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Stepping into the breach

DOMINIQUE STRAUSS-KAHN. Fred Goodwin. Tony Hayward. Gerald Ratner. What do they have in common? All of them have brought their companies – the International Monetary Fund in the case of Strauss-Kahn – into disrepute by their actions or by their words: an (alleged) attack on a hotel worker; a secret mistress; a badly handled crisis; and a breath-taking verbal destruction of a profitable jewellery brand.

Every one of them has affected their company’s reputation, investor returns, share price and, in a couple of cases, their own futures by what they did.

But when we read the coverage, tut over what they did, and wonder what our shares are worth now, few of us think of who is working away behind the scenes to mitigate the damage.

More often than not it is the chief financial officer, who is in many cases the de facto second-in-command, who has to very quietly repair the damage, reassure the shareholders, call in advisers and head up the risk management strategy.

There have been two good examples recently of finance directors who have stepped into the breach. Jez Maiden left Northern Foods to become chief financial officer of National Express in 2008. National Express was in deep water, having lost its East Coast franchise and experiencing mounting debts. It looked like an easy target for takeover and asset stripping, and was under attack from Brian Suter’s Stagecoach and buy-out group CVC, which joined forces with major shareholder, the Cosmen family of Spain.

Its chairman, David Ross, the Carphone Warehouse co-founder, resigned after disclosing he had used a stake in the company as collateral for loans. But Maiden kept a cool head, the threats were seen off, he led a rights issue in 2009 that was a resounding success, and is thought to make a good team with CEO Dean Finch, the head of London Underground contractor Tube Lines, who had also worked for National Express’s rival bus and rail operator First Group.

He’s had a pretty tough job, said one insider: “He’s a well-regarded, articulate, capable, steady and decent guy, well-rated by sell-side and buy-side analysts.”

His role has been vital. When he joined, there was no one running the ship and the company was more than £1bn in debt on the East Coast rail line. Besides working on the bid defence, structuring and organising the bid responses, Maiden also advised the bank, the brokers, the PR team, the City lawyers, and was integral to drafting documents, press releases and presentations, as well as being key to the reaction and response by the group. He had been in the City for some years and quickly gained respect among his peers, colleagues and advisers.

Ken Lever has done it not once, but twice. He joined engineering giant Tomkins in 1999 as FD, when it was in a difficult situation; it had fallen out of the FTSE100 and an eclectic policy of acquisitions had earned it the less-than-flattering moniker ‘guns to buns’.

More than a decade later (after a spell in a similar role as FD at the Swiss memory tehnology company Numonyx), he was brought in as finance director, then acting CEO, to the equally troubled outsourcer Xchanging, which had been plagued by speculation about its accounting practices and by the departure of its CEO. He became chief executive in June and a new finance director was appointed. He did not waste any time, bringing in a plan to focus on intrinsic value, cash, simplifying the business and making it less complicated. When the US business was sold in early June, the share price went up 8-9%, and shares that changed hands for around 50p in March are now nearer £1.

He is pragmatic, highly regarded in the city as a senior accountant (he is also on the Accounting Standards Board) and, at 57, he has a reputation for being able to deliver. It will be interesting to see what he does next.

Bad eggs

Adam Bates, KPMG’s UK head of risk and compliance, has spent 25 years doing investigations. “Executive directors are ambitious and hard-driving in general and some of them are going to be bad eggs, the same as anyone on the street. Some bad people will get to the top,” he says.

So do the special qualities that you need to become a finance director stand you in good stead when, as one contact said very subtly, the “proverbial hits the fan”? Yes, says Bates; in any case, the finance director role is far wider than looking at numbers and checking financial statements are right. “They need to lift themselves above just finance, be forward thinking and know where the business is going,” he adds. “They also need a very strong deputy if something crops up and they are in Brazil sorting out something else out.”

Usually it is the CEO who hits the headlines and plunges the company into disarray. But not always. The scandal that enveloped Société Générale in 2008, when a trader called Jerome Kerviel fraudulently lost the bank €4.9bn (£4.4bn), was the largest such loss in history.

The effect on the bank was so swift and so deep that it nearly went down. One of its first actions was to ring the Boston Consulting Group for help. Pierre Pourquery, managing partner of the Boston Consulting Group in London and Paris, explains: “The bank asked us to manage the crisis. We made sure that all the top management were fully engaged – we had a crisis management meeting every day from 7pm to 11pm. All the top management were actively involved and fully in line with what we were doing.

“All the regulators around the globe were asking questions, the press were putting lots of pressure on people in management and at board level, and we also had the clients asking what was going on.”

Tight timescales

The Boston Consulting Group had to produce a detailed report of what happened. Normally that would take three to six months – they had two weeks. They also had three weeks to put in place 25 new controls in the firm. One of those was that everyone needed to change their passwords. “It sounds easy, but after two weeks, only 16% of passwords had been changed. This illustrates how difficult it is to make changes,” Pourquery says.

That changed when the chief executive sent an email telling staff that if by the following day they had not changed their passwords they would not get their bonus, and if by the day after that they had not done so, they would lose their jobs.

Fearful of further fraud, the board also decided to install biometric keyboards (which recognise the thumbprint of the user) worldwide. That, too, threatened to take just as long, but was implemented quickly using the same method.

If there is a scandal, what should the CFO do? “Out of this experience, you make sure all your communication is current; it’s all about leadership and the ability to quickly respond to the concerns that your shareholders have and make appropriate changes, to persuade the public that this is what you are doing,” says Pourquery. “In the case of BP, ‘I need to have my life back’ is not a good example of leadership. You need leaders. In our situation, we had a credible leader and we managed to go through the crisis very well and very quickly.”

Staying put

However, at SocGen, the CEOs of both the bank itself and the operating company offered to leave immediately, but were asked to stay on through the crisis. Jean-Pierre Mustier, the head of the bank, stepped down in August 2009. And in the case of the parent company, the CFO, Frédéric Oudéa, was made CEO, working alongside Daniel Bouton, who gave up his executive role and remained chairman, resigning in April 2009.

“Oudéa was the man who communicated with the financial analysts and public and press about the situation of the bank, so he was in a good position to reassure the shareholders that everything was back to normal and that there would be continuity,” explains Pourquery. “He is still in place now; things stabilised once he took over.”

The former finance director of an AIM-listed company said: “The FD is effectively the deputy chief executive, the custodian of the critical assets of the business, which includes the brand. If the CEO brings the company into disrepute, that affects how people look at the business. The FD is responsible for communications with all stakeholders, suppliers, investors, employees, press and accountants. They will need to manage the story and reassure the staff. It’s vital that they are able to step into that role and manage the company message.”

Chief executives are known to be larger-than-life figures, even those who have not yet plunged their companies and themselves into controversy. Stories like these emphasise that those employing finance directors need to look for someone with leadership potential. After all, they will never know when they may need it. ?

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