And they are providing more information about what their businesses are doing – which is just as well given that they are supporting huge market valuations with smaller revenue streams.
Even in this internet age, the annual report remains the single document which best embodies the success – or otherwise – of an FD’s achievements.
It is, literally, an account of their stewardship and their success at creating value. The FTSE-100 itself is still the benchmark against which many businesses and directors gauge success and aspirations.
And Financial Director’s survey remains the definitive analysis of how leading companies account to shareholders.
This is the first ever annual reports survey to be an entirely Big Five affair.
Last year Baker Tilly had Securicor, but that group has now departed the FTSE-100. Our first survey in 1997 saw Clark Whitehill and Kidsons Impey doing their bit.
But that isn’t the only change – audit times are speeding up. Arthur Andersen is leading the way in improving its performance in this area.
But it’s not just the firms that are having to change.
When we launched this survey three years ago there were just five FDs in their 30s. Now there are nine – and only one in his 60s, compared with four back in 1997.
The average age of FTSE-100 FDs has, in fact, fallen from 49 to 48 since our last survey, suggesting that there’s enough influx of young blood not only to make time stand still, but to put it into reverse.
More new talent will be needed if this trend is to continue, though, as three of the FDs in the list are now knocking on 40. Baby of the bunch is Nicholas Luff at P&O, while British Airways’ soon-to-retire Derek Stevens ranks as ‘father of the house’.
The two dozen or so FDs who have joined FTSE-100 companies in the last couple of years are averaging 44 years old, compared with their longer serving colleagues who average 50. (They also typically earn about £100,000 a year less than older stalwarts.)
One unfortunate trend, however, is that FDs are being more reticent about revealing their age: more than a dozen felt shy about revealing their youth (or lack of it).
Once again the FTSE-100’s best-paid FD is AMVESCAP’s Robert McCullough.
But McCullough also becomes the first million-pound FD – a real breakthrough.
But perhaps Nick Rose of Diageo is the outstanding FD. He now earns £20,667 for every one of his 42 years – a lucrative marriage of youth and substantial remuneration.
And negatives? The number of companies that didn’t have an FD at the time of producing the accounts has remained unchanged at six, though some vacancies have been filled and new ones have arisen.
Shell and Bank of Scotland continue to hold out against such board level appointments.
Links – The Financial Director survey
/a>Big FiveHigh flyersFat feesAudit value for moneyFD’s total pay package
The increasing pressure to report results as soon as possible is resulting in a shortening of audit times. Over the four years that we’ve been conducting this survey, audit sign-off times have shrunk from 67 days to 61. The leading companies, almost without exception, continue to set the pace with some sizzling audit speeds. Scottish Power, last year’s fastest sign-off, was completed in just 34 days – 2 days faster than last year. Even old ICI knocked a day off, from 41 to 40.
Colt Telecom slashed its audit time from a laggardly 89 days to a better-than-average 55 days. Blue Circle mirrored that, cutting from 85 days to 51. Kingfisher went bzackwards, extending its book checking exercise from 44 days to 52. But star performer this year is BSkyB, which ticked and bashed in just 25 days (including weekends), knocking more than two weeks off last year’s performance.
But Carlton Communications, an almost identically-sized business as BSkyB, took 106 days to get a sign-off. A third of the FTSE-100 is getting the sign-off within 60 to 69 days, with just 17 taking longer than that.
The speed with which BSkyB completed its audit helped make Arthur Andersen the most-improved auditor, as its clients got signed off within 63 days, on average, down from 71 last year. Surprisingly, perhaps, jointly-held audits – AstraZeneca, Royal Dutch/Shell and Billiton – were completed more quickly, on average.
Overall, audit income from FTSE-100 constituents is down about 2% from last year. But Arthur Andersen has benefited from smart increases in fees from WPP and AMVESCAP, plus the introduction of CMG to the FTSE-100.
Deloitte & Touche managed to retain Anglo American as a sole client, losing partner auditors KPMG. Abbey National was Deloittes’ highest profile win last year, and the £3.2m audit fee more than compensated for the loss of Compass group, which fell out of the FTSE-100 index.
Last year six companies shared their audit amongst two firms; this year only three do so. In addition to Anglo-American’s move, CGU has favoured PwC over KPMG and Invensys has dropped KPMG in favour of FD Kathleen O’Donovan’s old firm, Ernst & Young. But KPMG now shares AstraZeneca with Deloittes.
