Bean counters taking over the world

Accountants were generally the kids who got beaten up in the playground, got picked last for team games and developed ailments around the time of the annual school dance so they didn't have to attend. Life was seldom fair. However, as they grew up, the same kids who used to kick sand in their faces and gave them disparaging nicknames invariably ended up using more respectful forms of address as the class geek tended to rise through the professional ranks to become chief financial officer and - increasingly in the South African context - CE of the company he worked for.

There's been a growing trend over the past three years for boards to appoint individuals with solid financial qualifications in top corporate jobs. The geeks may end up getting the best jobs, the trophy spouse and the cool car but are they really good for business?

In association with data providers McGregor BFA, Finweek has ranked the performance of South Africa's top 40 listed companies to ascertain whether those with chartered accountants (CAs) at the helm outperform those without. The results are illuminating and suggest, on balance, companies with a CA as CEO tend to outperform those without.

While many investors will focus purely on short-term share price movements to ascertain the levels of their individual portfolios, measuring the actual performance and long-term sustainability of a business requires greater scientific insight. While instruments such as earnings multiples might be a popular valuation method, investors need to be cautious when using them as a single tool to assess market confidence in a particular company because they can be deceptive.

McGregor BFA has ranked the overall performance of the top 40 using a "return on equity to cost of equity ratio" (or required rate of return: RoE) to give an overall indication of value creation. In assessing the overall corporate performance, those companies with a value of less than one indicates there's been a destruction of value: in other words, the actual return is lower than the market based required RoE. Any performance figure greater than one shows shareholders believe management is using capital effectively and is creating value.

Almost half of the JSE's Top 40 companies are run by accountants, who have either the CA (SA) qualification or an international equivalent. However, not one of the top 10 listed companies on the JSE in terms of market capitalisation has a CA at its helm. But on balance, companies - especially banks run by accountants - tend to outperform those run by individuals with other qualifications. That's contrary to the stereotypical view of accountants, who are often regarded as charisma-free, averse to the adventure of entrepreneurial activity and inherently risk averse.

Try telling that to Investec CEO Stephen Koseff, Bidvest founder Brian Joffe, supermarket icon Whitey Basson (Shoprite), Liberty founder Donald Gordon, Sun king Sol Kerzner or former Gencor boss and later Finance Minister Derek Keys, who all qualified as CAs before assailing the corporate world.

"There's a difference between attaining the qualification and using it to go into business and using the degree to become an accountant before following the CEO route," says Nick Binedell, head of the Gordon Institute of Business Science.

Accountants are renowned for being process bound rather than having a hint of the maverick that many CEOs would like us to think they possess. Why then would boards appoint the CFO or someone with a CA as CEO? There are two primary qualities required from someone reaching the position of CFO: a comprehensive knowledge of finance and internal controls and an understanding of the operational and commercial aspects of business. Those attributes are also demanded of CEOs. Gone are the days where bluff and bluster and being the glue that holds the team together will suffice.

The international trend toward boards promoting individuals with high levels of financial acumen to the top spot developed from around 2006. That was before the first signs of the global economic strain that was to reach bursting point last year were visible. Greater numbers of accountants were being appointed by boards to have final executive oversight of their affairs. In South Africa that picture was repeated.

David Brown replaced Keith Rumble at Impala way back in 2006, becoming one of the first high profile financial directors to take over running a mining firm. Later, Nick Holland replaced Ian Cockerill at Gold Fields, Dave Coutts Trotter succeeded Peter Bacon at Sun International, Wayne Hook (a CA) succeeded Peter Hughes at Spar following its unbundling from Tiger Brands, Ralph Boettger (also a CA by training) has had his work cut out for him at Sappi since taking over from Eugene van As, Clive Thompson was financial director to Tony Phillips at Barloworld, while Hubert Brody had a similar background under Bill Lynch at Imperial.

Wilf Robinson, who has subsequently left Pinnacle Point, was parachuted in from Absa in an attempt to restore order after the ebullience of the Jaco Verster era at what was then Acc-Ross, and Comair brought in two CAs in Erik Venter and Gidon Novick as joint bosses to take over from Piet van Hoven.

Brothers Ian and Grattan Kirk in recent years were put into the top jobs at Santam and JD Group respectively: few would dare call them typical accountants - to their faces, at least.

According to the SA Institute of Chartered Accountants (Saica), 25% of the directors of the JSE's Top 200 companies carry the CA (SA) qualification.

"Quite clearly," says Matsobane Matlwa, executive president of Saica, "the business sector is increasingly appreciating the extraordinary benefits companies can derive from the expertise of SA's most sought after business designation."

