There is something about anonymity which enables people to tell the truth. People in the health service used to be astonished when patients answering questions about their health provided different answers depending on whether they were face-to-face with their doctor or typing their answers into a screen-based system. The same is true when people do research into what FDs really think.
The latest example* comes from the research committee of the Institute of Chartered Accountants of Scotland. It is a follow-up to earlier work it has done over the past decade. But little did it realise how useful the latest work – coming as it does into a post-Enron world – would be.
Recent corporate history has made research like this all the more urgent. And at the heart of it are extracts from the interviews which back up the research findings.
What these anonymous voices give us is the authentic voice of the FD and of the auditors, both internal and external. Listen to them. This is how we learn what people are really thinking, opinions which they would never be able to voice in public.
“As far as non-execs are concerned, the thing that appals me in many companies is the lack of any real in-depth financial knowledge,” said one anonymous FD, talking about the failings of non-executive directors. “You find boards of directors where nobody has a clue. Look at Enron and so on in the US. I can understand how these things happen because many people do not have the technical knowledge to challenge management.”
Another FD commented on the shortage of effective non-executive directors by saying, “My controller earns £200,000 a year and is very, very good. How many non-executive positions has he got? None! Nobody has asked him. And he is the sort of person, not on the main board of a FTSE-100 company, who would love to be a non-exec of other smaller plcs. Typically, these smaller plcs have retirees on their boards because they cannot attract working executives, yet there is a pool of executives who are desperate. It fits their objectives within their own companies to have an outside interest. There is a whole pool of guys keen to find a non-executive role.”
Those brief extracts from interviews with finance directors tell you more about the issue of non-executives than any amount of work from worthy committees.
And this extract from an FD voicing his frustration with analysts is absolutely magical in conveying the issue in one paragraph. “They will phone up the FD (normally) or the CEO, and say, ‘Your results are coming out. We are doing our annual review, which is going out to our investors, and we’ve got you down for profits of x for the year.’ You are the FD.
What do you say? I am not prepared to tell you. It is confidential information. When I speak to my shareholders, I will tell you. And they respond, ‘Well, in that case, I am going to write that my best guess is it will go up by 25%.’ As the FD, you know the market is going to get information that is significantly wrong. What do you say? He might say, ‘25% is clearly not right. OK then, so 12%?’ Cannot say. End of story … The ones that are right at the edge – that really push to the limit – have the brass neck to say, ‘Well, if you do not tell me, I am just going to write this’, and you cannot tell them, but they wheedle it out of you. Otherwise, what is written could be absolute garbage. The share price will fluctuate, so you can’t afford not to do it.” There sounds the authentic voice of the financial director. You can almost chart the poor man’s blood pressure as it rises to an unsafe level.
And this brief extract from the views of an internal auditor on the big audit firms provides the same authenticity. “The main reason an audit firm wants to take a risk management approach is that it gives them other opportunities to generate revenue from their clients. That may be a cynical approach, and I will accept that, but I think there is a grain of truth in it.”
Forget all those anodyne quotes which FDs provide when the results come out. Buried deep in research work like this you find out what they really think.
* The Future of Corporate Governance: Insights From the UK is published by ICAS. Copies can be obtained from ICAS at a cost of £15. Contact Isobel Webber at the ICAS Research Centre on (0131) 347 0237 or at email@example.com
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