Corporate governance is in the doldrums. It’s one of a number of corporate responsibilities that are supposed to be taken care of by the supposedly overlapping connections between board members, and in particular the FD and chief executive officer, but which, instead, seems to come under the remit of none of them.
In the modern corporation, the chief executive is all things to all people and is under tremendous pressure at all times. The job of chief exec, as John Connors, global CFO of Microsoft, put it to me a while back, “is an almost inhuman role today”. Meanwhile, the FD has become the person in command of all the information, so it is hardly surprising that the relationship between FD and chief exec has become more difficult.
But what is being lost is the responsibilities in between. In these times of greater volatility, some of the crucial issues of corporate governance are simply being left on the edge of conflicting responsibilities.
Talking to FDs around the world for a research report* published earlier this year I found they were nearly all upbeat. But the reason they were upbeat was because they were increasingly seeing themselves as the corporate winners. The report was intended to look ahead to predict the state of the role of the FD in 2010. And from all points of the globe it was clear that the technology which has enabled a mammoth amount of information to be available and analysed is expected to ensure that the FD sits at the heart of the organisation. Norman Lyle, group FD at Jardine Matheson, summed it up simply. “The FD needs to guard the information,” he said.
The FD will become the gatekeeper and guard.
This has an obvious effect. In the words of Jan Hommen, CFO at electronics giant Philips, “the FD is the conscience of the organisation”. The FD of the future becomes the person who, because they have the monopoly on information and risk assessment in the organisation, effectively has control of all the levers – and the CEO’s dominance in strategy starts to be undermined.
If the FD is the guardian it follows that the FD can veto strategy from a strong position. The FD can stand rock-like at the heart of the organisation.
The FD knows what the information means. The rest will have less confidence in challenging the views of the FD.
“Systems will give people more access to information,” says Lyle, “so people may not be able to identify risk so easily because the information is flowing so rapidly.” Increasingly, the FD will be using this to ensure that rectitude flows from the role of the FD. For Iain Lumsden, who has now moved up from finance director to CEO of financial services giant Standard Life, this is even more obvious. “The likelihood is that the FD role in an organisation will become more distinct in the sense that the FD will be looked on as a counter-weight to the CEO rather than being seen as part of a team,” he says.
Now this is not a bad thing. The whole concept of corporate governance is based on the idea of balance after all. But the growth of the FD as gatekeeper suggests that the balance is tilting. Information has become the tide which has swept everything else away. And it is not just information from within the company which has done this. It is the quantity of information everywhere which has changed the landscape. It has also enabled regulators to be spawned at every corner. Regulation, as on the old Bank of England model, used to depend on intelligence both in the form of information and in the form of a measured and experienced view. Now regulation is a massive industry with a keen interest in expanding its universe and its influence.
This is where the FD will find the world of regulation an ally. And this is where the CEO will find it impossible. Lumsden, who comes from financial services, and so understands the scale of regulation better than most, sees this as a wedge between the CEO and FD. “It would be ideal to have the CEO and FD working together,” he says. “But the regulators will dictate that if the FD cannot endorse something which is material to the company and which the CEO wants to do, then the FD will be under an obligation to report the CEO to the regulator.”
These are murky waters which can do the cause of corporate governance little good.
* The Chief Financial Officer in The Year 2010 is published by IFAC, the International Federation of Accountants. It can be downloaded free of charge from IFAC’s website at www.ifac.org/store.
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