FTSE 100 alumni survey 2017: Big Four dominate boardrooms and regulator

In our exclusive survey of FTSE 100 boards, Philip Smith analyses the undeniable power of the Big four in corporate boardrooms and in the Financial Reporting Council's (FRC) senior executive team, with 61 out of 100 audit committee chairs held by a Big Four alumni

While the Big Four audit firms continue to totally dominate the FTSE 100 audit market (see FTSE 100 auditors survey, p8, Nov 2017), it is easy to forget that their influence extends deep into the boardrooms of these companies as well. Exclusive research by Accountancy reveals that 61 out of the 100 audit committee chair positions in this highest level of corporate UK are held by someone who previously worked for at least one of these firms – Deloitte, EY, KPMG and PwC – or one of their predecessor firms.

Not only that, but a similar proportion (64%) of CFOs are eligible to join one of the Big Four alumni programmes, while a further 15% of board chairs can claim a similar heritage.

Many of these former employees, directors or partners will have left their alma maters some years beforehand to pursue a career in industry. But a significant number would have spent their whole professional careers in just one of the Big Four, perhaps even becoming its senior partner, to then retire and build a portfolio of non-executive positions.

Undoubtedly, they fulfil the requirement to have ‘recent and relevant financial experience’, as set out in the UK corporate governance code, but at the same time, they could easily find themselves sat on one side of the boardroom table with some very familiar auditor faces opposite them. Is this a case of ‘governance capture’?

Accountancy’s research reveals that 14 FTSE 100 companies are currently audited by a firm where the current audit committee chair also spent part of their career. The equivalent number for CFOs is 13. However, only three board chairs are likely to bump into their auditor at a Big Four alumni event.


PwC has the largest share of CFO and audit committee chairs at 44 (22%), followed by KPMG with 34 (17%)

This latter group contains the familiar names of Sir Michael Rake, whose old firm KPMG audits Worldpay Group, which he chairs, and Sir Philip Hampton, chairman of GlaxoSmithKline, which is currently audited by PwC, the successor firm to Coopers & Lybrand, at which Sir Philip trained as an auditor in the 1970s.

In fact, the FTSE 100 is littered with well-known faces from the Big Four world. Board chairmen include Deloitte former senior partner John Connolly, now at G4S, as well as the firm’s former chairman Martin Scicluna, who presides over RSA Insurance Group as well as acting as audit committee chair at Worldpay.

Kieran Poynter, former senior partner at PwC, is now audit committee chair at British American Tobacco and International Airlines Group. John Ormerod, the one-time head of Arthur Andersen, which was subsumed into Deloitte in the UK following the Enron scandal, now holds the audit committee chair position at ITV. Richard Reid, who ironically used to head up KPMG’s alumni programme and is now a member of that programme, is audit committee chair at Associated British Foods. Brendan Nelson, the former head of banking at KPMG combines his work as audit committee chair at RBS with the same role at BP, while Jock Lennox, the former EY partner who now convenes the Audit Committee Chairs’ Independent Forum, is chairman of the audit committee at Barratt Developments.

Close connections

‘The external audit is seen as having to be robust, fair and independent, something that can be relied upon,’ says Roger Barker, head of corporate governance at the Institute of Directors. ‘But close connections between individuals could in theory compromise this.’

Barker observes that this risk is one of the consequences of only having four audit firms that are deemed to have the sufficient skills to carry out an audit of a FTSE 100 company. Auditors in these firms then become very attractive to these same companies as they look for individuals with the necessary skillset to take on the role of audit committee chair, or indeed any other role on the board.

‘There is a limited source’, he says, ‘but there are safeguards. Audit committees are required to have one person with recent relevant financial experience, but not all. Committees can have a broader composition, where there is a balanced range of skills.’

Jonathan Hayward, director at Independent Audit, a company that specialises in advising audit committees and the main board on such issues, agrees. He says: ‘There is a risk, but it is a risk that comes with a particularly strong asset. The best audit committees that I have seen are ones where you have really strong people from this background, so that they can speak the same language, and they understand the issues, but you have also got people that have operational experience and understand the business angle, which then becomes a very good combination.’

