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Pensions are prominent on the agenda, says the head of the U.K.'s informal club of top finance officers from the nation's largest companies.
Janet Kersnar, CFO Europe Magazine
June 22, 2006
There's something to be said for keeping a low profile. For the past 30 years, The Hundred Group — an informal club of CFOs hailing primarily from the 100 largest listed companies in the U.K. — has been quietly making its mark on national business issues, eschewing the glare of the public limelight in favor of low-key tête-à-têtes with politicians and other policy makers. While there are no signs of radical changes in this approach under the watch of its new leader, Philip Broadley, expect to see its influence spread to broader, EU-wide issues. Here, Broadley, whose day job is being the group finance director of insurer Prudential, speaks about The Hundred Group's current list of priorities, which includes raising its profile in Brussels and beyond.
Your two-year stint as head of The Hundred Group began last November. What's on your agenda?
You'll find two of the issues were on my predecessor's agenda two years ago — accounting and tax. The accounting has moved on a bit, but tax is always with us. What has come on to the agenda is pensions. What has come off is governance. Within that period, the U.K. governance frameworks have been settled, and now we're living with those.
As for pensions, managing defined benefits pension schemes is clearly a Europe-wide issue, but here in the U.K., we're also focusing on the fact that since a year ago, we've had a new national pensions regulator in place, which will expect to be a party to corporate negotiations in some cases. This is quite groundbreaking. Under this approach, an acquiring company may now not only need competition clearances from regulators, but also have to discuss with the pensions regulator what its plans will be to deal with the solvency of the pension scheme of the business it wants to acquire.
Is this a good development?
It's an understandable development. It recognizes the pension scheme as a creditor. That's a big difference from transactions in the past, when an acquiring company would have been thinking about its shareholders and its debt holders. And while those groups might have had a say in the transaction, the pension scheme did not necessarily.
But there's still a learning process. For example, we need to define under which circumstances the regulator expects to be involved, and the timing of that involvement. The Hundred Group has already started a dialogue with the regulator, and we're meeting again in July. They recognize that much of the risk for their agenda is concentrated in the larger schemes, in terms of members. Being from companies running those schemes, The Hundred Group is a natural constituency to meet with.
As you mentioned, tax continues to be on The Hundred Group agenda. In April, a survey conducted by PricewaterhouseCoopers showed that while your members paid a total of £9 billion (€13 billion) in corporate tax for 2004/05, the total business tax contribution was an estimated £18 billion. Did this finding surprise you?
Was I surprised by the absolute level of tax paid? Not particularly. But I was not aware that the total tax contribution paid by large U.K. companies was twice the corporation tax.
The aim now is to do the survey again for 2005/06, which will allow us to see some trends, and see whether the total tax contribution is going up. We will then feed the data into Oxford University's Centre for Business Taxation, which opened last November [and is receiving around £5m of funding from 60 companies in The Hundred Group]. The objective, and the reason that I persuaded colleagues at Prudential that we should help fund the center, is to understand whether the U.K. is a competitive tax regime. It's not just saying who pays the least tax; it's a wider question of public policy — that is, what are the tradeoffs for a tax regime that maximizes the rate of economic growth and the quality of public services to make the U.K. a more competitive place. Beyond that, however, we want to broaden the academic forum so that the research center can become more international in its outlook, both in terms of staff and EU involvement.
Speaking of broadening outlooks, in February The Hundred Group sent a letter to the SEC to weigh in on the current debate about the difficulty that non-U.S. companies face if they want to delist from American stock exchanges. What were your motivations for sending the letter?
About 40 of the companies represented in The Hundred Group have registered securities in the U.S., under the Securities Exchange Act of 1934. That means that these and many other non-U.S. companies like them are effectively subjecting themselves to the Exchange Act indefinitely. What we stated in the letter is that the U.S.'s current mechanism for registration — and deregistration — is outdated.
Non-U.S companies that want to access U.S. capital markets should [be] able to control the circumstances in which they can exit. That's currently not the case. For example, under the current rules, a non-U.S. company can only suspend, not terminate, its reporting obligations to the SEC, even if there is minimal interest among U.S. investors for its securities or if it hasn't made a public offering in the U.S. for several years.
Non-U.S. companies look to access the U.S. market for all sorts of reasons, but circumstances change. We saw that in Japan, in the 1980s. Many non-Japanese companies went to Japan with the view that they would need a listing there to access its capital markets and they found that it really didn't help, and that Japanese investors were buying equities outside of their home market.
