Five card trick: what to look for in today's FD

Since the launch of Financial Director in 1984, we have interviewed hundreds
of finance directors and met and spoken with perhaps thousands. But we, as do
our readers, remain intrigued by one question: what does the perfect finance
director look like?

To some extent the answer to that question has changed over time. The
vastness of global enterprises, the onward march of technology, the growing
complexity of business models and the multi-headed hydra of regulation have
certainly made the role more challenging. But it’s a moot point whether,
fundamentally, the role has really changed. This year marks Financial Director’s
25th anniversary, so it’s a good time to look back at our interviews and
features on the role of the FD to try to put together a picture of the
characteristics that make up the (mythical) perfect FD.

Our very first issue, in October 1984, carried an interview with Geoffrey
Mulcahy, then the chief executive of Kingfisher. “The financial director is in
an almost unique position, apart from the MD, of being involved in all aspects
of the business,” he told us, giving us the one quote that we have used most
often whenever asked what it is that FDs actually do. (It is a sad irony that we
should be marking our anniversary just as Kingfisher’s main business,
Woolworths, heads for oblivion.)

Mulcahy’s words were echoed by the Bank of England a year later when it said,
“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.” The reason why the Bank of England was
concerned about FDs was because, at that time only one major clearing bank,
Midland (long since subsumed into HSBC), had an FD on the board of directors –
and because a hitherto obscure operation called Johnson Matthey Bankers had
recently gone bust, without the help of an FD.

The Bank drew attention to perhaps the most important key characteristic of a
leading FD: “It is not an easy role, as the finance director must be prepared to
question and challenge the decisions of his colleagues.”

Strong and dependable
A dozen years later, in our December 1997 issue, we interviewed Sir Lewis
Robertson, a company doctor, then aged 75, who claimed to have hired and fired
more FDs than anyone else. Undoubtedly, his view of the ideal FD was coloured by
his career in rescuing businesses that had gone off the rails – hotels group
Stakis was his most famous success – and by his pre-war training as an
accountant in Dundee (“soul-destroying”, he said, though it gave him “marvellous
training in numbers”). Sir Lewis’s preference was for “one of these
granite-jawed Scottish chartered accountant types who rarely smile, but whose
numbers are always absolutely dependable.”

You may lack the looks – or the accent – that he wants, but Sir Lewis made
the point that that sort of characteristic gave the FD the necessary integrity
and degree of independence: “The FD needs to be prepared, if push comes to
shove, to stand up and say, ‘This is not actually right. We can’t fudge it. The
numbers will not work.’”

Our first issue gave us another insight into what the FD should look like. At
the time, British Telecom was on its way to privatisation and it was the job of
Doug Perryman to prepare the finance function for the harsh commercial realities
that awaited. What he found when he joined three years earlier was a finance
department that “was stuck like a limpet mine on the side of the battleship, but
having nothing at all to do with driving it,” he said. By the time of our
interview, Perryman had dramatically transformed his team and, indeed his role,
making himself what we described as “a fully participating strategist on the
board”.

Where the role of the FD, therefore, truly has changed is in the once-public
sector organisations that have been privatised. In the commercial world, the
fundamental job an FD is paid to do has, perhaps, changed less. In September
2001 we interviewed John Coombe, FD of GlaxoSmithKline and at the time chairman
of the influential but low-profile organisation, The Hundred Group of Finance
Directors. He told us, “Since I became an accountant, people have been asking
whether the accountant is going to have to be strategic and stop being a
beancounter. For 30 years people have been asking that question. And 30 years
ago it was a stupid question.”

Coombe’s point essentially matched that of Perryman and Mulcahy. But in
mentioning the ‘B’ word – beancounter – he touches a raw nerve that FDs have
struggled with for as long as we’ve known them: getting the balance right
between “producing the numbers and using the numbers”. A regular part of this
discussion has always been the debate about whether an FD even needs to be an
accountant. Clearly, most are – and the American tendency of having chief
financial officers with MBA degrees (perhaps with an accounting major) rather
than a professional accountancy qualification has never really caught on over
here.

Time and again we’ve been told about the value of the ethical backbone a
professional qualification provides, helping an FD challenge his boardroom
colleagues and to prevent the sort of company-destroying shenanigans we’ve seen
at Enron and others.

And yet many others over the years have dismissed the need for the FD to be
an accountant. “Finance is simply the language of business,” said non-accountant
Archie Norman, FD of Kingfisher in 1990. “Finance directors have certain
specific responsibilities, but the function should not be a specialist one. My
job is to manage high-quality, specialist staff.”

Points decisions
As true as that is, however, we think the argument is won on points by the
accountants. Today, the demands of financial management and financial reporting
are such that a non-accountant at the helm may – may – lack the necessary
education and training that gives him a more intuitive understanding of what’s
going on and what’s being reported.

Let’s go back to John Coombe: “We accountants are brought up to be prudent,
to only believe what we think to be correct and true,” he said. “We are unlikely
to put on coloured shirts and strange ties and take extreme actions that will
change the course of business life.”