Anyone can ask the “idiot” question, but can they ask the informed “idiot” question?

David Styles, director of corporate governance, FRC

David Styles, director of corporate governance at the Financial Reporting Council (FRC) adds that in order to have independence, there is a need to have knowledge, relevant skills and experience. ‘If you do not have that then you will not be able to analyse the information you have in front of you and be able to make decisions,’ he says.

‘Anyone can ask the “idiot” question, but can they ask the informed “idiot” question? The key point is that one needs to look at this in terms of the whole committee, and indeed the board, to ensure diversity in the widest sense of knowledge, skills, background and experience in order to provoke the right level of constructive challenge.’

Styles points out that it is the board that will have collective responsibility for decisions, ‘so it is the right level of independence on the board as a whole that is important’.

Lack of diversity

However, ensuring that there is diversity as well as appropriate experience and qualification can be a ‘fundamental challenge’ when recruiting for new audit committee chairman. ‘The requirement for recent and relevant financial knowledge basically means it has got to be a qualified accountant, and the vast majority of those will either be ICAEW or CIMA qualified,’ says Mark Freebairn, head of the CFO practice at recruitment consultancy Odgers Berndtson. ‘Admittedly, over the last decade the power of the ICAEW qualification has reduced slightly, but the vast majority will have come through the Big Four firms.’

And this goes to the nub of the matter: if the Big Four audit firms are responsible for training the lion’s share of qualified auditors and accountants, then it is inevitable that there is a big proportion of Big Four alumni on the audit committees and elsewhere within the FTSE 100, and beyond. However, Freebairn believes the power of the ICAEW qualification, which traditionally was seen as the ‘blue blooded’ qualification, might be beginning to wain in favour of the CIMA qualification.


The percentage of CFOs at FTSE 100 firms with a Big Four background is 64%, while 61% of audit chairs hail from a similar background

Indeed, since Accountancy last carried out this survey in 2015, the number of ICAEW qualified audit committee chairs and CFOs in the FTSE 100 has declined by a small number, but nevertheless, it is by far and away the most dominant institute. In 2015, there were 51 audit committee chair positions filled by an ICAEW member, this year the figure stands at 47. Similarly, in 2015 there were 45 CFOs with an ICAEW qualification, now there are 41.

However, no matter what the qualification or the background, Freebairn also believes that there are other aspects such as integrity that are equally as important. ‘The integrity with which they have to operate, and have had to operate throughout their professional lives, means that there is no hint of impropriety,’ he says. ‘If anything, it is a bit like refereeing your own child’s team at a football match, they will be more anxious about that. Having spoken to audit partners who are going in to pitch to someone they may have trained with, they say it is by far the hardest process they go through.’

But Freebairn acknowledges that someone would need to be well immersed in the process to understand the importance of this aspect, something that outsiders may not appreciate.

Rebutting bias claims

So, what can audit committee chairs, and indeed those on the wider board, including the chair and CFO, do to ensure that they do not have to face accusations of bias when dealing with their auditors? Of course, they could take similar action to that of Mike Ashley, the former KPMG partner and current audit committee chair at Barclays, who not only removed himself from the audit tender committee at the bank, but also did not participate in the actual board decision to appoint his former firm. But now that KPMG is in place at Barclays, it would be difficult to maintain this neutrality on a day‑to-day basis.

‘Non-execs are very conscious not only of the act of impropriety but also the optic of impropriety,’ Freebairn says. ‘If an audit committee chair loses their reputation for integrity then that would be the end of their career, it would be something they could not come back from.’

Limited candidates

But the fact is that, as Freebairn and others observe, the starting point is that the pool from which audit committee chairs, and indeed CFOs at this level, come from is such that nearly half will be from a particular institute, and more often than not trained in one of only four firms, who also dominate the listed audit market.

