Who's the most influential FD in the UK? Probably Philip Broadley. As well as being FD of Prudential, he's the current chairman of the Hundred Group of FDs. So why don't we hear more from them?
1 Why isn’t the Hundred Group more high profile? GW, Birmingham
It is a championing organisation, waving the flag for the FD in the areas most relevant to what FDs do. It is deliberately not a high-profile lobbying organisation – and it never set out to be.
It started in the mid seventies to represent the views of FDs over what was then a fairly controversial subject: accounting in the era of high inflation. So while people automatically think the Hundred Group is limited entirely to the FTSE 100, the name predates the creation of the index. Today it broadly represents the UK’s largest companies, although it does welcome mutual organisations, for example, and includes the BBC FD.
Historically we’ve found that having relationships with, say, the Inland Revenue, the DTI or the ASB works very effectively. And that happens best through regular contact, attending meetings of the different bodies – it’s all relatively quiet stuff, it’s not trumpeting ourselves from the roof-tops. But then FDs tend, by and large, to be quiet, measured people. So as an organisation I think it actually suits the style to which we work.
2 So would a higher profile be counter-productive? RealFD.net
A lot of the time the subjects of the dialogues we have are not, let’s face it, of great interest to almost everyone else. The only way a journalist might make it exciting is to go “controversy looms!”, which is why all of the coverage about IAS39 last year tended to be around the various groups who were allegedly in conflict, rather than the underlying content. Typically, we’re not seeking confrontation – we’re seeking to achieve a consensus and a desired result.
3 What are your key objectives as chairman of the Hundred Group? JD, Plymouth
I have tried to set a relatively narrow set of priorities in five areas. First, the agenda for the IASB and what it does next. Second, pensions. We have a new legislative framework in place. As a result of that, our role as finance directors will change. There will be a different dialogue with trustees and the Pensions Regulator. So how is that going to work? Third is tax. The Hundred Group, through their companies, have agreed to fund a research centre at Oxford University. It’s important to get some academic research into the broad questions to which there are perhaps no clear or reliable answers at the moment. So has the UK become a less competitive place to do business from a tax point of view? What is the overall balance of corporate taxation? Could public policy be better achieved if tax was higher or lower?
Fourth is relations with institutional investors – again something which is best done not by shouting things from the rooftops at each other. And fifth is widening the role of the group outside the UK, especially in Washington and Brussels. Things like Sarbanes-Oxley obviously matter to some companies, but it’s by no means a universal area of interest. Brussels is rather different. Something like the market abuse directive, which came into place last year, has widespread significance. Our challenge is to join the debate in Brussels as we do in Whitehall, where we have a track record of offering an opinion that is knowledgeable and not hysterical.
4 What’s your view on the OFR – and the chancellor’s meddling in the interests of “lighter regulation”? AS, Bolton
I haven’t met anyone who wasn’t surprised by the announcement and its timing. There is still a lot of uncertainty as to quite what it means, and there is now a consultation period on the OFR until the end of March.
Our view is that narrative-based reporting is a very important part of communication to shareholders. But as a group we always said that if you want to extend narrative into forward-looking areas, the way to get the most value out of it was to have a so-called “safe harbour” provision – the defence would be that you made comments “in good faith”. If you don’t have that, our concern is that the narrative report might get written by the finance team, but it will then go through a filter and what will emerge won’t be terribly useful to investors. So at least we now have an opportunity to go back and say that if this is about “lowering the cost to companies”, you need a safe harbour.
