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Schroders CFO on the Big Four conundrum

Richard Keers, the finance head of asset management giant Schroders, defends his successful move from Big Four accountancy firm PwC.

When Richard Keers left accountancy giant PwC to become CFO of Schroder Investment Management in 2013, it caused a stir.

Previously a senior audit partner at the Big Four firm responsible for the Schroders audit account, he took a mandatory two year break allowing him to join the FTSE 100-listed asset manager.

At the time there were already concerns about the seemingly cosy relationship between companies and their auditors, which often earned fat consulting fees from the same companies, following a series of accounting scandals.

It led to fears that the Big Four of Deloitte, EY, KPMG and PwC which audit 99% of the FTSE 100 and 97% of the FTSE 250 elite group of companies, could not effectively challenge corporates when undertaking their audits.

EU rules now require companies to put the audit out to tender every 10 years and to change the auditor at least every 20 years. In the UK accountancy regulator the Financial Reporting Council (FRC) demands audit staff rotate accounts every seven years and stop auditing a company two years before going to work for it.

When Keers made the leap from being one of PwC’s most senior audit directors to Schroders five years ago the issue of company/auditor relationships was already warming up.

Last week’s damning parliamentary report on the collapse of UK government contractor Carillion, which called for splitting up of the Big Four, has made the issue white hot.

Keers defends his switch from PwC against those that say the move contradicts the idea that Schroders, one of the UK’s largest investors, should push for better corporate governance. “After I joined and met shareholders, the vast majority were very happy- only two shareholders in the UK said they were not sure about it,” he says.

“I said, what’s the issue? I’ve been off for two years, I understand the business, do you want a CFO that understands the culture, the business, the challenges ahead, or do you want someone walking in, taking two years to get up to speed and understand the business.

“I didn’t see it as an issue for me. If a CFO went to become a Big Four audit partner, and audited his previous business I think that’s a different issue. I still can’t see the downside,” he adds.

Making the leap

Keers wanted to move across to a senior corporate role before he figured it was too late. “I realised that if I didn’t move by the time I was 50 to an exec role I probably never would,” he reveals. He says that having rotated on the Schroders audit he was then approached by the firm’s CEO Michael Dobson (who become chairman in April 2016).

At PwC, Keers was one of the most senior audit partners- responsible for the audit of some of the UK’s biggest financials- including insurers AXA UK, Legal & General, Jardine Lloyd Thompson, and retail bank Lloyds TSB when it acquired insurer Scottish Widows, as well as Schroders. He missed auditing Lloyds during its disastrous 2008 acquisition of HBOS due to the mandatory seven year audit rotation.

Keers says PwC only officially ceased acting as the asset manager’s auditor at the AGM last month following EY’s appointment last year after a tender to replace PwC in 2013 collapsed when newly mandated KPMG was found to have a consultancy role with the asset manager. “It was discovered they were doing some risk consulting work in Luxembourg,” he says.

The FRC, which many argue is captive to the Big Four, said KPMG couldn’t be appointed but allowed PwC to continue as auditor for another three years. That was because the bids from Deloitte and EY weren’t up to scratch at the time, reveals Keers. “The FRC was happy with that, even though I was a former partner,” he says. “We changed the PwC team so that the leadership weren’t people who used to work for me.”

Part of the problem for why the Big Four dominate in audit is a deeply flawed system, says Keers. “There’s a big gap between the Big Four and the rest in terms of competence, and that’s unhelpful,” he says. “Michel Barnier [the EU chief Brexit negotiator who was the Internal Market and Services Commissioner at the time] tried to solve that problem but made it even worse, as every FTSE 250 company now has to have its audit retendered and a Big Four team is always going to look better than a division two firm. So the Big Four have won even more audits and got bigger, they’re passing it around each other now,” he says.

Keers says a challenge is the fact that “the FRC doesn’t write the auditing standards because they’re not UK auditing standards, they’re international. It’s a global market, where the FTSE 100 is more international than domestic. For example we’ve got 31 offices, it will be more like 40 in five years’ time.”

Value builder

Since his arrival, Keers has played a key role in driving growth at the firm, which the Schröder family still owns 45% of, alongside Dobson and then new CEO Peter Harrison who joined Schroders as Head of Equities in 2013 before taking the top job in 2016. In the last five years Schroders has seen a dramatic increase in profits, a large part of it coming from some unlikely locations such as Latin America.

