ROLE OF THE FD - Banks need finance direction.

Bankers, so legend goes, have a traditional antipathy towards accountants. And part of the Johnson Matthey mess must be attributed to the effect that this mood has had on bank-management methods. There is, as a result, a delicious strand of irony running through the Bank of England’s current efforts to beef up financial controls in the nation’s banking industry. Those very institutions that have been so keen to see well-trained people at the helm of potential borrowers – armed with precisely worded business plans and the latest in management accounts – have seemingly neglected the lessons that they’re determined to see learned by their customers. As the Bank of England committee said in its report last June on the system of banking supervision: “Banks have been relatively slow to follow the example of commercial companies and appoint finance directors to their boards.” While the committee went on to say that this was understandable – “in the sense that all the executive directors are ‘financial'” – it went on to spell out, in its own brand of no uncertain terms, that it expected the situation to change. “We believe … that there is an important role to be played by a finance director who, apart from the managing director and the chairman, will be best placed to take an overall view of the business. It is not an easy role, as the finance director must be prepared to question and challenge the decisions of his colleagues, but it can be a most important one. JMB had neither a finance director nor an audit committee.” In terms of having professionally-qualified financial managers, the Old Lady herself has not exactly been a shining example. The same report notes that its supervision department has only two qualified accountants working within it and recommends “some increase” in that number. To date, only two major banks in Britain have appointed outsiders to perform the task of finance director. And only one of those made the appointment at board level. Michael Julien, group finance director at Midland Bank, has impressed the City with an open and scientific approach to financial management. He is a veteran of chartered accountants Arthur Andersen and was previously finance director of BICC, where he displayed exactly the questioning and challenging qualities now sought by the Bank of England for Britain’s lending institutions. Part of the central bank’s new-found keenness for finance directors is thought to emanate from Julien’s performance at Midland. While he was not approached by the supervision committee, it did spent a lot of time at Midland, discussing its troubled Crocker Bank subsidiary in California. “They spent a fair amount of time with us, discussing how we controlled the business,” he said. “I suppose that with hindsight they were trying to learn what we were doing. One of the things they had never understood was how we were organised. We explained our structure and showed them how we had built up controls and information systems.” Despite his professional background, Julien does not believe that chartered accountancy is the essential training for a bank finance director, although clearly that profession is going to be one of the recruiters’ main hunting grounds. “There is too much emphasis on the accountancy qualification,” he said. “The tradition in US banking is that there has always been a chief financial officer. But this person could easily be a banker.” The fundamental quality of a finance director as a sort of business interpreter to all of the different departments in an organisation makes bankers look less likely as candidates in the smaller houses. Ian Martin, a bank auditor with Arthur Andersen, observed that most senior bankers in this sector are lenders first and foremost, while banking as an industry has grown into something more. Products like foreign-exchange dealing are vying for attention with the more traditional business. And management structure has not always kept pace. The outsider’s advantage, as Julien sees it, is that he’s not “locked in”. A similar point of view is put by Julien’s opposite number at the Royal Bank of Scotland, David Coulter. “A banker, if he’s been with a bank all of his life, has never seen the outside world. There’s a huge gap there.” Coulter, who as chief financial controller at the Royal does not sit on the board, knows that the skills he has acquired over his career could equip him for a financial-management job in any commercial or industrial organisation. A previous employee of BL, Nestle and Time Incorporated, Coulter has developed that “second sense” for financial ratios that bankers do not always seem to possess. “You could get a financial person in a bank producing a balance sheet that could be off by £50m on both sides and he won’t realise it,” he said. “You’ve got to have that ability to sense that on a certain level of assets you’ve got to expect a certain level of interest.” Bankers, needless to say, don’t entirely agree. Charles Green, who is general manager for finance at National Westminster, has been with the bank, or one of the smaller institutions that created it in the mega-merger of 1970, since he was 16. His career has seen junior branch-work, export finance, long-range planning, corporate strategy and line management as manager of NatWest’s Lombard Street office. He was also managing director of Centrefile, NatWest’s data-processing subsidiary, and general manager for business development before his present job. Breadth of experience is the “great thing about big banks”, Green said. While acknowledging that there is a case for specifically trained financial managers doing the job, he added: “It depends on how you manage it. I am in the very genuine sense a general manager, with lots of chartered accountants supporting me.” Green sees no culture clash between financiers and financial managers. “The role of the general manager, finance, in our bank is to act as critic and analyst of what the other general managers do,” he said. And he added that a banker’s intuition in “thinking instinctively in terms of exposures that banks have to expect” gives him an advantage over the outsider. “An outsider would have to learn that,” he said. So what exactly do these bank finance directors do? In Julien’s case, one of his first tasks at Midland was the establishment of an internal audit function: “the custodian of the corporate conscience”, as he put it. “When we sat down to consider the internal audit function at Midland, we found that people didn’t know who was responsible for it,” he said. Auditors Ernst and Whinney were brought in to question people throughout the group on who they thought they were accountable to. When no clear consensus emerged, the financial management team set to work. “You could very simply divide the finance director’s role into