An Inside Point of View

Paul Richardson, WPP’s group finance director since 1996, catches up with Noreen O’Leary

Q. Do you think the industry events of last year reflect a fundamental change in the dynamic between industry boards and management, or is the focus on corporate governance a reaction to headlines?
A. I think this is more of a reaction to what has happened. There are different standards of corporate governance. The U.K. has a stronger sense of corporate culture in place, dating back to the late Robert Maxwell and his misuse of corporate funds a decade ago. It takes a crisis of a reputable company leader, and when that causes an institution to fail badly, that then creates a political agenda. You could see that very clearly last year in the U.S. as people reacted quickly—with the SEC and [New York State Attorney General Eliot] Spitzer and the various agendas coming together. The only danger is they are regulating change quickly. These things take time to, No. 1, get introduced and No. 2, become truly effective. While these changes are right, they are reactions to very serious political and commercial events that have taken place.

What’s the case for separating the CEO/ chairman job and putting in place a non-executive chairman—a practice more common in the U.K. than in the U.S.?
One of the roles of the non-executive board and the chairman is to help with corporate strategy and decisions without being in the thick of operations. Because they’re uncluttered by the day-to-day management, they can see the fuller picture. The secondary aspect to it is the chairman and the board’s responsibility to appoint successful management, which means the CEO and his team. Clearly in the U.K., there is the expectation that if a company is not performing, it’s the chairman and board’s job to take action to address the shareholders’ concerns. It has evolved into a clearly understood procedure. This is being facilitated by shortening directors’ contracts to what is now an industry standard of 12 months only.

You come from a job outside marketing communications, having joined WPP Group from Hanson PLC. What are some of the unique aspects of and challenges to this industry’s financial management?
The main differences are that people are the assets and the importance we have to place on talent. In a competitive environment, where everyone is recruiting, the retention of talent over time is a key difference from other industries. It’s also unusual in that it is an industry dominated by U.S. and French players worldwide, with the exception of Japan.

How is the role of a board director changing?
The job of being a public-company director is now more onerous in terms of the monitoring that has to take place. Boards should be aware of all risks, not just financial risks … things like copyright infringement, management succession, political risks—the total universe of risks in running an enterprise. That’s not to say you must eliminate risks, because taking risks is necessary in business to generate profit. What is important is the changing environment of risk. Is a company taking more risks than it was in the past or more than its competitors? It’s about understanding that aspect of the business. You can have a very good business financially but still fail because of non-financial risks. The challenge is about directing the strategy to ensure a company does not stray into new areas where they’re taking excessively big risks. This responsibility falls more heavily on boards now than it did five years ago.

[UBS Warburg senior adviser] Derek Higgs, in his new Review of the Role and Effectiveness of Non-Executive Directors, may say it best: “Good corporate governance must be an aid to productivity, not an impediment. It is an integral part of ensuring successful corporate performance, but of course only a part. It remains the case that successful entrepreneurs and strong managers, held properly to account and supported by effective boards, drive wealth creation.”

Do you think board members may become overly cautious in their oversight?

There’s a real danger that boards become more cautious in this environment by clamping down on the freedom of operations. Boards have to operate within the regulatory environment. Having access to capital for acquisition is a principal reason for why companies go public. Growth through acquisition is now seen as less valuable, and there is a return to fundamental organic growth. There are now probably more reasonable growth expectations, and it is not realistic and conceivable for mature companies to grow at 15 percent over a decade organically. Over the last decade, people accepted acquisitions as part of that growth. Now, in the current environment, people see higher acquisition growth as having higher risk.

WPP was the first company in the industry to expense options. Why?

There is a real cost to options. Everyone in the corporate world was reluctant to put a charge on earnings unilaterally because it would be a detriment to your earnings, not your competitors. Once Coca-Cola started the process [in the fourth quarter], it made a lot of sense to follow. In the U.K., companies have been more restricted in their ability to dispense options—that is, they can distribute up to 10 percent over a 10-year period. At WPP, we have 6 percent of share capital under option versus 10-15 percent of our competitors. Hence the charge to earnings for options will be low to WPP relative to our competitors.