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A midsummer night’s dream

Financial Director is getting ready to take its month off for high summer, so it is appropriate that, as the school holidays come into view, our thoughts turn to those grinding essays on what we did on our holidays.

This year for FDs only one topic is uppermost in their thoughts – the inexorable pincer movement, as painful as any seaside crab, which awaits them in late summer, namely the final versions of the Higgs and Smith reports on non-executive directors and audit committees, and the resulting changes to the Combined Code. Also looming is the imposition of international financial reporting standards by 2005, and one other thing, but we’ll leave that until later.

In late summer, the drafting teams will be sorting out the final versions of the corporate governance guidance that will go forward from the Higgs and Smith reports and form the revised version of the Combined Code, which applies to all listed companies. FDs see this as a double-edged sword. Sure, they can use it as a means of bringing the rest of the board of directors into line, but they also have to suffer the gripes of the chairman and the CEO as they bellyache about all the rules that stand in the way of the old cliche of wealth creation.

FDs should, in fact, be rejoicing, or at least raising a small glass of something exotic to the tropical sunset. The result of all the arguments is likely to leave them with a more open way of going about their business and with a lever to get the rest of the organisation into shape.

The fuss that has been raised in the six months or so since the Higgs report was published has meant that where things seemed hard and fast they are now to be emphasised as guidance.

I would be surprised if the whole resultant Code was not hedged about with what it should be hedged about with – an emphasis on principles rather than rules. Companies are likely to have to say what they have done, provide details of any special circumstances that have led them to differ and then provide an explanation. Then, in the world of ‘comply or explain’, it will be up to shareholders, particularly institutional shareholders, and other interested parties to make up their minds whether they are furious, not fussed, or indifferent to the transgressions.

It looks as though the approach of assuming that the people the Code seeks to guide are grownups – originally instigated by Sir Adrian Cadbury more than a decade ago and now underlined by the approach of Sir Robert Smith, in particular – will continue. The other side of this bargain is the hope that analysts and institutional shareholders will also behave as if they were grownups. They, too, should ensure they don’t suddenly take a stand over something that any thoughtful investor would have forseen several months earlier and had a quiet chat about with the audit committee or elsewhere in the company.

Next up is international accounting standards, or international financial reporting standards, as they are steadily becoming known as. All good FDs know the 2005 deadline means work on this transition had to start some six months ago. The whole business of comparatives, running the systems in parallel, and the debate over hedging, has meant that if you haven’t started already then you are already a lap behind.

This sounds more like the school sports day than something worth pondering on holiday, but it is not going to become any easier. Hard work now is going to pay dividends later and there is no good pointing out that companies in the more far-flung financial parts of greater Europe are never going to be able to manage the task, and the whole enterprise will result in a massive fudge. Keep concentrating on the cost of capital. That too will improve as a result of hard work on the 2005 front.

And finally, just to knock the edge off the pool-side reverie, have a think about the latest brainstorm put forward by Robert Bittlestone, the iconoclastic managing director of consultants Metapraxis. When we were talking about corporate governance the other day, he suddenly said: “Why not have companies reporting externally on a monthly basis?” He has a point. It is much harder, if not impossible, to fiddle and smooth the figures if they are being reported monthly. All those provisions would go out the window, and the emphasis of the reporting would have to go right to the heart of the business. It would have to focus on cash. And as we all know, cash is at the heart of everything. Looks like it’s time for a swim.

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