two,” Julien added. “Namely, defining the policies and then establishing an internal audit function which checks whether those policies are being put into effect.” Throughout the Midland Group, he discovered about 450 people who were performing internal audit functions. But they were not driven from the centre. Their functions were revamped, without the need for a big recruitment drive, and a group-level team was established to drive it. “The role of any bank’s chief financial officer must be to see that that sort of function exists,” Julien said. In Midland’s case, internal-audit groups are led by the chief executive, the chief financial officer and the chief credit officer of each subsidiary. The group’s chief internal auditor meets them four times a year. Midland’s policy was laid out in an internal document printed in July last year. That document defines Julien’s role thus: “The group finance director is responsible for establishing accounting policies and for the standards of performance of procedures and systems affecting the Midland Bank Group statutory accounts, management information systems and planning procedures.” This responsibility is defined further as “establishing consistent and compatible policies for accounting and internal control, approving procedures which implement those policies and reviewing for adequacy the controls over accounting systems”. The head of group audit has a similarly worded brief for his own division, while internal control committees and audit committees are responsible for confirming the adequacy of internal audit in each segment of the group. These committees are also responsible for ensuring that management responds to findings from internal-audit reviews. A similarly rigorous framework was adopted by David Coulter at the Royal Bank of Scotland. He was appointed at roughly the same time as Julien, in mid-1983. The bank was going through a rough patch and his first job was to find out why. That meant quickly establishing a system of monthly reporting to the board on the back of a fast-response management-accounting system. Coulter now has a 30-strong team based in Edinburgh that performs this function. At the same time as establishing new management methods, he tried to do away with some of the less successful old ones: notably a fondness for committees. While he still works on some, others have been ditched. “We had a taxation committee when I joined,” he said. “My feeling was: we’ve either got a tax problem or we haven’t. If we have, let’s get an adviser in to sort it out and not sit around a committee table discussing it.” Banking is changing in so many ways that the moves to strengthen the industry’s control function must be welcomed. In his own opinion, the biggest challenge facing Charles Green right now is working out ways to manage and monitor the whole new range of exposures thrown up by changes in the London capital markets and the bank’s stronger presence within them. But it’s not just the City revolution that is straining the system. The burgeoning market for fixed-interest securities presents mind-boggling demands on risk management. Banks spread their cash through the money markets and fixed-interest markets, matching interest rate for interest rate and taking their profits on the spread. The US bank Goldman Sachs recently hired two university professors, Jeff Yawitz and William Marshall, to head up a 30-strong team of analysts whose sole job is to develop risk ratios for elements of the bank’s exposure to certain fixed-interest securities holdings. The technique, according to Marshall, is to treat the bank’s balance sheet like an investment portfolio. The department then looks at specific segments of it – holdings of corporate securities, treasury stock or whatever – and arrives at an exposure ratio. He admits this does not allow for an exposure ratio on the balance sheet as a whole, nor is it useful for assessing corporate loans made by the bank. But it does serve to illustrate the degree to which scientific analysis is usurping the banker’s traditional “feel” for risk. Michael Julien’s sidekick at Midland, general manager for finance Frank Fitzpatrick, summed it up. The old style of bank management failed to establish a systematised and formal control ethic in the industry. “A lot was left to trust, integrity and personal standards,” he said. Fitzpatrick, incidentally, is also an outsider, brought in by Julien from BL last September. While no one wants to see trust, integrity and personal standards make an exit from the industry, everyone now seems to be realising that on their own they are just not enough. This article originally appeared in the September 1985 issue of Financial Decisions, the magazine that became Financial Director in 1990. When this magazine launched in 1984 (as Financial Decisions), it was still uncommon for even the largest clearing banks to have a finance director on the board. The once again deferred retirement of Barclays FD Oliver Stocken presents us with an opportunity to reprint an article first published in 1985. Almost 14 years later, it still carries pertinent and interesting lessons about the role of the FD in industry and commerce. THE JOBS MIGHT BE THERE BUT WHERE ARE THE PEOPLE? The Bank of England’s call for more finance directors in the industry could not have come at a worse time as far as the recruitment market is concerned. Headhunters are already scouring the field for potential recruits. But they are finding a number of obstacles. First, the ever present City revolution is sucking financial-manager material into stockbroking firms and the business end of merchant banks, pushing salary levels up in the process. One recent appointment, a finance director at a small to medium foreign bank in London, carried a remuneration package of £40,000 to £45,000. That range will probably go up in September when the hunt starts in earnest. In bigger banks, of course, the salaries will be much greater. Second, the accounting firms, a key hunting ground for the recruiters, are going through a boom period. And most of them are introducing or have introduced their own corporate-finance departments. This is providing an incentive for accountants who might otherwise have left the profession to stay on in roles that are becoming increasingly entrepreneurial. Third, the Bank of England itself is seeking to increase the size of its supervision department and to draft in professionally-qualified individuals. It is refusing to give even rough estimates of the number of recruits it is seeking. But some industry insiders are putting the figure as high as 40. Bankers have already poured scorn on one idea to meet the shortfall – namely seconding people in from the industry itself. The obvious objection is that a bank such as Barclays does not want a supervisor from Nat West checking its books.