When he arrived, Schroders was still a long way from fully realising its potential, says Keers, who was insistent that better management information was required to improve strategy. “We didn’t have management information of the right level. There was too much intuition, rather than granular fact. I’m a great believer that if you measure something it gets done,” he says.

“We’ve issued record results for the last five years, and growth last year was at the highest rate it’s been in that term,” says Keers. For 2017, Schroders delivered pre-tax profit up 23 per cent to £760.2 million while assets under management increased 13 per cent to £447 billion.

“The strategy of the business changed quite dramatically in that five year term, and what we’re doing to prepare ourselves for future growth is substantial,” says Keers. Schroders has invested for long-term future growth by allocating more resources to diversify the product offering, expand geographical footprint and leverage opportunities created by new technology.

The push to invest for the future flew in the face of short-termist advice from some City commentators at the time, says Keers. “The analysts were then saying just stop investing to deliver more profit growth,” he reveals. “But if you don’t reinvest in the business, you don’t have a great business at the end of it,” he asserts.

The long-termist approach is supported by board member Bruno Schroder, a direct descendant of Johann Heinrich Schröder who launched the business in 1804. “There’s plenty of benefit to being a public company with a substantial private shareholder, that’s closer to some of the continental European models. It’s an approach clients love because they know we’re going to be around in 20 years’ time,” adds Keers.

A new approach

Underpinning the long-termist view is a determination to rethink asset management, in order to drive value growth.

That means a more diverse approach to the markets the group is investing in. For 2017 a third of Schroders’ net new business came from Columbia, Peru, Malaysia, Thailand and China. We’ve only got offices in one of those countries, China, and we only opened that office at the end of 2017,” informs Keers.

“The world is getting wealthier, but product demands are changing and it’s making sure you’ve got the right product ahead that services the future needs of these countries,” he says.

That means offering a broad product mix away from a concentration in equities that Schroders was known for 20 years ago to fixed income and multi-asset that was added a decade ago. “We’re now in the next stage- providing private assets and alternatives- effectively the fourth leg of growth,” says Keers.

The aim is to stay ahead of competitors by developing a platform that can handle the firm’s increasingly complex product mix, “without adding on people.” A symbolic aspect of the quiet revolution Keers and Harrison are driving at Schroders is the move to a new building where no-one has a dedicated desk or PC.

The move, which Keers says is already six months over deadline, is intended to “make the business more dynamic,” by creating an environment “that facilitates chance encounters.” By having an open, shared working space the intention is to create a collaborationist culture where better ideas flourish.

As part of the grand vision there’s also a doctor’s surgery, a dentist and well-appointed gym. “I don’t want people to take a half day off to go to the dentists for half an hour, it means people actually do use the dentist,” he says.

Keers and Harrison will be part of that new set-up, sharing a single desk where they can exchange ideas quickly, and are no longer isolated in executive offices. “We can’t ask everybody else to work differently if we’re not prepared to do it, so actually we see a lot of value in sharing a large desk, so that we have more opportunity to catch five minutes with each other,” informs Keers.

Diversity of thought is also considered key to driving value growth. Keers says better ideas, creativity and problem-solving which comes from diverse thought is good for shareholders. He says the gender gap was closed by 4 per centage points when 2017 numbers were revealed-  after it was the first major financial first financial in the FTSE 100 to deliver numbers for 2016.

“We’ve got a problem but we’re trying to solve it,” says Keers. “It’s slower progress to fix senior representation, which skews the whole thing,” he adds. “But we are improving, we increased our participation at our board level, at our senior management level, but it takes time,” he says.

Regarding diversity, especially at board room level, what does he think about Dobson’s move from CEO to chairman in 2016, flying in the face of all corporate governance guidelines- behaviour that would rankle Schroders fund managers if it happened at investee companies?

“We’ve got someone who understands the business, and who our clients respect. We knew that it would be a bit noisy but was the right thing for our business,” assures Keers. “We’ve bolstered the independence around Mike with people on the board like Ian King, the former BAE Systems CEO and Sir Damian Buffini who ran Permira,” he adds.


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