Shareholders are getting more information but do they feel they are being served?
This article first appeared in Aimzine, www.aimzine.co.uk
I’m not sure why but I look back on the 1970’s with a degree of nostalgia. It could be the three day week resulting from the miners’ strike, or the country declining to the brink of bankruptcy or the ever present threat of nuclear annihilation. I suspect though that, as a child at the time, part of the nostalgia is down to having shared experiences such as most of the country simultaneously watching programmes like “Are You Being Served?”. So it was with some momentary sadness that I read of the death last month of Trevor Bannister who played Mr Lucas in the series. Another 70’s great passes away even though most of us probably never realised he was still alive.
Roll forward to the late 1980’s and the miners had been defeated in the return leg of the strike fixture, the economy had been brutally beaten into shape and as the USSR disintegrated, nuclear annihilation suddenly became further into the future than just four minutes. It was around that time that I was approaching graduation and wondering what I could do with my life to avoid practising my degree subject of pharmacy. I started to consider accountancy amongst other things, and one of the ladies I worked with in Boots during my pre-registration training suggested I have a chat with her son, Chris Lucas, who had joined Price Waterhouse a few years earlier. I met with Chris and his enthusiasm for accountancy was a key factor in my subsequently joining the profession, albeit with the slightly cuddlier firm of KPMG.
I haven’t seen Chris Lucas since but to be fair to him he hasn’t really been free. He’s been busy firstly rising to partner at what is now PricewaterhouseCoopers, then to Head of PwC’s Banking Practice, being the lead partner on the Barclays Bank audit, and then more recently becoming Group Finance Director of Barclays.
Close monitoring
With an audit partner becoming the Finance Director of a client, there is always, quite rightly, a closer monitoring of the individual’s role and whether the gamekeeper turned poacher has any implications for corporate governance and financial reporting. In this case, to their credit, Barclay’s dealt with the potential issue by appointing Sir Michael Rake as a non-executive director not long after. Sir Michael was previously Chairman of KPMG International and is one of the biggest hitters in accountancy circles.
We don’t know what impact Sir Michael has had on the governance of Barclays. In fact, shareholders seldom know what is happening behind the scenes in a company. Annual Reports and trading updates often refer to business activities in a rather perfunctory way. Although, regulators have tried to change this by requiring companies to discuss business operations and risks in more detail there has seldom been any discussion about why the numbers reported are as they are.
That box-ticking landscape began to change recently because Sir Michael as head of the Audit Committee of Barclays wrote a few paragraphs in his Audit Committee report about certain judgements the Committee discussed with the auditors. Whilst not very long this section highlights five issues which could have been accounted for differently and, if so, would have had a material impact on the numbers that Barclays subsequently reported for 2010.
Although shareholders cannot work out what financial impact there would have been if the issues had been accounted for differently they do provide an invaluable insight into the prudence applied or otherwise in preparing the accounts. This is the type of information which hitherto never went beyond the audit committee, board and auditors.
Methods and judgements
No doubt Sir Michael’s decision to introduce this improved reporting may be connected to a document issued by the Financial Reporting Council on Effective Company Stewardship (1) which is well worth a read and, amongst other things, highlights the reliability of financial statements being increasingly dependent on matters such as “the methods and the judgements made in valuing assets and liabilities”. In Barclays case for example, whether the fall in value of its investment in the fund manager Blackrock (to which it sold Barclays Global Investors) should be charged against reserves or go through the profit and loss account and hit earnings per share. Not surprisingly, Barclays chose to take it through reserves and not through the P&L, but at least it was highlighted and there was a rationale given for that decision.
Unfortunately, the significance of this improved reporting and of Barclays leading the way has been drowned out by the continuing public and shareholder anger at banker’s bonuses; the 2010 bonus pool at Barclays was £2.6 billion compared to dividends to shareholders of just £645 million.
So, whilst Sir Michael deserves a knighthood if he didn’t already have one, important improvements such as this one will be overlooked if more pressing business issues aren’t addressed by management teams, and if shareholders continue to feel that they aren’t being served by the people their company employs. In the case of Barclays, if Mr Lucas is free he might want to consider whether the cost of bonuses at this level makes business sense or whether a rebalancing with the dividend might prove to create more shareholder value.
(1) http://www.frc.org.uk/images/uploaded/documents/Effective%20Company%20Stewardship%20Final2.pdf
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