Finance in the firing line

THESE HAVE been troubled times for finance directors. More FDs are finding themselves in the firing line – because sales have slumped, the share price has tanked, a merger has not delivered value, or an overseas expansion has failed.

The steep rise in profit warnings tells part of the story: 64 UK-quoted companies in the second quarter of 2011, representing an increase of 42% on the same period last year. FDs that have visited profit warning territory this year include David Wolffe, who joined HMV Group in January, and Paul Hollingworth, chief financial officer at Thomas Cook, where shares initially dived more than 25% after the third profit warning in 12 months in July.

Smaller businesses have not been immune either. Brulines Group, an AIM-quoted monitoring and measurement company, where Mark Foster is FD, reported lower than expected profits in March. Managed Support Services, an AIM-quoted environmental compliance and building services company, where Piers Wilson is group FD, blamed poor trading earlier this year as well as churn in its customer base for a profit warning.

So more FDs are finding that they need to learn how to survive – and thrive – in a world economy where volatility, rather than stability, looks like becoming the norm, certainly for the next few years.

In doing this, FDs will need to become more skilled at promoting rapid change in their companies, while also protecting their own backs against the inevitable knocks that companies will take as markets swing more violently.

Richard Pennycook, FD at Morrisons Supermarkets, has had more experience than most FTSE-100 FDs in managing change in difficult circumstances – notably after Morrisons’ Safeway takeover and, earlier in his career, at Laura Ashley, Welcome Break and HP Bulmer.

He notes that the traditional role of the FD is to “get an iron grip on the change process as it affects the numbers” when difficult change is on the agenda.

“You need to understand what’s coming and then track it as it comes,” he says. “In a change environment, you’re going into the unknown – almost by definition – and that applies to the finance function too. You’re trying to measure stuff that you may not have had to measure in the past. The danger of being caught out is quite high. So the FD has a traditional role in terms of control, transparency and communication.”

But Pennycook believes the FD needs to contribute more when a company is facing difficult change. “There is a broader plc hat, as we call it in our business,” he says. This involves tasks such as contributing strategic thinking, aiding process change and communicating with stakeholders.

“When driving change, you need clarity of thought, the ability to articulate opinion,” he adds. “You need to be able to sit back and see the big picture and also get into detail. The sorts of skills an FD would have are well suited to turnaround change.”

Paul Below, who recently stepped down as interim FD for Fulcrum Utility Services, a company that spun out of National Grid and floated on AIM, says that FDs facing periods of change need to be adaptable.

“In a change situation, you need to develop your plan and constantly change and reappraise it,” he says. “You always need to be looking at the implications of what you’re doing to get to the profit and cash targets that you’re aiming for.”

In Below’s case, he had to move the business into a position where it could stand on its own feet as a public company. “We were moving from being a standalone subsidiary to a quoted plc,” he explains.

Below says one of the keys to dealing with rapid change is the ability to prioritise.
“Some issues are life-threatening and others are not. You need to be able to prioritise quickly on the hoof,” he says.

“There’s usually a reason why things are done a certain way, so making a change is potentially fraught and quite dangerous because you don’t want to do something that might be wrong. You have to make some sweeping changes, but you do have to do that from a position where you’re sure it is the right thing to do.”

On the book

The dilemma faced by many FDs is that they cannot afford not to change, but they must also tackle dangers if they do. And their own careers are on the line if they get it wrong either way.

Nick Prangnell, director of consulting at Deloitte, notes that directors who are asked to step down have often experienced one of a number of calamities. These include a significant control failure, material misstatements, going concern issues, poor judgements, failing landmark projects or being involved in poor business decisions.

“Good practices in a finance function – for example, a robust controls framework, a fit-for-purpose ERP footprint, shared services and well-managed data – will go a long way to minimise the risk of these, and indeed it is a key stewardship role of the FD to do so,” he says. “Having these fundamentals can help by providing capacity in the function to react to choppy waters. Ultimately, investors will support FDs if they inspire trust and confidence in those around them.”

But there are times when the market smells failure, for whatever reason, and simply wants blood, and that means top managers’ heads on the block.

“In some cases, there may be little an FD can do if it is a case of removing those at the top by association,” adds Prangnell. But he warns FDs about thinking too much about protecting their own position: “This can lead to the development of an environment of blame and trust as well as limiting the FD’s ability to take the bold steps that often make the difference.”

Pennycook believes that it is vital for the FD to communicate both outside and inside the company during a period of intense change.

“In a turnaround, there may be a period when the numbers get worse before they get better. Communicating those expectations very carefully is vital,” he says.

He argues that some good may have come out of the turbulent times many FDs have experienced in the past three years. “We have a generation of finance managers – the FDs of tomorrow – who will never forget the basic disciplines they’ve had to relearn. That will be very healthy,” he says.

“It will be in 20 years’ time – when the lessons are being forgotten – that we’ll face the next crisis.”