This is what you get if you search for a free picture of a company director…
Sadly the reality will probably be different gender, have less hair, and no limo.
Consider this question in a way which suits you. It could be that you are working in a company and have ambition to work your way up. Or you may already be on the board. And if you are in an organisation which is not a company, then stick with this – these principles can still apply to you.
In news this week, directors of companies may become personally liable for inaccuracies in financial statements, even if they have been audited. You maybe expect that should be the case anyway, but recent UK history suggests otherwise.
Look at the string of corporate collapses where ‘clean’ audit certificates proved to be no guarantee of accuracy: Goals Soccer Centres, BHS, Patisserie Valerie, Conviviality PLC, and the big one – Carillion. There are plenty of other corporate failures too – just not always a consequence of questionable accounting.
Quite rightly, in my view, the government has been looking into these failures. It is possible the Directors of Carillion will face legal proceedings. Another outcome is an overhaul of the regulation of auditors. The Financial Reporting Council will transform into/be succeeded by ARGA – The Audit Reporting and Governance Authority. This is going very slowly.
But making Directors personally liable for audit problems should help focus minds. Already the cost of insuring against such liability has increased. The costs of Directors & Officers Liability Insurance – known as D&O – is up around 50% according to reports in the UK Financial Times.
This will suddenly be front of mind if you are a Director of a large company, especially if it public and with shares traded on a Stock Exchange.
Two other situations are instructive: Mike Lynch, who sold UK software from Autonomy to HP and now faces extradition to the US over alleged fraudulent accounting. If he is not extradited, he may face trial in the UK. On a different note, the Chair of auditor KPMG Bill Michael has stepped aside following his remarks of ‘stop moaning’ to his staff. Maybe its easier to step down if your remuneration last year was £1.7 million?
At the other end of the company scale though, there is a different set of problems. Thousands of UK small company directors have been unable to access financial assistance from the UK government, unlike their self-employed ‘sole trader’, (that is operating outside a limited company) counterparts. Declaration of interest – this includes me. And yes, I have lobbied my MP on the issue.
For smaller businesses, this may mean fewer businesses owners incorporating, possibly inhibiting business growth.
Back to larger businesses – it may still be worthwhile being a Director, as you should be paid well. FTSE 100 CEOs took home a median pay package worth £3.61m, which is 119 times greater than the median earnings of a UK full-time worker (£30,353). Not all Directors are CEOs but there is still large gap between the ‘shop floor’ and the board room. (Figures from the CIPD).
With power comes responsibility, and that responsibility may be increasing.
BUT: that will only happen if the relevant regulations are put in place and enforced. How well does the UK do this?
What if financial services regulation was a proxy for the rest of the UK? Remember that no bank directors were prosecuted following the financial crash of 2007-9.
Also in the news are reports that Andrew Bailey, former boss of the Financial Conduct Authority, wanted his name removed from a report into regulatory failings following the collapse of London & County Finance. (Leaving investors short of some £300million).
Andrew Bailey is now Governor of the Bank of England. I have only seen him once, Chairing the FCA AGM a few years back. He came across and highly professional, competent, and in charge of a wealth of detail. But seemingly seeking anonymity for a regulatory failure is not a great look.
Company directors will need to look out for, and take on, more responsibility, more regulation, more accountability. Oh, and that’s is on top of furlough, making redundancies, cybercrime, WFH, Brexit paperwork, and the rest of the day job. Maybe ask for a rise? (😉 )
Do you still want to be a company director?
If feeling keen, here are some links for background. You should be able to look at these for free, but the FT will be keen for you to subscribe.
https://www.telegraph.co.uk/business/2021/02/04/audit-shake-up-could-make-directors-liable-errors-firms-accounts/
https://www.ft.com/content/d4dd13a9-903e-4ff7-9fc3-d30ffdf764be New Personal liability for Directors
https://www.ft.com/content/7fd09758-ac7b-469a-9096-486a707f2915 increased insurance costs.
https://www.frc.org.uk/news/may/update-on-frc-s-transformation-programme
https://www.bbc.co.uk/news/business-55659196
https://uk.finance.yahoo.com/news/andrew-bailey-lcf-responsibility-angry-dame-elizabeth-gloster-report-row-naming-121424239.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAI683QRMlRjtqxUQwdqJn9Nq413VQFQtBF9rlbgzlEVweKUWH6x-kBgvPFQDnWE98DIbluZX8ChA1J_wTvusR2YTPjT5aKJSJhSRQ7j4ZDrwr-tmmfL87xyoQEf-U8YTqaEh2nnqKL0bZ0t-ILHt0VVqfenIl4PD-z3FweKzsRq4
Buzzwords of the Week – Earnings Per Share
Definition – Calculated as a company’s net profit divided by the number of outstanding shares. This serves as an indicator of a company’s profitability. EPS can be adjusted for extraordinary items and potential share dilution. Increasing EPS is seen as a sign of growing profitability.
Alternate View – Careful with this: it is easily manipulated. Used a common indicator for Executive remuneration, it is (allegedly) tweaked to achieve more boardroom, rather than just be seen as a financial outcome. You can be more profitable – or reduce the number of shares – and the EPS will increase. Which route will you choose if your bonus depends on it?