowledge failed to put off both Parry and Schroders’ nomination committee.
“The key is to know the questions to ask. It’s not about knowing the contents of paragraph 403 [of IFRS],” Parry explains.
IFRS made finance people re-learn, he points out, but there is always technical, external expertise to help “get the intricacies right”. The strategic side of the finance function is about interpreting information and communicating it.
“You get bogged down in the numbers or you look for the unusual aspects that will point you to some opportunity – or, indeed, problems. Trying to link finance to other business functions is not telling them a number is 15% higher or lower than last month, but whether 15% is significant,” he says.
On broader matters, Parry says the financial services sector must get back on the straight and narrow. “It’s a vital industry and the own goals are too numerous. The need to get back to high ethical standards has never been greater.”
He can’t point to an event that proved the tipping point at which the industry’s governance failed: “It just drifted over the years, and we have some celebrating that they didn’t know about the industry. We need to go back to basics. How do people understand how a bank works? Let’s go through training before they go into key roles.
“You’re looking after other people’s money. It’s a huge responsibility.”
A lot of work lies ahead – for the financial services industry and the ecosystem it feeds. For Parry, it’s about the industry’s appreciation of the fact it has responsibility for other people’s money.
“It’s become too remote,” he says. “There is an end customer. Someone’s money is at risk. You never see the pension fund, with thousands of people in it – real individuals, little old ladies. It can’t be right where we are today.
“It’s taken 20 years to get here, maybe ten years to reverse – but it’s not going to be overnight.” ?