5 Now we don’t have specific requirements for narrative reporting via the OFR, will companies still feel the need to report on things other than just the financials? AG, London N1
It ought to be a cost/benefit analysis. The more you put into the OFR about how the business works, the more you can explain its complexities to shareholders. If you are at the other end of the spectrum, a smaller quoted company where the share register doesn’t change very much, doubling the size of the annual report and putting in lots of drafts to explain where the value-added contribution has come from is probably not going to be a fundamental driver of the share price. Personally, I found the framework in [the ASB’s OFR standard] RS1 helpful in terms of providing examples of the sorts of non-financial measure that companies might put forward. Whether it’s corporate reporting, corporate social responsibility (CSR) or broader financial reporting, you actually have the same debate: do you want to slot every company into the same box, so that there is a standard model used by everyone? Or use something that recognises the variations between, for example, different sectors? Reporting should reflect those different models.
6 How do you ensure that CSR is meaningful to your staff and makes a difference to the wider community – and is not done purely for good PR? RH London SW6
It’s not just PR. FDs are aware that if they manage the business only to a short-term measure of shareholder return, that is not long-term value creation. So I don’t think that you need to legislate to ensure that companies will balance these various interests – it is a fundamental purpose in corporate life.
7 What’s your view on why FDs tend to have such a broad remit? Is there any reason for us to take responsibility for, say, HR or IT? FE, Dulwich
FDs typically do have a background in process and management, so there is a range of things that they are equipped to do. And on many boards, you have a chief executive and then business unit heads, so the finance director is the natural person to hold over-arching group responsibilities. But, personally, I volunteered for the CSR role because our business is about long-term trust – there is a fundamental link between maintaining trust in the brand and its values, and shareholder return.
8 When BA’s actuary suggests that liquidation is the only way to resolve its pension deficit, is it not time to find a better measure than FRS 17? NC, Mayfair
I can’t offer a Hundred Group view. We are re-engaging a pensions committee to work on this. But there is clearly no single right answer to pension fund accounting. I can come up with an FRS 17 answer and that is relevant because it does tell you if you have got a big enough stock of assets against the stream of liabilities – it at least tells you that you might want to do something about it. I accept, though, that this number is very volatile. The challenge is how the information is used. If it becomes a question of simply eliminating volatility, then potentially you act in a way which is sub-optimal for long-term management of the fund in the interests of pensioners and shareholders. And, however you account for it, the underlying picture is that many pension funds’ liabilities have grown faster than assets. So just replacing FRS 17 would not change the amount of work that we are likely to be doing managing pension funds over the next few years.
9 Have the benefits of adopting IAS outweighed the costs? DT, Claygate
Any change of this type is a gamble. It’s effectively an investment project: the cost is hopefully a known; and then you try to find the benefit. The whole purpose of doing this is to improve comparability, transparency and ultimately investor confidence – and therefore achieve a lower cost of capital. That is not going to happen quickly – and, indeed, you may get a spike as the unfamiliarity takes comparability away and removes confidence, rather than building it.
Some industries – the large oil companies are a good example, or pharmaceuticals – already have a global investor base, and US GAAP is pretty much the financial language that they have used. So, for them, the idea of a global standard is familiar and comfortable. Others, with no holdings outside of the UK, are comfortable with the cost of capital that they’ve got as a result of the way their balance sheet is structured. So you have a group of companies at the top saying IFRS won’t change the cost of capital much; another lot at the bottom for whom it won’t change for a different set of reasons; but what about the group in the middle who may have some US shareholders, some European, some in the Far East? Will their cost of capital go down? That will take time to judge.
10 Does the cost exceed the benefit when it comes to hedge accounting under IFRS? JC, London EC3
The general view I hear on IAS39 is that the detail as to what qualifies as a hedge and what doesn’t is complex and expensive to monitor – and therefore a number of companies have taken the view that they won’t try to meet hedge accounting criteria. But it’s all a question of where things appear on the income statement. Hedging stabilises the operating profit; if you choose not to hedge, you will have a volatile operating result, and then you’ll have your derivative programme down below going the opposite way, but still moving up and down. The total number will be the same under both methods, so it would be, let’s say, an odd decision not to hedge. If I was an airline FD who’d been hedging fuel, but not in a way that meets the criteria, do I actually want to be unhedged? I’m not sure that’s such a strong proposition.