Fees from non-audit work continue to provide the growth that is notably absent from audit income. Note that the table excludes the distorting effect of a £100m non-audit fee paid by BP Amoco to unnamed accountancy firms for non-audit services.
One of our favourite KPIs, our ‘high flyers’ metric compares salary and age to give a pay-per-year-of-age figure. We hit on the idea when we spotted that a particular 40-year-old FD earned about £400,000 – £10,000 for every year of his age.
That FD was Phil Yea of Guinness. His successor, Nick Rose of Diageo, now earns about twice that figure, £20,667 for every one of his 42 years.
In fact, the average for FTSE-100 FDs is now just under £9,700.
Michael Davis’s free accommodation (see FDs’ total pay package, far right) takes the Billiton FD to the top of this particular league table, leapfrogging last year’s chart-topper, John Mayo of Marconi.
This is, of course, a crude calculation. But it isn’t one that necessarily favours the more youthful FD. Four of the FDs in the list at right are in their 50s, suggesting, perhaps, that these men are certainly not yet past their best.
A typical FTSE-100 audit should still yield you change out of £2m. But at £12m, HSBC is the company with the biggest audit bill, significantly ahead of the equally global, equally complex business of BP Amoco – and three times the fees paid by either of the remaining quoted English clearing banks.
Because of rounding errors, we are generally loathe to examine how individual companies raise or lower their audit bill (a rise from £1m to £2m might really just be a rise from £1.49m to £1.51m).
But it is apparent that Invensys has more than halved its fees from £9m to £4m. About one company in six is getting its books ticked off for under £500,000 – and no, that ARM audit fee isn’t a misprint.
The Royal Dutch/Shell group audit fee is shared between PwC in the UK and PwC in Holland.
But sadly, the group abides by US and Dutch GAAP, and so has failed to disclose a proper audit fee since its 1997 accounts when it revealed a £7.5m sign-off cost. (The UK GAAP-compliant disclosure of a parent company audit fee worth £8,000 is clearly useless.)
It’s no wonder that annual reports are getting thicker. From 81 pages last year and 76 and 74 pages the years before that, the annual filing is now 84 pages. The accounts section of the report is also growing – typically 33 pages, it’s up two on last year.
AUDIT VALUE FOR MONEY
Whether an audit fee represents value for money is one of the longest running debates in the game. Without an audit certificate, you can’t carry on in business – so what’s the value if the sign-off is priceless?
But one imprecise metric is to look at the audit fee and compare it with the scale of the business. Admittedly, comparing a business like Tesco with a company like 3i isn’t easy. But the fact is that industry peers Tesco and Sainsbury have a similar audit-fee-per-£1m-of-turnover figure (£43) – as do BT and Vodafone Airtouch (£121), United Utilities and Powergen (£125) and Schroders and AMVESCAP (around £1,000). So somebody must be looking at these numbers!
The average has risen from £430 to £450 since 1999 (we didn’t do this in 1998), though we’ve excluded the distorting effect of Freeserve’s £14,828 figure, derived from a £290,000 audit fee incurred to sign off turnover of less than £20m.
FS’S TOTAL PAY PACKAGE
For the third year in a row, the FTSE-100’s best-paid FD is AMVESCAP’s Robert McCullough – who also becomes the first million pound FD. McCullough’s basic salary is a positively modest – below average, in fact at £255,000 – but an £800,000-plus bonus takes him to seven figures.
While bonuses can help top up an FD’s pay, a small number make an appreciable profit out of the benefits package. Billiton’s Michael Davis is a case in point: he lives rent-free, a deal said by the company to be worth $327,000 (£233,000) a year.
At Marconi (GEC, as was), John Mayo earns the highest basic salary, £515,000, up 5.75% on the year.
Half the FTSE-100 FDs earn between £300,000 and £500,000 a year. Only five earn less than £200,000.
Since last year, FTSE-100 FD remuneration has risen 13% from £406,621 to £459,902. Basic salaries are only 6% higher, but bonuses have risen from £112,283 to £146,888 – though ten FDs received no bonuses in their last pay packet.
We try to make an accurate, consistent record of annual cash payments out of company coffers into FD pockets.
Our salary tables are based on salary, benefits and annual bonus. We don’t count profits from the exercise of share options, nor do we include LTips, payments into pension schemes or golden handshakes.