Alan Ferguson: The changing role of the audit committee chair
Alan Ferguson talks to Robert Outram about his journey from executive to non-executive director and the challenges of leading audit committees
For much of his career, Alan Ferguson CA has been an executive director with multi-billion pound turnover listed companies. Now he sits on the other side of the corporate governance fence, as a non-executive director with four companies: The Weir Group, Johnson Matthey, Croda and Marshall Motor Holdings.
Ferguson is also audit committee chairman with all four, and senior independent director at Johnson Matthey. He says the remit of the audit committee chair has changed substantially over the years since he was first appointed as a finance director: “The role today has a greater exposure, a higher profile. It’s more challenging than it was 15 years ago, and that’s appropriate.”
You don’t want the pendulum to swing too far.
He describes the relationship between the chief financial officer (CFO), audit committee chair and audit partner as three points on a triangle and adds: “Best practice now is for this to be an equilateral triangle. So the relationship the CFO has with the audit partner needs to be equal to the relationship the audit committee chair has with the audit partner.”
He stresses that “communication and trust are key”, and this includes ensuring that as audit chair he has gone through the agenda in depth with both the CFO and auditor, well ahead of the audit committee’s meeting.
He warns, however, that it would be a mistake to allow the line between executives and non-executives to blur. As he puts it: “You don’t want the pendulum to swing too far.”
As audit committee chair at four different businesses, Ferguson says there are elements of commonality, but stresses: “These companies all have their own distinct cultures, markets, ways of working.”
The Weir Group is a leading multinational engineering business, supplying engineering products and services to the minerals, oil and gas, and industrial sectors. It reported turnover of £2.438bn last year.
Johnson Matthey and Croda are both specialist chemicals producers. Johnson Matthey is a leader in sustainable technologies, operating in more than 30 countries with around 13,000 staff, and turning over £3.1bn, excluding precious metals (with precious metals, revenue was more than £10bn); Croda operates in 34 countries and reported turnover of £1.046bn for 2014.
It’s a challenge moving from executive to non-executive, and I’d like to think I’m a better non-executive today than I was four years ago. You learn and you develop.
Marshall Motor Holdings has more than 70 franchised motor dealerships in the UK, turning over more than £1bn. For Ferguson, it represents a link to his former role as group finance director with motor retail and distribution group Inchcape.
Ferguson’s move from an executive role to a “portfolio” career came at the end of 2010, when he stepped down from his post as CFO at platinum mining group Lonmin.
He says: “It’s a challenge moving from executive to non-executive, and I’d like to think I’m a better non-executive today than I was four years ago. You learn and you develop.”
Ferguson adds that experience as a CFO helps to define what makes a good non-executive – because you have seen the system operating from the other side of the boardroom table – but it is important to remember that there is a line between the two roles. He adds: “As a former CFO you know where the line is, you just have to manage it.”
Ferguson advises that when embarking on a non-executive career, while it makes sense to build your portfolio gradually, it would be a mistake to focus too much on one company.
As he puts it: “As an executive, you’ve been running at 100mph and when that stops, if you only have one directorship, the danger is you start to cross the line and begin to act like an executive director. You should find something else to keep you busy!”
One of the areas in which the role of the audit committee has grown is in appointing the company’s auditors. This is now very much a responsibility of the committee, albeit with significant input from the CFO and the company’s other executive directors.
Ferguson is embarking on that process just now with the Weir Group. He says: “I totally accept that 40-year relationships with your auditor can’t be justified, but let’s never forget that this should be all about audit quality.
“Audit quality is hard to define, but I’m hoping that the firms will start to differentiate themselves more… there is a lot of churn and change right now. It is incumbent upon audit committees to ensure that, when we complete a tender, we end with at least as high a level of quality in audit, and hopefully better.”
Competition comes down to what the respective firms tendering can offer, he says, not on price.
Alan Ferguson trained for the ICAS qualification with Thomson McLintock in London, which meant heading up to Scotland to study and for exams. The firm offered both Scottish and English options, but for Ferguson the appeal of ICAS was twofold. It was a nod to his heritage (his father was a Scot) and he liked the idea of completing his course in just two years.
He moved into industry not long after qualifying, beginning a 22-year career with Inchcape. At the time it was an international trading business and his first role, as a project management accountant, involved plenty of travel. Ferguson says: “It was a great education, not only in business but in life.”
Returning to London he worked in Inchcape’s insurance broking business, Bain Clarkson, and the testing services arm, now trading independently as Intertek. In 1995 he became FD at Inchcape Motors International, with a turnover of £1.9bn, operating in 25 countries, and in January 1999 he was appointed as group FD for Inchcape plc. It was a time of great transition for the group, with the disposal of a range of non-core interests to focus on a clear strategy as a motors business. It was a tough challenge operationally and, initially, a hard sell for investors, but it worked. The group’s market capitalisation rose tenfold and the plc returned more than £600m in capital to its shareholders.
It was a huge challenge for the people at BOC to go about their daily business with that level of uncertainty, particularly the people at head office.
Feeling that “22 years is long enough to work for one company”, Ferguson was headhunted by UK-based industrial gas business BOC Group in 2005. It was to prove a turbulent time for BOC, however, with a takeover bid from Germany’s Linde Group.
Ferguson recalls: “It wasn’t what I expected, but it was a great education... initially we resisted, but the price got to a level were we could resist no more.”
Even after the board approved the takeover bid, antitrust processes prolonged the completion of the deal.
Ferguson says: “It was a huge challenge for the people at BOC to go about their daily business with that level of uncertainty, particularly the people at head office.”
After helping the owners to dispose of some of the BOC businesses, Ferguson took a few months off before his next role as CFO with Lonmin, the multinational mining company. Lonmin is a platinum specialist and the swings in the value of that commodity present a huge challenge.
Ferguson illustrates the extremes: in 2008 platinum reached $2,000 an ounce and rhodium went up to $10,000; now, both are around $1,000. Faced with that slump, Ferguson’s challenges at Lonmin included repairing the balance sheet through a rights issue and refinancing the debt as well as tackling costs, and he also had to help defend against another hostile takeover bid, this time from mining group Xstrata.
ICAS has been one of the foundations of my career.
He says: “When commodity prices are going down, that’s when you have to be at your best as a management team. In the downturn there’s a huge amount of hard work, rewards are less and you only see the fruits of that hard work when there’s an upturn.”
He acknowledges the value of his CA qualification though all these varied challenges: “The CA training instils values in you, and I think those values are incredibly important. They are part of your toolkit, and they are instilled right at the beginning of your life in business.”
Now, as a member of the ICAS Business Policy Board, he welcomes the opportunity to give something back to the profession. As he puts it: “ICAS has been one of the foundations of my career.”