This article was first published in the January 2014 UK edition of Accounting and Business magazine.
An industry facing a technology-driven revolution in the buying habits of its customers and a radical change in its business model. A complex and demanding deal involving a much-loved brand name that is not quite a divestment yet not quite a merger. Customers and staff in more than 70 countries and a tough trading environment where ‘banker bashing has become business bashing’.
Welcome to the world of the FTSE 100 finance chief – in particular, to that of Robin Freestone, CFO of education and publishing giant Pearson, owner of the Financial Times and, until last July, of Penguin Books.
The specifics might be different, but the sort of issues described above are common to most big-company CFOs. And that makes Freestone well qualified to be chairman of the Hundred Group, which represents the views of FDs of the FTSE 100 and several large private companies.
Defining the CFO role, says Freestone, is complicated. ‘Someone said to me recently that the role of the modern CFO is very different to what it used to be. But probably it isn’t. If you boil it down, it’s about trying to allocate resources to the places that are going to make the best short and long-term return for you, and then getting on with the execution of that. It’s both a decision-influencing job – making sure the company’s strategy is being applied and that capital is supporting it – and about execution, making sure you put that capital in the right place and that it does actually generate the return you thought it was going to.’
On top of this, he adds, are all the other things associated with finance, such as making sure the numbers are right. Pearson’s finance function is 1,500 strong and, at the time of the interview, engaged in closing off the books for 2013 as well as putting together the 2014 budget. Freestone is a proponent of annual budgets with quarterly forecasts rather than rolling budgeting, which he has tried but says did not engage the same focus.
A significant chunk of the process-oriented parts of finance has been outsourced to IBM in Bangalore; Pearson also has a centre in Manila and a new centre opening in Dalian, China, with Accenture. For the in-house finance team, there is an emphasis on business partnering and critical decision-making. So there are plenty of challenges to discuss with fellow members of the Hundred Group.
‘Becoming a CFO is quite daunting,’ says Freestone. ‘Many of the issues you’re dealing with are things you know about, but the whole shareholder arena is new, and you suddenly find yourself in charge of functions like treasury and tax, which you may not specialise in. The group is a very good place to meet like-minded CFOs, some of whom are more experienced, and share experiences and concerns.’
The group, whose opinions have always been sought but has not historically been vocal in the public arena, is shouting louder about some of these concerns.
Freestone highlights the issue of popular sentiment towards business.
‘There’s a feeling that big business is self-serving and not operating in the interests of the wider community, whereas anybody who works in big business knows that the vast majority of companies are trying hard to survive and prosper, and benefit both customers and other stakeholders.’
One reason this issue is critical, he says, is that anti-business sentiment could trigger a reaction against pro-European lobbying by big business in any popular vote over the UK’s membership of the European Union. ‘Most big businesses recognise that with continental Europe accounting for half of the UK’s exports, it’s really important that we continue to be seen as part of a European Community and a single market.’
Drivers of anti-business sentiment, he says, include rising prices hitting hard-pressed consumers and the continuing debate over boardroom salaries. Then there’s the damaging debate over tax avoidance, which, says Freestone, has become too focused on corporation tax.
The Hundred Group is trying to influence the debate with its annual Total Tax Contribution survey (see box below) pointing to the increasing overall amount of tax that member companies are paying.
Employers’ national insurance, business rates and irrecoverable VAT together make up more than 55% of Hundred Group company total tax bills, while corporation tax makes up just 27%. The corporation tax take itself, he says, is declining due to the falling rate and rising payments into pension schemes.
He adds that globalisation and technology make it an increasingly difficult tax for governments to legislate on and administer. ‘If you’ve got a virtual team with an individual in Mexico, another in Venezuela and one in Asia, all working on the same product or service, how on earth are you going to attribute the cost?’ A revolutionary approach is required.
Pearson has staged its own digital revolution with the Financial Times, which has pioneered making online newspaper readers pay. ‘The FT has got more readers – about 630,000 per day – than ever,’ he says.
‘What’s interesting is that the number of digital subscribers is now significantly higher than for the paper version. The beauty of the FT.com model is you can reach a lot of readers you would never reach every morning with a physical paper because it’s just not cost-effective to put small volumes of physical newspapers into smaller cities of the world.’ Pearson will be happy, he says, as long as FT.com subscribers grow faster than the readership of the paper version.
But it is Pearson’s Penguin brand that has been stealing
the headlines recently. Its merger with Bertelsmann-owned rival Random House created the world’s biggest book publisher. ‘It’s a complicated deal because we still own 47% and we may own 47% for the next 100 years, so it’s an arrangement where you are both looking for the best result for Pearson, but recognising you need a good result for Penguin Random House as well.’ The deal closed in July, but Freestone reckons there’s probably a couple of years’ worth of work in unpicking Penguin from Pearson’s infrastructure.
The logic of the deal, says Freestone, was inexorable, both in terms of cost synergies and because the market is changing. ‘About a third of the North American market will be e-book downloads this year. This is a significant change in quite a quick timeframe. It’s clear that e-books are going to grow for some time to come and there will be fewer distributors than with physical books.’
Freestone himself prefers to read his books in hard copy: he enjoyed Penguin’s JFK’s Last Hundred Days by Thurston Clarke and Gone Girl by Gillian Flynn on a recent holiday.
The Financial Times and Penguin might be the headline-grabbers, but more than three-quarters of Pearson’s sales come from its education business, which supplies educational materials including textbooks, technologies and assessments. Its biggest market is North America.
This too is being transformed, albeit more slowly, by the digital revolution. ‘I think you’ll see more tablets in the classrooms and in the hands of students, and you’ll see more university students using more digital products and fewer books.’
He says it’s about much more than taking content and putting it online – it’s about augmenting it. ‘The critical thing is to embed assessment of how much the student has learnt, then help them learn more by bringing them hints and assistance associated with the errors they’re making.’ This provides not just a diagnostic tool but also a teaching aid.
Another area of change affecting big-company CFOs is corporate reporting. One issue focusing the minds of Hundred Group members is the new UK rules on annual reports – particularly new terminology such as ‘fair, balanced and understandable’. Then there is narrative reporting and changes to the audit report. He expresses concern over the ever-growing size of the annual report, questioning both the burden it places on companies and its value to stakeholders.
The recent changes requiring greater rotation of audits have, Freestone says, landed in a sensible position, although he worries about the knowledge loss of having a completely new audit team. ‘But I think the perception benefit probably just about outweighs the extra costs.’
Integrated reporting, he says, is a little further down the line, but still valid. ‘It’s more fundamental to ask what your organisation is really for and actually contributing. You’ve got to be doing a lot more than just profit these days. There has to be a wider agenda and doing some form of good. What outcome are you trying to achieve? The most successful companies already tend to be thinking that way.’
Chris Quick, editor