Martin Cubbon, CFO of an original Asian tiger

Martin Cubbon isn’t happy. The Asian economy may be on the up after a lengthy
spell in the doldrums. Swire Pacific, the property to aviation conglomerate
whose finances he presides over, may be experiencing double-digit bottom line
growth. And the view from his office on the 35th floor of Pacific Place, a Hong
Kong landmark from which he can look down on his empire, may be peerless.

But it’s not comfort enough. Not when regulation is restricting what he
considers to be his proper role. Nor when compliance is threatening to constrain
growth in his business.

But his current concerns stretch beyond his own position and the future of
his company. Right now Cubbon fears for the future of the accountancy
profession. IFRS, corporate governance and the quality of auditing all come in
for scathing criticism during an hour in Cubbon’s company. But in truth, though,
the UK-trained accountant and director of one of Hong Kong’s biggest – and
highest profile – companies is more frustrated than cynical.

Take international financial reporting standards. Cubbon can see the logic in
a single set of standards, but makes little attempt to hide his annoyance at the
straightjacket that IFRS imposes. ‘The Hong Kong society has decided to go for a
single set of standards, which is a laudable aim.’ But he adds a highly
targetted dig: ‘The view is the importance of consistency and comparability
across companies outweighs any downsides they do or don’t acknowledge,’ he says.

Many FDs would concur with his pinpointing of the problems that throws up.
‘It’s not that 90% of the standards are bad and 10% good. It’s more that 90% of
every standard is good.’

He checks himself. ‘I hate to get into an argument about how much of a
standard is good or bad, because it’s not very easy to make much headway. I’m
neither bright enough nor do I believe in it strongly enough to argue that any
of the accounting standards have got obvious flaws. I’m saying that what comes
out – and what you’ve seen through the development of accounting in the last
five years – is something that is much harder to follow. And therefore it is
more difficult to asses the quality of underlying earnings.’

And that is the nub of Cubbon’s frustration. With one notable exception, he
can see little merit in most of the accounting and governance reforms of the
past decade.

‘My issues are much more macro about how the accountancy profession is and
has developed over the last 10 years,’ he says. ‘I’m questioning its relevance
in terms of the role of the audit profession and financial accounts. What is its
role in business?

‘I say it’s a receding role. We’re moving to this rules-based system that
seeks to produce a value at every accounting period for transactions and assets
as the end game. And we’re moving away from the sorts of metrics and principles
on which businesses are run – actual transaction values and cash flows.’

The upshot is confusion. ‘It produces numbers that are not very helpful and
I’m struggling to see who is using these numbers and what benefit they get out
of them.’

By now he’s on a roll. ‘The issue with the profession is that this is their
focus. All the brains and all the resources that are going into developing the
accounting profession are in a sense in this formulaic approach to accounting
standards. I don’t see much development going into auditing techniques.

‘It’s a brave assertion to say that auditing standards have declined over the
last 10 years, but I certainly can’t make any case that they have improved. And
in recent history it’s as much auditing that has failed as the rigour of
existing auditing standards.

‘I’m sure the scandals that have been described as accounting scandals around
the world, particularly in America, are not accounting scandals. They are about
fraud and poor quality auditing. I don’t think IFRS would have made any
difference to the incidence of any of these entities and their abuses.’

After the best part of 20 years in Hong Kong – from training with Andersen in
Manchester, he became an internal audit manager with Cathay Pacific in 1986 –
Cubbon is not backwards in coming forwards with what can seem like contrary

His willingness to confront accepted wisdom is no surprise to his former boss
at Andersen, Ken Lever. ‘He was very capable and was seen as someone who would
make good progress in the firm. It was a disappointment when he left,’ says
Lever, now CFO at engineering giant Tomkins.

Cubbon turns a different financial phrase to his UK peeers. For instance, he
questions the need for him to devote a significant proportion of his time to
something that doesn’t contribute to ‘shareholders having a warmer view’. He
talks passionately about analysts and their needs. And you get the sense that it
isn’t his northern (English) background that underscores his bluntness. It’s his
experience in a city-state that lives and breathes finance in a way that could
never happen in the UK.

Nevertheless Cubbon’s estimate that he spends 30% of his time on compliance
is shocking. Five years ago it was 10%.

And he asks: What’s it all for? ‘It doesn’t change anyone’s behaviour, but
it’s a process designed to try and give someone the view that governance is good
in Swire’s. Someone has decided this is how you do it – you will have these
sub-committees who report to the board and you’ll go through these processes.
Whether they are needed or not is not asked because you’ve got to be consistent.
And you, the CFO, have to comply with them.’

