A surprising new report from Ernst & Young makes the bold claim that only 10 percent of CFOs actually want to become CEO. The report - entitled ‘DNA of the CFO' - was based around a survey of 699 CFOs in Europe, Middle East, Africa and Asia and included in depth interviews with CFOs of leading companies such as Heineken, Dubai Aerospace Enterprises and Marks & Spencer.

The accepted wisdom is that in times of trouble, boards turn to CFOs to become CEOs. CFOs are seen as having a good handle on the numbers, attention to which is seen as the cure to the company's problems.

Companies in the UK are experiencing increased levels of financial distress according to a recent survey. The second quarter 2010 Red Flag Alert Statistics released by business rescue specialist Begbies Traynor showed that £69.5 billion of liabilities in the UK are at risk of default. This is up 26 percent from the first quarter figure of £55 billion.
 
Moreover, the average debts of troubled companies have jumped by 60 percent to £545,000 in the second quarter from £340,000 in the prior three-month period.
 
The one ray of sunshine in the report that was released at the end of last week was that the actual number of companies that are in financial disarray fell by 21 percent from the first quarter.
 
The research therefore suggests that a weak and trepid economic recovery is largely accruing to larger companies, as the weak get weaker and the strong get stronger; fewer companies are facing greater levels of distress.
 
This situation is likely to continue as the level of credit now available for corporate UK is at its lowest level since the end of 2008. According to the Bank of England's Credit Conditions survey, only 6.5 percent of lenders expect more credit to be available in the third quarter of this year than in the second quarter. This is the lowest level for five quarters, which had all predicted credit availability increases in the 20 percent to 29 percent range.
 
According to Ric Traynor, Executive Chairman of Begbies Traynor, further distress looms, due to cuts in government spending and in more assiduous tax collection. Traynor believes that some 52,000 companies in the IT, recruitment, advertising and business services sectors will face increased levels of distress due to reductions in government spending, the so-called austerity measures. Moreover HMRC, the UK tax collection agency, is being less forgiving in applications for tax deferrals, the so-called Business Support  Scheme or "Time to Pay" as it is nicknamed.
 
"We are concerned that the levels of business distress will increase again, potentially from the first half of 2011, once the full effects of the coalition government's fiscal tightening measures impact the economy and particularly amongst those private sector businesses most dependant on public sector contracts," says Traynor.
 
Of course, Traynor clearly has a vested interest in highlighting corporate distress, given its role as a recovery expert. But the statistics do point to a trend that has been apparent for some time.
 
Large, well capitalized companies are doing well in this recession. Although banks are flush with corporate deposits, credit is only available to large entities. Smaller companies are hurting. Those that rely on credit for working capital are battered while those that depend on government outsourcing contracts are likely to be bust.
 
CFOs at such companies could face the spiral of decline as their debts mount and revenues fall. At which point, it would be time to call in the recovery specialist such as Begbies Traynor.

 

CFOs in the UK face the grim prospect of facing shareholders who will have to comply with a new Stewardship Code. This Code has been set up by the Financial Reporting Council to make shareholders take a more active role in the companies they own. By empowering shareholders this way, the UK authorities hope to make them responsible for monitoring the governance of UK companies.

The Stewardship Code does not mention what shareholders are expected to do in specific areas of governance; rather it focuses on the general approach they should take. It contains six principles covering: the monitoring of investee companies; the escalation of activities taken to protect or enhance shareholder value; collective engagement; voting policy; managing conflicts of interest; and public reporting and reporting to clients.

 

CFOs might be forgiven for thinking that putting their cash into a European bank is a bit like entrusting your prized aquarium to BP. With corporate deposits at near-record highs and the counterparty reputation of banks at all time lows, some companies are taking matters into their own hands.

 

A ruling by the US Supreme Court last Thursday effectively ended US jurisdiction in so-called foreign cubed cases. These lawsuits are where foreign shareholders in foreign companies listed in foreign exchanges seek to bring cases against those companies in US courts.
 
