Pity the poor finance director. What started as a small point within a larger
document has grown and now threatens to become the received wisdom. In November
2006, the CEOs of the world’s largest accounting firms put out a document which
they described as their ‘vision’. It was all good and rather predictable stuff.
It suffered, as everything coming out of the large firms on thought leadership
does, from having to go through innumerable levels of sign-off and inevitably
being completed in a headlong rush. None of this allows the quiet and
common-sense final assessment which we are always told is the hallmark of a good
As a result, a chunk of the document, more a throwaway remark, took the
headlines. It asked whether investors, in a digitalised age, should have to wait
until the next quarter to hear what the document referred to as “pertinent
financial information”. “Technology”, it went on to say, “allows far more
frequent disclosures, even daily”.
It is at that point that every financial director’s hair went white. The idea
of dealing with analysts on the phone about every day’s new figures is not
something FDs are prepared to contemplate. But it may be something that they
will, eventually, have to get used to.
At a roundtable organised by the
month on Anglo-American corporate governance, one of the most prominent of US
regulators made it clear that this sort of thing would be inescapable one day.
Charlie Niemeyer is a board member of the
Accounting Oversight Board in the US. He suggested that what drives a
company is the internal information provided to senior managers on, for example,
a weekly basis. He saw no reason why, if investors realised the value of such
information and its succinct existence, they should not ask for it. So if
real-time reporting was possible, investors would want it.
For CFOs to survive this coming era there needs to be a reassessment of
precisely who they are doing their job for. The old one-word answer,
‘shareholders’, may no longer be enough. The assumption that the prime investor
is an individual saving for retirement is not true in the UK, or in many other
parts of the world. Here, the objective – investing for future pensions – is the
same, but the way it is carried out by huge institutional investment
organisations is different.
So the financial director community will reassess its responsibilities by
breaking down the investment community into separate chunks. Robin Freestone,
CFO at Pearson, argued that quarterly reporting was not a route he wanted to go
down, let alone day-to-day figures. He suggested that there were three distinct
types of investors making up the shareholder pool. First, there were what he
called growth investors. These were long-term holders of the shares. Second,
there were what he called value investors. These were people who thought the
stock was cheap and expected to hold it for an 18-month to two-year period.
Finally, there were event traders. They were there simply for what he described
as “a short-term blip-up.”
Freestone was clear where a responsible company’s duty lay. He said it was
not in a company’s interest to provide more information for the event trader
community. And it was clear that he thought, quite rightly, that these
shareholders had little interest in all the long-term qualities which provided
steady growth, wealth creation and all of that. He made this clear in the
terminology he used. “Providing more ammunition is not something we ought to
do,” was how he put it.
What corporate governance is supposed to do is create a virtuous circle.
Demonstrably well-run companies are better able to nurture long-term growth and
profitability and as a result investors gain better returns. This was
demonstrated at the roundtable by Mark Anson. He has been a senior member of the
investment management industry on both sides of the Atlantic. Previously chief
investment officer for
the legendary California Public Employees’ Retirement System, he is now chief
executive of Hermes Pension Management. He pointed out that at CalPERS they had
carried out corporate governance audits and found that those companies which had
good corporate governance added 35% growth annually. It was, he said, an “alpha
This is much harder to do if your shareholder base is not made up of the
understanding, but tough, investors of the CalPERS and Hermes ilk. If the
investors don’t care where the company might be five years down the line, it is
much harder to provide the growth, structure and culture to bring about
long-term and relatively assured security.
And this, in the coming years, is going to be an ever-growing problem.
Corporate governance has been driven, and has largely come about, because most
investors don’t want surprises and genuinely want long-term growth. But this
type of thinking is on a direct collision course with the way that technology
appears to be driving the process down to a day-to-day trading approach.
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