Company directors are increasingly insecure as confidence in accounting collapses
Financial Times - July 11th, 2002

Company directors are under siege.  A matter of months ago they were respected figures; now they are being talked and written about as suspect characters who are wreaking damage on their countries’ economies and all our savings in order to satisfy their personal greed. 

The emotions of chairmen, chief executives, finance directors and non-executive directors I have met over the past few weeks have ranged from indignation and vulnerability to downright fear. 

The non-executive directors, who in most cases perform their roles for small financial reward, are questioning whether the prestige of being on the board of a public company justifies the risk of having their reputations ruined. 

Chief executives are wondering how something they have worked for throughout their lives can have turned out to be a poisoned chalice. 

Finance directors feel the most vulnerable – and in many cases downright scared.  The fact is that most accounting standards and regulations are subject to interpretation.  If a finance director treats an item aggressively and the company continues to flourish, he is described by commentators as very bright and creative.  If, however, the company collapses, the same treatment is described as deception and, before you know it, someone is calling for him to be handcuffed. 

Senior business figures are now turning their minds to the question of how we ended up here and searching for ways in which the problems can be resolved.  Leading companies are collapsing one after the other.  Senior executives of these companies were being paid tens of millions of dollars, it seems not for building good old profitable business as we all understand them but for engaging in all sorts of financial trickery to boost the share price of their companies.  Losses were being reported as profits under ebitda (earnings before interest, tax, depreciation and amortisation).  Analysts were writing glowing reports on these companies to boost the corporate finance business of their employers and earn their multi-million-pound bonuses.  It was a joyous merry-go-round for those few who were on it. 

It was being paid for by the silent majority – people who were saving for their retirement: people whom the world of high finance refers to as “unsophisticated investors”.  No wonder they feel bitter. 

Talking to senior business figures over recent weeks I sense general agreement on a few things.  First, that most public company directors are honourable men and women who work hard for the success of their companies and are essential to the economic well-being of their countries.  It would be wrong to tar them all with the same brush owing to the misdemeanours of a minority.  As one chairman said to me: “I am not sure that I can recommend that anybody work hard all their life in order, on day, to join the board of a public company.  You can make far more money in investment banking without a fraction of the risk to your reputation.” It would be hugely damaging to the country if this sentiment prevailed. 

Secondly, they agree that boards should be structured in a certain manner.  Executive chairmen, as a breed should become extinct.  It is no coincidence that the worst problems have emerged in US companies that, generally, combine the two top jobs.  It is simply not credible to say that non-executives on such boards are completely independent when they are hired and fired by an executive director. 

What else can be done? I believe there should be three to five non-executives, each with a particular skill-set and focus.  They should be paid a reasonable amount to spend the time required to familiarise themselves with their areas of responsibility and held accountable if anything goes wrong within their areas.  Non-executive directors far too often try to wring their hands and say they only attend a board meeting every quarter. 

Executives need to be given incentives but the packages need to be far more transparent and the targets should not be based solely on share price.  Focusing on one indicator increases the temptation and makes for easier manipulation.  There should never be the possibility of poor performance being rewarded under these packages.  Basic salaries are quite enough for average performance. 

Once appropriate measures have been taken to restore public confidence, we must ensure that it is both financially rewarding and an honour to serve on the board of leading company.  The fact that public companies are obliged to provide greater disclosure should not make their directors an easy target for a populist backlash. 

This would drive all the top-calibre people into the rather less accountable worlds of investment banking and private equity and we should all be the poorer for it. 

The writer is chairman of Buchanan Harvey & Co., an executive search firm.

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