Saturday, March 19, 2005
Being above it all is no longer a viable defence.
Jax
The corporate world felt a seismic shift when a New York jury found Bernie Ebbers guilty.
Ignorance may be bliss, but legal precedent now suggests that a chief executive will never be able to enjoy this state of serenity. Whenever he feels the warm glow of a knowledge vacuum beginning to suffuse him, he should be instantly chilled by the realisation that no right-minded observer will accord him this luxury. It is impossible to be blissful because ignorant outsiders automatically assume your complete grasp of all the facts.
The legal precedent, if it be such, was created this week with the conviction in the US of the collapsed WorldCom's chief executive, Bernie Ebbers. Fraud to the tune of $11bn (£5.8bn) bankrupted the telecoms high flyer in 2001. Ebbers had relied on a defence characterised as "aw shucks" - that he was above the detail of his business, and that all of the corruption took place beneath his station and his knowledge. Only if his likely appeal succeeds, and he avoids a possible 85-year jail term, will his ignorance (real or imagined) prove to have been blissful.
To those outside the business world it may seem extraordinary that Ebbers could have hoped to pull off such an eye-popping legal coup de thétre. However, it is not quite as extraordinary to those who have experienced the particular interplay between finance directors and the chief executives to whom they report. The prosecutors in the WorldCom case were helped by wringing a plea bargain out of the company's former chief financial officer. It is impossible to conceive of a witness in a more pivotal position to be swung against the accused.
The role of finance director or chief financial officer brings with it a range of responsibilities that are often hard to reconcile. On the one hand, he has a duty to provide an accurate representation of the business's financial performance and health. On the other, he has a key part in the company's future growth and development, as well as its financing, and is likely to be incentivised accordingly. In reality, few major strategic and tactical decisions are likely to be taken without not only the CFO's input as a bean counter, but also as a businessman.
Modern financial regimes - involving regulation, accounting standards, taxation and the money markets - are so complex that a detailed understanding of them is beyond any but the most expert. The average chief executive is unlikely to have sufficient expertise to find his way through these mazes. His finance director may himself be wanting. Nevertheless it is his responsibility to corral the necessary experts (within the firm and from outside advisers) to make the best for the business from the opportunities and pitfalls that abound.
It is no wonder that, in practice, chief executives with the (supposed) strategic leadership skills that have (supposedly) got them where they are rely heavily on their CFOs to have a complete grasp of the numbers and all necessary accoutrements. The chief executive will concentrate on finding a finance director who is up to this task, and crucially with whom he can get on, and then leave him to it.
Leaving him to it, though, involves an intimate, continuous working relationship in which each trusts the other to fulfil his half of the corporate responsibilities. Such is the reality of corporate life. The best businesses are topped by a duo with complementary skills and personalities. It is no coincidence that the two career paths tend to be separate, few CFOs make it into the top seat.
Ebbers' guilty verdicts have been generally interpreted as an indication that the jurors concluded that he was not ignorant of the fraud perpetrated on WorldCom's shareholders. One might ask, however, whether it would or should have made any difference had Ebbers indeed been blissfully ignorant. After all, one of the most fundamental "crimes" that any chief executive can commit is to misjudge the character of his finance director.
In the UK, where there is almost always a splitting of the posts of chairman and chief executive, the chairman has a crucial role to play in setting the objectives of both the chief executive and his CFO. And in assessing their performance. One might wonder, then, whether the British buck should stop at the chairman, and not the chief executive beneath him. This thought might send a chill down the spine of many a part-time chairman who fears the tougher regulatory environment, but currently sleeps easy with the thought that his chief executive will catch the deadly bullet while he might merely find his reputation winged.
The common sense evident in a New York jury room this week could, in time, perform a valuable service to the cause of corporate governance around the world. At the same time, though, it will raise the risk bar even higher for those contemplating the highest corporate office and the necessary faith in fellow executives that goes with it.