The cost is considerable – he insists there is a clear link between the
compliance burden and the ability to generate money for Swire shareholders.
‘That’s why people ask how many beancounters are needed to go through all these
needless procedures. That’s not the big cost. It’s the insufficient focus being
given to the generation of wealth,’ says Cubbon.

And it is the impact on investment appraisal that worries him most. Although
he concedes you can put more people in corporate finance – it still comes back
to the CFO, the board member responsible for finance. ‘It’s not always about
numerical analysis. If it were, life would be very simple.’ Investment appraisal
requires tyre-kicking – and that’s something he has less time to do now.

Having lived through the Asian financial crisis, Cubbon is worldly wise
enough to recognise that there was a case for making changes to the corporate
governance regime five years ago. And in some areas he can see improvements. ‘If
there’s a benefit it’s that the quality of disclosure in our annual and interim
accounts is better,’ he says. ‘But that could have happened without the need for
all the other processes that have to go on.’

He is warmer, to use his own phrase, about audit committees. ‘I think the
biggest single step forward in corporate governance in the past five years has
been the imposition of audit committees,’ he argues. ‘If the objective of that
committee is to give shareholders the comfort that the executives run the
company in the best interest of all shareholders, that’s the most important
improvement of the last five years.’

Nevertheless it’s time consuming. ‘You look at the guidelines from the stock
exchange on the modus operandi of the audit committee. It says it is responsible
for assessing the quality of the internal controls system once a year. That’s
quite a big job.’

You have to wonder whether he could make his life easier. Swire has no
compliance officer for instance. Why? ‘That’s a good question,’ he concedes. ‘In
fairness, we are looking to recruit somebody who will not have the title
compliance officer, but will fulfill some of those roles.’ So why not appoint a
head of investment appraisal too? ‘That’s my job,’ he snaps. ‘What the hell is
my role if it’s not that? Are you saying I should be the compliance officer?’

Compliance is always going to be a big deal for a conglomerate like Swire. It
acquires and disposes of businesses more rapidly than many businesses serve hot
dinners and given its prominence in Hong Kong and Asia it has to be seen to do
the right thing.

That doesn’t mean Cubbon will embrace every governance fad going. Swire, for
instance, won’t be electing to comply with the voluntary Hong Kong Stock
Exchange code that recommends quarterly reporting.

With a blank sheet of paper, Cubbon has no difficulty in defining what should
be the CFO’s proper role. ‘The focus of my job is really on lowering the cost of
capital,’ he argues. ‘You do that by innovative borrowing, deciding capital
structures, explaining to investors as clearly as possible your business model
and your prospects so you get a lower cost of equity.

‘It’s clearly about making sensible investments that will bring down the cost
of equity that will bring returns to it. And it’s sometimes so that includes
ongoing performance assessment as well.’

Given everything that gets in the way of lowering the cost of capital,
Cubbon’s view of the current state of business is fairly bleak. But he doesn’t
believe that a crisis is looming nor that the damage is irreparable. ‘There’s no
Armageddon scenario where everything falls apart. I just think we’ll come full


Swire is the sort of conglomerate that begs to be described as ‘sprawling’.
Its operations stretch from Asia to North America and from aviation to property.

Swire Properties Ltd is one of Hong Kong’s leading property developers.
Incorporated in the 1970s, the company’s first venture was the 61-storey tower
Taikoo Shing – Hong Kong’s first private housing estate.

But it is best known as a property investor. It owns and manages Pacific
Place – one of the best hotel and shopping complexes in Asia.

A luxurious development, it comprises more than 160 retail and catering
outlets, three department stores and a four-screen cinema – as well as three
hotels, in each of which Swire retains a 20% stake.

Chief among its aviation businesses (which take in Vietnam, mainland China
and Canada, as well as Hong Kong) is Cathay Pacific, in which is owns a 46%
stake. It also owns a significant slice of local carriers Dragon Air as well as
all-cargo carrier Air Hong Kong.

Swire Beverages has the franchise to manufacture, market and distribute
products of The Cola-Cola Company in Hong Kong and Taiwan, as well as 10 US
states and seven provinces in China.

Swire Pacific Offshore has one of the largest energy support fleets in the
world, supporting a range of exploration and production activities. The group is
involved in importing, marketing, distributing and servicing Volvo trucks and
buses in Taiwan.

Swire Resources acts as the holding company for extensive retail and
wholesale interests in sports and active footwear and apparel.

Anyone for sugar? Or paint? If you’re in Asia, the chances are that Swire
will have played some part in ensuring it reaches you.

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