Four years ago just 78% of the CFOs of Top 200 companies carried the CA (SA) title. That number has now grown to more than 90%, while a growing number of SA's top-flight companies are appointing accountants as CEO. Among the more recent appointments: Mike Brown at Nedbank (replacing Tom Boardman, himself a CA) and Ian Farmer at Lonmin. And the FirstRand Group also appears to hold the CA (SA) qualification in high regard. Chairman Laurie Dippenaar, incoming CEO Sizwe Nxasana and COO Johann Burger are all accountants.

Research by Accenture released as the global financial crisis was gathering momentum pointed to the growing importance of the CFO in every organisation. CFOs - invariably most of them CA (SA) qualified - began taking a far more active role in executive management, with the role of "chief accountant" being replaced by individuals with a far more holistic view of the total business.

The role of chief financial officer has changed considerably over recent years. The concept of CFO as a number cruncher providing support to the CEO, who was invariably the flamboyant member of the team, is less pervasive now than it once was: 31 FTSE 100 companies are now headed by CEOs who were previously the CFO. Boards have found solace in the financial crisis in the fact that the CFO knows the business intimately and has a solid technical grasp of the intrinsic issues the firm faces. Having a solid grasp on a company's finances also assists in tricky turnarounds and is invaluable when firms need to raise capital or embark on costly restructurings.

One of the paramount concerns about promoting the CFO to the CEO role, or hiring a CA to run the operation, is the ever present worry the individual will exhibit a lack of entrepreneurial flair. However, it's a more conservative hand on the tiller that boards seek when times turn tough. It was the presence of excessive flair that got the world into its current mess in the first place.

"The issue is less about the academic qualification CEOs have on their CVs but rather whether they're leaders of people with high emotional intelligence, whether they're credible strategists brave enough to embrace different points of view, rather than just operate within their own comfort zone," says Hylton Brown, partner at headhunters Odgers Berndtson in Johannesburg, "Of concern to me is boards that are comprised of too many individuals with the same professional qualification, training and experience."

Peter Brooke, head of Macro Strategy Investments Boutique at OMIGSA, says: "What's relevant is whether they create value or not. Clearly, a good technical grounding is valuable. But you should look at the entire executive team - and a good financial director is much more useful than a CEO who is a CA."

However, it's tough for a CFO to be promoted to CEO without some operational experience. For Imperial CEO Hubert Brody, growing up in the shadow of the late Bill Lynch was invaluable. Brody carries the CA (SA) qualification with pride but insists it provides only a solid grounding. "The studies to become a CA are only a small part of a career that's impacted by so many other forces and influences that shape you over time.

Under Lynch, Imperial was an acquisitive conglomerate of numerous businesses in logistics, transport and even financial services, while Tony Phillips at Barloworld had global aspirations for what's now FreeWorld Coatings and the vehicle business. The accountants took over and the operations of both companies are now considerably simplified.

Julian Roberts, the erstwhile CFO at Old Mutual, was dispatched to Sweden to run the newly acquired Skandia group. When his predecessor - Jim Sutcliffe - fell on his sword at the height of the financial crisis, the group called on Roberts to fill the void. He'd been out of the group's finance function for almost two years but was able to take up the slack in a relatively short period of time, courtesy of that experience. Partly as a result of a turnaround in global market sentiment, and partly as a result of a more conservative and centralised management approach, shareholders have again begun to back SA's biggest life insurer whose globalisation had led many investors to write it off as yet another corporate folly. He has overseen a surge in confidence at Old Mutual over recent months.

Traditionally, industries such as mining were run by engineers, but as the appointments of individuals like Farmer, Holland and Brown have shown, even mining boards have begun to favour individuals with a strong finance background.

However, in a recent analyst report JPMorgan analysts Steve Shepherd and Allan Cook noted their preference for Anglo Platinum as an investment choice. One of the reasons they cited was that Neville Nicolau is the only CEO of a major platinum company with a mining engineering background. According to McGregor BFA's research, Anglo Platinum has consistently added value to investors over the past three years while the numbers show CA-run Impala has not.

Herman de Beer, a lawyer and partner at accounting firm KPMG, says: "In our interaction with the leadership teams of major corporations, the CAs clearly stand out: their significant attention to detail and their ability to identify and predict trends from financial data, even from a very small sample."

But De Beer adds a caveat: "I do believe the jury is still out as to who will be the most successful business leaders in the future, with the focus changing from pure bottom line numbers to less tangible matters, such as the long-term sustainability of business, people wellness and environmental impact issues."

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