The latest version of the UK corporate governance code, commonly referred to us as UK SOx, leaves them personally liable, at least in part, for the accuracy of financial statements, and the effectiveness of internal controls and risk management frameworks.
I’m all for preventing fraud and accounting scandals, but no one should be surprised that we’ve seen unintended negative consequences as a result.
The first and most obvious is that fewer and fewer qualified people want to take the top finance role: the risk just doesn’t seem worth it. The same is happening in second tier positions looking after audit, risk and governance, for the same reason.
As a result, some businesses are missing out on the vital strategic support of a great CFO, whilst also struggling to adhere to the regulatory requirements themselves. We’ve already seen average CFO tenure drop to well below five years, and the talent drought is set to get worse.
Second, companies want/ need to be audited to be compliant but are struggling to get auditors to take them on. Indeed, some auditors are beginning to vet CFOs of potential clients before accepting assignments, which risks them effectively interfering with company management, jeopardising their necessary independence.
How are companies like yours adapting?
Companies can’t control the regulatory environment but they will adapt to it, even if it’s to the detriment of the UK’s high-growth ecosystem.
Many British companies – including Farfetch, Cazoo and Arm – have either domiciled abroad or listed on more growth-friendly American markets. Some are opting to float on the small-cap AIM index rather than the FTSE, sacrificing investor coverage for less onerous compliance.
However, many are simply choosing to remain private. This reduction in the number of companies listing is in itself a challenge for UK plc, but that’s a question for another time.
Pragmatic answers
1.Do what needs to be done
We’re seeing smaller public companies that may otherwise have hired a more commercial FD instead pick candidates who are more focused on audit, risk and governance. This provides greater security but can result in them becoming more risk-averse, stymying growth.
2. Build full-service teams.
If you are determined to pick a commercially minded candidate, you need to recognise that no CFO stands alone. Wise companies build teams of directors, heads, managers and externals that offer the full range of skills and aptitudes to support the business.
This includes having senior roles for both commercially minded and risk-mitigation minded people: it doesn’t have to be either/or. Indeed, a would-be plc CFO will feel much more comfortable knowing that they have sufficient support to do everything that the business requires.
3. Build bespoke employer value propositions that work
You need to make yourself more attractive to high-calibre finance candidates as they are fundamentally more risk averse now than they ever have been. Getting an offer right requires thinking about stronger reward packages and better working conditions.
It also involves understanding the motivations and requirements of potential star CFOs –– through meticulous and creative candidate research and assessment. That’s something we pride ourselves on, and it enables us to remove barriers that are depriving companies of great CFO talent.
In conclusion, changing the rules has also changed how companies need to respond when hiring CFOs and finance teams. In the absence of a relaxation of those rules to put the UK on a par with the US, it’s something we expect to become more urgent as time passes.
This piece was inspired by recent CFO and Group Finance Director searches. If you are interested in finding out how we can support you please email us.