The Court threw out a case brought by three Australian shareholders against Aussie bank NAB. The shareholders claimed that they had been misled on the performance of the bank's US mortgage servicing subsidiary. But the justices said that the section of the Exchange Law that they were using was never intended to cover foreign companies or their foreign shareholders especially when those securities were bought on a foreign exchange. This was despite the alleged fraud happening within the US.
 
The ruling has massive implications for a number of foreign companies who are currently being sued by overseas shareholders in US courts. These companies include Porsche, Vivendi, EADS, Infineon and Alstom. While these companies will still be sued by their investors in their home jurisdictions, they will now in all likelihood escape trial in the US.
 
Shareholders like to sue in the US because the securities laws are seen to favor investors over corporate management. 

The emergency budget unveiled by the UK government on Tuesday was unashamedly pro-business, giving British businesses everything they could have wanted. While the headlines have focused on the drastic cuts to public spending that the budget outlined, a more subtle trend was the way in which the tax burden has shifted from companies to individuals.

The key area affecting most businesses was the reduction in the main rate of corporation tax to 27 percent this year and then by a further 1 percent a year to 24 percent in 2013. This was accompanies by a cut to the small companies corporation tax rate to 20 percent. This was more generous than the 3 percent reduction to 27 percent that most were expecting.

 

Two pieces of news this week show how attitudes of the Asian authorities are hardening towards to CFOs in particular and companies in general. Both cases show that Asia's famed laissez faire attitude to corporate shenanigans is changing.

In Singapore, WBL Corporation CFO Kevin Chee Fai Lew has been found guilty of insider trading by the country's High Court. The court found that Chee sold 90,000 shares of WBL Corporation in the weeks prior to the company announcing a significant loss. He has been convicted under the Securities and Futures Act and is the first CFO to be charged in this manner since 2004 when the new guidelines came into force. As punishment he is likely to receive a fine plus costs equal to three times the profit he made on the insider trade.

 

The UK government's Office of Fair Trading (OFT) announced last week that it was investigating the fees that investment banks charge companies for secondary equity issues. In the UK these are known as rights issues. In 2009 companies raised some £70 billion in equity capital and paid out £2 billion in fees for the service.  

The study will begin this summer and according to the OFT it will examine the equity fund raising activity of 350 of the largest UK based and listed companies. It will closely look at whether or not there is a cartel in pricing of equity underwriting or if other structures might be the cause of the inelasticity of pricing in the rights issue underwriting market.

 

It has been almost seven weeks since any European bank issued senior unsecured bonds in the market. Partly to blame is the rapid rise in spread levels, which over that time have increased by 50 bps to 100 bps for double AA-rated banks in Northern Europe and by much more for their cousins from Southern Europe.

But an equal cause of the drought has been the EU-wide guarantee schemes that individual countries set up from October 2008 in the wake of Lehman Brother's collapse. Many of these schemes were due to end last year but they have been extended. Reports suggest that Germany, the Netherlands, Sweden and Hungary are likely to extend their guarantee schemes beyond June 30^th. France Italy and the UK are likely to let their schemes lapse (although the UK allows the government guaranteed bonds issued by banks to be refinanced until 2014).

 

The CEO and Chairman of UK's Prudential - Tidjane Thiam and Harvey McGrath - have faced heavy criticism for their failed bid for AIG's Asian insurance business, AIA. Most damning are the charges that they failed to properly communicate with shareholders about the deal, which at $35 billion was too high a price to pay. Furthermore, in the process of the failed bid they racked up some $675 million in fees to bankers and lawyers.

While some of these charges are fair, few people are actually discussing what role the shareholders had in this fiasco. These institutions must shoulder part of the blame, not just for scuppering the deal, but also in their short sighted attitude to their fiduciary duties.  Specifically, the deal collapsed because these institutions demanded that Prudential negotiate a 10 percent cut in the agreed price with the seller, namely the US government.