Coombe’s comments remind us of a story told by Patrick Ponchon who, when we
met him for our April 1998 issue, was FD of Xerox Europe. Frenchman Ponchon is a
qualified expert comptable but an avowed admirer of British accountants: “They
have a technical knowledge which is above the average and their education is
quite broad. Honestly, I learned a lot of things here.”

Ponchon told us that, a few years earlier, while he was heading up the French
subsidiary, he needed to hire more people for the finance department. Because of
France’s employment laws he wanted to recruit internally rather than increase
company headcount. So he took in applicants from sales and marketing and turned
them into finance people. “After some years they had become the best finance
people I had ever seen. That was amazing because a number of these people tend
to behave like sales people – they are more relaxed, their sense of discipline
is not so good. [But] they are very creative. Their capacity to communicate –
even to impose difficult things – is higher than the average of traditional
finance people.”

Ponchon’s comment highlights the need to communicate well within the
organisation. His salespeople-turned-accountants had the ability to explain why
tough decisions sometimes had to be made and to make other managers feel better
about them. That can’t help but improve relations between finance and other line
managers.

Follow my leader
Perhaps the most important thing any FD has to master, however, is their
relationship with the chief executive. Many FDs we’ve met have been true
admirers of their CEOs, prepared, almost, to follow them to the ends of the
earth. Peter Anderson, FD of Canary Wharf, said in our January 2001 issue of
Paul Reichmann, “Paul is in both a financial and a real estate sense an
exceptional individual. I just wanted to have the opportunity to work with him.”

About seven years ago we asked FDs themselves what they think of their
relationship with their CEO and what they thought the CEO thought of them. Most
said their CEO didn’t regard the FD as “just the numbers guy”, but one-in-five
took a more neutral stance on that proposition. The things that make the CEO-FD
relationship work were said emphatically to be trust, respect, openness and
honesty.

Perhaps one thing that creates friction between the FD and the CEO is the
fact that the CEO may well think that the FD is after his job. At our last
count, one FTSE-350 CEO in six came up through the finance route. But the skill
set required to be a CEO can be quite different to those required of an FD. Much
depends on personal attitude as well as aptitude.

Sturge Holdings FD Peter Davis told us in October 1992 that he was “best in a
support function because I am neither an entrepreneur nor an operator.” Then
Charles Miller Smith, an FD-turned-operations director at Unilever, told us,
“You can be as entrepreneurial as FD of
Unilever
as you can running food sales.”

GSK’s Coombe added to his comments about coloured ties and extreme actions by
saying, “Not many accountants make it into the CEO job.” But it’s notable how
more and more FDs – Helen Weir at Lloyds TSB, Andrew Higginson at Tesco, Hanif
Lalani at BT and many others – have left their finance roots behind to take up
roles managing big, important divisions within their organisations. “I never had
an interest in pure accounting – it was just a means to an end,” Higginson told
us last November. “My aim was to be involved in running a business, and my view
as a student was, ‘Those accountants seem pretty involved, so why don’t I do
that?’ I never worked in the profession because I didn’t want to be an
accountant. I wanted a job in business, and finance was my route in.”

This sort of move – taking fuller responsibility for a smaller (but
significant) piece of the business seems like a growing trend that will better
equip FDs to graduate to group CEO – though as Microsoft CFO Chris Liddell said
in December 2007, his experience as a CFO-turned-CEO made him a better CFO when
he returned to finance.

We can offer some encouragement. Analysis we conducted five years ago showed
that companies where the CEO used to be an FD were more likely to create more
shareholder value than the rest of the market. On closer examination, however,
the rankings revealed that the top companies were in financial services,
property or accountancy software (Sage CEO Peter Walker was our top performer).
No marketing-led companies nor engineering businesses featured at the top of our
list. Advertising group
WPP
was at the bottom.

Shares responsibility
At the highest FTSE-100 level, FDs typically tell us that they spend around 20%
of their time on investor relations – more in results season. A keen awareness
of the demands of shareholders is almost a given – but how one approaches that
is another matter. “There hasn’t been a day when I or my boss haven’t thought
about the share price and how to maximise it,” said Compaq UK FD Howard Rosen.
Then there was Ian Davidson at Kaloamazoo who said in 1995, “I’m sorry, ladies
and gentlemen of the City, but we cannot constantly think of something today
that’s going to enhance our earnings by the end of next week. We have to invest
in our future.”

When we met Tony Conophy at
Computacenter
in September 2007, his company’s share price was languishing at about one-sixth
of what it had been. He seemed very relaxed: “I’m not sure the market fully
recognises the potential of the business and also the strength of the balance
sheet – which is a discussion we have from time to time,” he said with great
restraint. “The longer term investors [who] have been with us quite a long time
understand the message. Obviously, we’ve got to keep delivering and make sure we
don’t let them down. That’s the key.”

* The second part of this feature will be published to Financial
Director’s website in late February 2009