The answer therefore may lie in widening the pool within which the headhunters fish. ‘The only requirement is that you are senior enough in the finance function to be a credible guarantor to a board of the control, process, infrastructure and environment within which an organisation is operating,’ Freebairn says. ‘What that traditionally has meant is that you have had to have been a finance director of a PLC. But the demands for more diversity on boards has allowed us to widen that pool out away from a main board finance director to a broader senior person in the finance function.’

Freebairn feels that a solution to the issue of removing any potential conflicts of interest would at the same time create a much greater problem of having unqualified people chairing audit committees.

Even seasoned campaigners such as Richard Murphy, director of Tax Research UK, accept that although there is potential for conflicts of interest, FTSE 100 companies are commercial organisations and will behave in a commercial way.

‘There needs to be an audit committee, but these are commercial organisations that undertake commercial activities in the interest of their shareholders,’ he says. ‘However,there has to be a degree of separation, and it would be wise to make sure that nobody who has recently been an audit partner [for a company] can immediately serve as chair of that audit committee.’

Accountancy is not the only way to understand finance. It is up to a company to decide who they choose but I am surprised at how blinkered they can be

Richard Murphy, director of Tax Research UK

There is, of course, the two-year cooling off period, a requirement to stop auditors from immediately joining the company that they had formerly audited, but as Murphy asks: ‘Is that long enough?’ Instead, he urges companies to look beyond the traditional pool of Big Four trained accountants. ‘They should be broad minded enough to say that they do not have to come from a Big Four background,’ he says.

There would appear to be a long way to go before non-Big Four trained accountants become anything more than a rarity at this level. Currently, of the audit committee chairs that have had any experience in practice, only one (David Keens at Sainsbury’s) is not from the Big Four. The equivalent number for CFOs is two: Steve Kalmin at Glencore and Prashanth Shenoy at NMC Health.

‘Experience of finance does not necessarily mean accountants,’ Murphy says. ‘There is a large MBA programme in the UK, which produces people trained in finance, so why do we not value their opinion of finance as highly as we do of those that are trained accountants? Accountancy is not the only way to understand finance. It is up to a company to decide who they choose but I am surprised at how blinkered they can be.’

The Financial Reporting Council

The Big Four diaspora are not only found around the boardroom tables of the companies they audit, but also in the corridors of those that regulate them as well. In a welcome move to improve its own transparency, the Financial Reporting Council (FRC) has published a register of interests of those that sit on its various committees, including its main board. This register lists, among other things, whether its members are also members of any Big Four pension scheme. 
Accountancy analysis (see table below) shows the share of former Big Four alumni representation on the main FRC board, senior executive team, and where relevant shows whether they are also members of the critical Codes & Standards and Conduct committees.
Of the 15-member main board, five are Big Four alumni, three of which came from one firm, PwC. Out of the 10 members of the FRC’s codes and standards committee, four come from the Big Four, while five members of the 13-strong conduct committee have a Big Four background.
What the register does not cover is the number of ex-Big Four who are now senior executives at the regulator and the apparent unwillingness of the regulator to recruit from mid‑tier or smaller firms. 
Only three of the 13-strong senior executive team do not have a background in one of the larger practices, and of the 10 that do, one is from mid-tier firm BDO, another worked at Crowe Clark Whitehill and the rest are from the Big Four.
In a statement, the FRC said: ‘Having some members with audit backgrounds ensures the FRC has the expertise it needs on its board, councils and committees to make informed decisions on the matters within its remit. 
‘However, the FRC’s constitution does not allow recently retired auditors to sit on any audit regulation decision making bodies and requires a lay majority on all the constituent parts of its governance structure.’

FTSE 100 senior directors 2017

Accountancy's exclusive table showing FTSE 100 audit committe chairs, CFOs, and chairs along with what Big Four firm they have worked for and what professional qualifications they have is here: PDF iconaccountancy_ftse_100_alumni_december2017.pdf

About the author

Philip Smith is contributing editor of Accountancy and a specialist audit, business and accounting writer and author

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