'Why would I want to do that?': David Childs on first hearing of FRC role

DAVID CHILDS is hiring. His efforts to find three non-executives for his recently adopted home at accounting watchdog the FRC are a far cry from his past life at leading UK law firm Clifford Chance (CC).

There the staff numbers involved were far larger. And, despite overseeing a wave of international expansion across Australia, Asia and the Middle East, he will forever be more closely linked with huge cuts in headcount rather than growth.

Taking on the managing partner position in 2006, shortly before the financial crisis hit, Childs was forced to take the unprecedented step of culling 15% of the partnership three years later. The sweeping 2009 restructuring of the top end of the firm came alongside 350 redundancies elsewhere, defining Child’s term.

While the firm’s position when he retired in April 2014 was vastly improved – revenue and profits per equity partner (PEP) rose significantly to £1.4bn and £1.1m respectively during the last financial year, compared with a punishing 2008-09 when PEP plummeted 37% to £733,000 – he is visibly more relaxed in his two-day a week role at the FRC. “It’s totally different from being managing partner of Clifford Chance,” Childs tells sister title Legal Week. “You’re conscious that you’ve got 6,300 staff and 500-odd partners and you think about the firm all the time. When Matthew [Layton] was elected, I thought ‘I can relax – someone else can worry about the place.'”

It was with some relief that Childs stepped into his new role as FRC board member and chairman of its conduct committee then, replacing Richard Fleck, who stepped down in May last year but remains a member of the committee. “To be
frank I don’t miss the responsibility and worry,” admits Childs. “While I do think about the FRC, it’s not the same, so that’s a plus. That and the five-day weekends.”

Fleck, formerly a corporate and disputes partner for nearly three decades at legacy Herbert Smith in London, completed a term on the board of the FRC and a three-year term as chairman of its conduct committee.

Just ten months into the first of his maximum of two three-year terms as chair, Childs has already slipped comfortably into the role. “There’s a lot to learn here because the FRC has a lot of different functions and roles and working out how it all pieces together is not easy –not least because the FRC is a product of evolutions of four or five different bodies,” he explains. “One of the other non-execs said it took him four years to get to grips with it. It has taken me three or four months.”

Childs is surprisingly humble about how he landed the role. “You have to really work at it actually,” he says. “I hadn’t done an interview for 14 years. It makes you remember you’ve got to sell yourself.”

Childs checked into outplacement specialists two years before retiring from CC. “I duly went round to 14 headhunters they recommended. I hadn’t written a CV for years and the draft I did was totally rewritten to grab attention.”

Even with a CV boasting a three-year term as COO and eight years as managing partner of the largest single profit pool UK law firm as part of a 40-year career at CC, the interviews were a challenge. “I made a point of saying to every headhunter I met ‘I’m not a lawyer. I haven’t been a practising lawyer for more than eight years. I regard myself now as a business person. I’ve been running a large international organisation with 6,200 staff across 28 countries’ – and yet still, most of them would at one point say to me ‘of course the trouble with you lawyers is…’.”

Hard sell

It is well-known that lawyers often find it difficult to score non-legal work post-retirement. “Lawyers are still a bit of a hard sell,” says Childs. “They have this reputation unfortunately of being risk-averse, a bit long-winded, not terribly commercial and getting bogged down in the detail. They have a selling job to do.”
He admits that management experience made it easier. “What people like is the combination of having been a practising lawyer and having had a management role. You end up chairing a lot of meetings so that’s an obvious skill.”

Although many companies are still reluctant to hire lawyers for their boards as they do not see what skills they can add beyond the existing talent within their legal functions, Childs believes this is a mistake. “Lawyers naturally have a lot of the skills that boards need, such as analysing risk, being objective and problem solving. If you look back at the financial crisis you might say that institutions would have done well to have had lawyers on their boards.”

Childs says that regulators and not-for-profit organisations most typically hire lawyers. While the bulk of the conduct committee at the FRC have financial or civil service backgrounds, five of them (including Childs and Fleck) have legal backgrounds, such as Lois Moore, who in 2007 initiated and then withdrew age discrimination proceedings against her former firm, Freshfields Bruckhaus Deringer. Moore is now a consultant at the London arm of Shearman & Sterling.

Getting the call
Childs was initially reluctant to go for his current role as it was an organisation he knew “very little” about. “When the headhunter first rang me to describe the role, my first observation to him was ‘why would I want to do that?’ I spent a couple of hours on the FRC’s website and tried to understand what the different divisions do.”

As chairman of the FRC’s conduct committee, Childs is responsible for reviewing the financial accounts of around 200 companies a year and the practices and procedures of auditors. The conduct committee is the body responsible for overseeing the FRC’s conduct division, which encompasses the organisation’s monitoring, oversight, investigative and disciplinary functions. It meets 11 times a year and sits alongside the broader FRC board, the executive committee and the codes and standards committee.

Childs thinks there is a lack of awareness about what the FRC actually does. Of particular concern is the fact that M&A lawyers are not always familiar with it, he says. “With hindsight, when I was an M&A lawyer, it was a bit of an omission that we never asked if there had been an FRC report on the audit of accounts.”

Awareness of the organisation may rise thanks to Tesco. Childs was confronted with the retail giant’s accountancy scandal just months after he joined. The retailer admitted in September that its commercial department had booked huge payments from suppliers into the wrong accounting period.

The FRC started a probe into the preparation, approval and audit of Tesco’s financial accounts in December. “We are still looking at it,” Childs says, declining to comment further.

However, he does go into detail on the potential disciplinary proceedings. “There are two disciplinary schemes: the accountancy scheme and actuary scheme. If there is misconduct and the issue affects the public interest then the FRC can bring disciplinary proceedings. If it’s not settled, it goes to an independent tribunal to hear and decide on an appropriate sanction. At any one time, we have 13 or 14 cases to decide whether there has been misconduct that ought to be taken to a tribunal unless there is a settlement,” he says.

Going forward, Childs is bracing himself for several changes that will affect the body. The main one will be the EU audit directive, which is due to be implemented in June 2016. The FRC is consulting now on aspects of the directive and will include its proposals in the next update to the UK corporate governance code in the autumn of 2016. “Over the next 18 months, a big issue for the FRC will be how our new audit directive will be implemented, which will change our relationship with professional bodies and increase their monitoring role. The big thing coming along is that our audit reports, which were confidential in the past, will get more publicity. The Competition and Markets Authority recommended that the FRC should review more audits and part of the grades we give should be published.”

A full version of the interview is available here

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David Childs’ career
2014 – steps down from Clifford Chance and joins the Financial Reporting Council (FRC)
2013 – appointed as board member and chairman of the FRC’s conduct committee
2010 – re-elected to serve a second term as managing partner
2009 – oversees restructuring of Clifford Chance’s partnership
2006 – elected as managing partner of Clifford Chance
2003 – appointed as global chief operating officer
1999 – elected as head of Clifford Chance’s global corporate practice
1987 – Coward Chance merges with Clifford Turner to form Clifford Chance
1981 – promoted to partner in the corporate practice
1974 – joined Coward Chance