Boards are all talk on soft issues

Wherever you find a collision between theory and reality you find battered egos and broken businesses. This is what has happened over the issue of reputation risk. Everyone played lip service to the theoretical threat. No one did much about it. And now people are getting hurt.

Take the events which took place in the opening days of October. Ric Piper, former FD at WS Atkins, was poised to step from support services and the world of the public finance initiative, into the media. He was about to take up the position of FD at Trinity Mirror, publisher of, amongst others, the Daily Mirror newspaper. But a political row about the value of PFI swept over the Labour Party’s annual conference and then Atkins issued a profit warning. Its shares went into freefall.

On the following day, Piper was due to start his work at Trinity Mirror. But he never made it. That, for finance directors everywhere, was horrific news. Reputation risk had claimed a real and high-profile victim. The chairman of Trinity Mirror, Sir Victor Blank, made the connection clear.

“Had it not been for the statement on Tuesday, and the element of reputational risk to us,” he said, “the appointment would have continued as planned.” This has been a year in which reputation risk has been much talked about.

Accountancy firms in particular have always made a fuss about it. But, as became obvious when Andersen, once the largest firm in the world, vanished inside six months, they had never done anything concrete about it. Like so many worthy sounding management initiatives, the reality had never been allowed to match the theory.

What the events of those two days in October should have now made plain is that everyone is at risk, FDs probably more than most. Think recession and hard times. How many FDs will preside over poor or unexpectedly bad results in the next six months? What the Atkins/Trinity Mirror events suggest is that any FD who has presided over poor figures is currently unemployable. And he or she is not unemployable because of any sleight of hand or questionable accounting policies. He or she is unemployable simply because he or she will have been tainted by being in the FD’s seat at a time of decline. Reputation risk now means that relative failure becomes absolute.

The word is that the message has finally got through to accounting firms. For years, they have stressed the importance of their reputations. For years they have given the impression that they were doing something about this. Now we know otherwise. They may have made public statements about the importance of ethics or integrity. But when it came to internal actions involving the culture, the organisation, or training, they now appear to have done almost nothing tangible at all.

Reputation risk was one of those issues people talked about – but never acted on. There are parallels here with the situation for FDs. Many, knowing it would make a good impression, have talked up the “soft” issues of management.

Issues such as corporate social responsibility, environmental reporting, simplified reporting, and all those that come under the general heading of “people issues” have been much written about. But the reality is far from the words that have gushed out in position papers and ancillary reports.

The result is that everything sounds good and effective when exactly the opposite is true. The problem has been that, as in the matter of reputation risk, people within corporate organisations often feel that talking about an issue means it is dealt with. And boards feel that, by giving ownership of those issues to small dedicated groups within the company, the problem is solved.

The result is that these issues rarely enter mainstream company culture. The chief executive can say how important they are when questioned, and then simply refers the questioner to the small specialist group.

The reality, it is increasingly obvious, is that the main board of directors has often lost sight of what companies are now about. Finance directors, in particular, have felt that by marginalising these issues they are somehow contained. But they are missing the point. The whole emphasis on reputation risk exposes the dilemma of the finance director. As one senior executive with a large company put it to me recently: “Businesses now get killed off because of reputation risk – they don’t get killed off because the fixed assets were wrong.”