Sydney, 26-27 November 2002
Address to the AFR Conference on Corporate Governance
Tom Pockett, National President, Group of 100
Good morning - Ladies & Gentlemen
It is a privilege to a address you here today. I believe the timing of this conference is quite appropriate given the current state of the corporate governance debate in Australia.
Firstly, a small housekeeping matter. Today I am speaking to you not as CFO for Woolworths but in my role as President of the Group of 100.
The topic I have been asked to cover is “How the role of the CFO will or might be impacted by the recent scandal and regulations”. Following my presentation I would be happy to answer any questions you may have on the topic or on the G100 itself.
It is a topic I am delighted to address, but before I do and for the benefit of those who may not be fully aware of the Group of 100 – or G100 – I should explain our organisation’s role and something of its mission.
The G100 is the premier body representing the CFOs of the majority of the top 100 enterprises in Australia. It has as its primary mission to ensure that the voice of its members and the organisations they represent is heard on financial and regulatory issues. We have as important aims the ongoing “improvement of Australia’s regulatory framework, the strengthening of our international competitiveness and to ensure there is public debate on these core areas”.
The Group has been very active in recent months in areas such as the international harmonisation of accounting standards, slated for introduction in 2005, tax reform and of course the current debate on corporate governance.
Directing the G100 is a national executive which is elected each year. An important role it has is to identify issues which are of concern to CFOs and which need to be addressed. Another task is to ensure that our organisation is well represented in important forums and is effectively engaging with other relevant bodies whether they be regulators, standards setters or business organisations. A contemporary expression of this is our participation on the Corporate Governance Council, an initiative of the ASX. And, at the operational level, we have a small secretariat located in Melbourne
So, I hope that provides a brief insight into the G100.
Now let me turn to the subject I have been asked to address.
Firstly, let me put the subject into some context.
The reputation of Corporate Australia has taken something of a battering flowing from the recent round of corporate collapses. On the evidence emerging, failure to observe, or a disregard for, good corporate governance practice and related internal control processes have been a significant contributing factor in not fully informing the market on the real state of affairs of these companies.
This has been amplified by other factors including the influence of powerful executives, apparent conflicts of interest and, more disturbing, suggestions of collusive behaviour.
Some CFOs have been in the middle of this turmoil.
There has been extensive media comment in relation to all CFOs. This has ranged from statements comparing the CFO’s role in the appointment of auditors being akin to that of putting a thief in charge of security or a sweet-tooth in charge of the lolly shop through to being perpetrators of largesse with no thought for tomorrow let alone for their shareholders or other stakeholders.
This colourful but worrying style of comment may lead some in the community to think that the CFO is now seen with an aura of danger and risk about them – the “corporate gunslinger” if you like.
I would like to state here one very important fact, that very few CFOs are transgressing. Overwhelmingly CFOs do the right thing delivering high levels of performance and transparency to Corporate Australia.
A few bad seeds should not spoil a crop and we should be careful not to discriminate against the vast majority of CFOs who are performing their duties diligently.
But the G100 acknowledges more can be done and the Group supports the strengthening of Australia’s already strong system of corporate governance.
However it is important that we do not over react and over legislate with draconian legislation. History has shown us it is not possible to legislate to ensure plain old honesty and high ethical standards. This is true whether this is in the corporate area or the broader community. Excluding wrong doing, business failures are a normal outcome of business activity. All draconian legislation will do is reduce the competitiveness of Australia’s corporates at a time when our companies are not only being asked to operate globally but are indeed compelled to if they are to ensure their survival in the long term. The current Australian legal process already has the ability to impose significant legal penalties (both financial and personal) on companies and individuals including the CFO.
That is not to say the G100 is opposed to the further strengthening of Australia’s already strong system of corporate governance as outlined by the CLERP 9 proposals. It is more a question of a measured approach and one of balance and good sense. For more detail about our position on this I would refer you to our full response to CLERP 9 which can be found on the Group of 100 website.
The G100 is also a strong supporter and a participant in the Corporate Governance Council initiated by the ASX and recognised in CLERP 9.
Some years ago the chief concern of large organisations was to ensure the corporation complied with the legal reporting requirements and therefore accounting standards were a top priority. As was reviewing what you could call traditional internal controls. Management reporting grew as a natural consequence of transaction reporting becoming more automated and in this environment the role of the CFO has evolved.
In today’s business environment while financial performance and accounting and control activity is essential, the CFO has far wider and more significant responsibilities. These range across investor services, portfolio management, performance management, risk management, capital management and the more traditional functions of audit, tax and treasury.
Clearly the role is more complex and over-arching as we go forward.
So, what should the role of the CFO be as we move to further strengthen Australia’s business competitiveness and transparency? We believe it should change in these ways:
The CFO needs to have greater independence and Board access. He or she needs to have a direct reporting line to the board and to have access to the majority of important Board discussions. Whether they are appointed to the Board is, I believe, another matter solely for each Board to evaluate.
In the future the CFO must not find himself in a position where he says “I did not know”. Boards must be attuned to the fact that if a CFO is being isolated, the situation must be remedied quickly.
The CFO needs to be the strong independent voice to the board on the financial health of the organisation, the appropriateness of acquisitions, divestments, etc. If you like, the third umpire of the corporate world. Boards must expect and demand this from their CFOs. To do this Board’s must ensure CFOs have full and unfettered access across the entire organisation.