I hope the SEC will recognize that the rules governing the entry and exit of the U.S. market leave much uncertainty among capital market participants. It could make the U.S. market less attractive, and one can observe that over the last couple of years there have been relatively few foreign registrants coming to the U.S. market.
In contrast, it is seemingly a lot easier to exit the London market. It doesn't have the U.S.'s issue about the level of share ownerships on the domestic market. Meanwhile, the number of non-U.K. companies using London as their principal stock exchange listing is considerable. In 2005, nearly 140 non-U.K. companies listed on the London Stock Exchange and AIM — a 96 percent increase from the previous year.
What is important for the SEC to bear in mind as it revises the Exchange Act is that the U.S. shouldn't become a one-way valve. I don't think that's in anyone's interest.
In the letter to the SEC, you took the opportunity to voice concerns about U.S. GAAP reconciliation requirements for foreign private issuers that report in IFRS. The letter stated that recognizing IFRS would, among other things, remove "the single largest deterrent" for EU companies considering a public offering in the U.S. How does this fit in with the larger convergence initiatives?
What's emerging from the conversations I'm having with investors and with other members of The Hundred Group is that there is increasing concern that convergence will be seen as a goal in itself. There is a majority view that we would rather see a simpler set of standards around which we converge, and there is a strong sense from institutional investors that the responsibility to prepare and audit financial statements with a true and fair view is an important concept that they don't wish to lose.
There is still a lot to do in terms of simplification. The IFRS book is currently 2,305 pages. Very few preparers, users, and even — as I've heard — members of the IASB would have read all that. When I was training as a chartered accountant some 20 years ago, the U.K. literature was a couple of hundred pages, and you could reasonably expect someone doing the final exams to be a certified chartered accountant to have read it all.
There's a strong case to say, take the IFRS book and simplify it, and turn all of the standards into the principles-based standards that are at the heart of what the IASB's work is about. If that means convergence takes longer, fine. We can carry on doing the reconciliation for a while longer.
For most of us, the interest in the current accounting debate is focused on IFRS adoption and whether it will lower our cost of capital by widening the participation of European investors in our companies. What I generally hear about IFRS adoption is that a lot of the core operating results have not changed greatly. But there is concern about the general lengthening of annual reports, and that we are in danger of providing more information than most users want.
The main users of accounts whom I have in mind are the portfolio managers. A portfolio manager is making decisions about which companies to buy and sell, and let's say he might have 40 stocks in his portfolio, but needs to maintain an understanding of a universe of 100. If we collectively start giving him 20,000 pages to read, compared with 10,000, is he going to thank us? That is the accounting challenge.
As for another challenge, it's been said in recent press reports that you believe the government's intention to introduce narrative reporting requirements in company results would leave CFOs and other executives vulnerable to claims of making misleading statements if legal safeguards aren't in place.
That's because the idea of a legal "safe harbor" fell by the wayside amid plans to introduce mandatory narrative reporting for all listed companies in the U.K., which would have come under the operating and financial review, or OFR. That OFR would have required information about future expectations and nonfinancial information was not an area we worried about. Though Chancellor Gordon Brown scrapped plans for a mandatory OFR late last year, most large companies from our point of view were well advanced in their planning for it and I don't think many of us would have put it on the list of top concerns. We actually welcome the idea of narrative reporting and forward-looking statements.
But to have genuine discussions with stakeholders, we believe that it's essential for management to make forward-looking statements in good faith without feeling obliged to set out a range of caveats if they make a statement like, "We expect sales to grow by 10 percent in the course of the next year." It also means that management doesn't have to return to a statement made 12 months previously to explain, say, why growth was 8 percent and not 10 percent, and why there was no negligence. Under safe harbor, we can say we made a statement in good faith and that's that.
I'm pleased to say government consultations about narrative reporting that includes safe harbor protection are now back on the table and that draft clauses started going through Parliament last month.
Does this work have an EU-wide dimension?
As many people say, nearly all of the requirements of the OFR are in the EU's Modernisation Directive. If you wanted to shape narrative disclosure, you needed to have been talking two years ago in Europe about that directive, rather than waiting until it was passed and then seeing how it gets applied in the U.K.
My question is, how does an organization like ours get heard in Brussels? We have no staff, or separate offices, and it comes down to individual finance director involvement to effect changes. But to be successful, do we need to have a Brussels office and if so, who do we put into it? Immediately it would start to change the character of the organization. It's something I'm wrestling with. But I have put on the agenda that I would like to raise our profile in Europe and discuss how we might respond to issues that are in the early stages of the European Commission's thought process.