The CFO needs to be the driver of transparency and substance over form even though the legal fraternity are not comfortable with that phrase. It is a critical requirement to ensure the Board and the market is correctly informed. The CFO is in a unique position to ensure all stakeholders interests are appropriately balanced protected and preserved. This comment links back to my comments regarding CFO independence. Substance over form goes to the heart of many of the scandals that have recently been reported. Without this concept, reporting becomes compliance with accounting rules not reality.
The CFO needs to ensure that processes exist for robust transparent reporting throughout an organisation. The CFO needs to drive this principle through the culture of the organisation. No cover ups, no “I’ll report the loss next month”, no diversionary tactics e.g. “what do you know, you’re just the finance guy”, should be tolerated. Full and transparent reporting is the only acceptable process.
On external reporting, the G100 has been a strong supporter for some time on the use of Management Discussion and Analysis (known as MD&As) by Australia’s corporates.
It first put out its best practice guidelines in 1998. We are currently updating these guidelines and working with the ASX Corporate Governance Council to establish the MD&A as a mandatory reporting requirement in Australia. An MD&A was proposed in a previous corporate law reforms but at the last minute was deleted from the final legislation.
The absurdity is that discussion and analysis is required in Concise Financial Reports but is not required in a full set of Financial Statements within an Annual Report. The ASX has the G100’s MD&A as best practice guidance in the Listing Manual but few companies produce one.
We support the view that all listed companies should produce one.
Personally I will not be surprised if the requirements for MD&A are not transported across the Pacific to Australia either in this round of legislation changes or the next round as it already applies to Australian companies who have made a US SEC 20-F filing.
CFOs will also have their work cut out for them under the new continuous disclosure rules proposed. The G100 has been a supporter of a robust continuous disclosure regime, however we are sceptical of the proposed requirement to respond to market rumours. This will lead to market fishing expeditions and could well prove highly contentious and possibly misleading.
Given the trend in the US for CFOs along with the CEO to sign off the financial statements, the role of the CFO becomes even more responsible and fundamental. It is this requirement which strengthens and endorses my remarks a few moments ago in respect to the CFO being independent yet not isolated.
The US requirement for CEOs and CFOs to sign off the Financial Statements is a somewhat controversial requirement especially in regard to signing off internal controls. Having had several discussions on this matter with the G100 National Executive it was interesting to note from those discussions that nearly all were indifferent on whether or not they had to sign off the Financial Statements. Most commented that they saw this as their role anyway.
The CFO also needs to drive the risk management culture and practices of an organisation. World best practice in Risk Management for the organisation as a whole is an area trending towards the CFO’s span of management responsibility.
Management of risk is not just about accountability and mitigation of risk, but about performance and identification and optimising of opportunity. Risk leads to both hazard and opportunity and investors need information in relation to an organisation’s approach to risk.
In Australia, the reporting of an organisation’s risks is usually caught within the Corporate Governance reporting within an Annual Report. Some companies do this well while others pay little more than lip-service to it. Having said that banks and financial institutions do provide risk analysis within the Notes to the Accounts in compliance a requirement of the Accounting Standards.
The benefits of disclosure of a risk management policy is important as it shows to the investor community the risk profile of the company and that the company is managing its exposures in such a way as to maintain a competitive level of risk which ensures stability and attracts investors.
Best practice is to formulate a policy on how to identify risk and develop a process. The company has to develop its policy to include the alignment of the board, audit committee, management and internal audit.
The major point I wish to stress here is that risk management policy alone is not adequate but investors should be able to see the assessment of the effectiveness of these policies and their implementation.
And finally, in respect to the changing role of the CFO.
CFOs should be the champion of good corporate governance throughout an organisation. We believe that Australia’s CFOs should operate under a code of conduct.
As a result the G100, in response to the US position requiring such a code but in advance of Corporate USA developing one, has commenced the process of developing a code and is now well advanced.
We regard this as an initiative which will further enhance Australia’s reporting framework.
We anticipate publicly announcing and releasing the Code in mid-December so I won’t go into full detail here however the Code will cover, amongst other matters, the following:
That CFOs:
The full text of the Code, and its implications, will be outlined at our announcement and will in due course be available on our website.
That we are developing such a code is not a criticism that adherence to such principles is not already undertaken by CFOs: it is more a statement within and external to an organisation on the minimum standards expected of CFOs and their finance functions.
These ethics must be embedded into the culture of an organisation driven from the top down to be successful and for the organisation to have long-term profitable growth. Many of the corporate scandals we have seen have at the heart of them an inappropriate culture or cultures that accept misuse of shareholder funds or permit misrepresentation of the facts. These cultures are destructive and behaviours such as these should not be tolerated by an organisation. Such behaviours often feed on themselves and will eventually destroy the company.
The definition of good corporate governance continues to evolve as each year passes and has had an extraordinary review process following the recent corporate collapses both here and overseas. It will continue to be an evolutionary process.
Downstream, the G100 will continue to work closely with the ASX Corporate Governance Council in further establishing the CFO Code of Conduct. As part of the corporate governance framework for Australia.
In today’s competitive environment, and with greater retail shareholdings in play than at any time in the past, it is crucial the investor community has confidence in the integrity of information conveyed to it by corporates and that those corporates act with integrity.
I expect the financial press will be closely monitoring corporate performance and governance in coming months and years, including taking a critical view of appointments to boards and the remuneration of directors.
It is in this environment that the role of the CFO will, and is required to, change as I have outlined. The Group of 100 will continue to take a leadership position in these changes and will continue to actively participate in the debate going forward.
Finally, we all need to continue to work hard at ensuring Corporate Australia is a global success story with the right balance of government and self regulation.
Thank you for your time this morning and I look forward to taking questions from the floor if you have any. If you could identify your organisation it would be helpful.
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