It is not always possible (or desirable) to judge someone by their place of work. I would hate anyone to take a look at my desk and come to conclusions about me. But there are exceptions. You get a decent impression of Robin Freestone from his office – large, impressive and tastefully (if neutrally) dressed with a view of Westminster and the Houses of Parliament. Which seems pretty apposite. For the CFO of Pearson is tall, tastefully dressed and, as chair of the Hundred Group, the influential lobby group of FTSE 100 CFOs, his mind is focused on government matters. In particular, he is concerned with the way government impacts on business.
“Whenever you come out of a financial crisis the reaction is always to think increased regulation will be a good thing. But hitting everyone with more regulation is not helpful. It all costs money and importantly it diverts people’s time, attention and resources away from commercial matters as they have to focus more on compliance. It differs from sector to sector but no matter where it comes from the regulatory tide is still rising and a lot of it is not justified by any sensible cost-benefit analysis.”
If we are going to start portraying things like legitimate investment or the desire to invest in new plant or R&D as avoidance, we really will have lost the plot
Freestone says reducing the regulatory burden is one of his primary objectives for his time in charge of the Hundred Group (usually a two-year tenure). But he has other concerns, too. He has been both a supporter and a vocal critic of the IFRS project. While the media has picked up on his criticisms of the standards, he proclaims himself an advocate of global convergence. Even without the participation or engagement of the US, he insists, huge advances have been made in the past 20 years.
“Putting the US to one side you have to look at the progress made,” he says. “Effectively we now have international standards in most major economies except India, which has a few issues of its own to resolve, and Japan, which tends to follow the US. That was a fantasy 20 years ago. It’s a shame the great convergence idea hasn’t worked out fully, because business is more global than ever and one set of standards would be better.
"But to the extent that the differences are that much smaller [than they used to be] the project has already been helpful. Over time I think we will see some pretty specific and well understood areas of difference that to some extent will become a minority sport.”
If he is sanguine about convergence, he has a more general concern about the complexity of the standards and numbers produced as a result. “My generic worry is that I see the use of IFRS numbers, either by shareholders and investors or by management running the business, diminishing. The more complicated we make these albeit technically brilliant international accounting standards, the more complex they are to implement. There is a balance between complexity, integrity and relevance. The danger is that IFRS becomes a set of compliance numbers that are too complex to understand.”
More worrying still, he says, is the amount of work required to meet the standards. “The more complex we make IFRS the more resources we have to put into doing lots of manual adjustments — that is both risky and not very SarbOx compliant. These are offline spreadsheet adjustments and it seems a strange trend. The costs are rarely ever considered.”
One of his concerns is for the man on the street trying to assess investing in one company over another. This interface between business and the wider community is a common theme of our discussion. Another objective for his tenure as chair of the Hundred Group is to re-engage business and society and try to dispel the increasingly popular idea that business is bad. “We’ve quickly moved from banker bashing to business bashing,” he says. An obvious recent example has been the often less than edifying debate on corporation tax. Freestone doesn’t agree with Sir Martin Sorrell’s statement that corporation tax is a matter of judgement.
“Anyone can choose not to pay it if you choose to leave the country,” he says. “But that route is open to all and not many have taken it.”
He believes we need a more considered debate on the issue. He points to the trend for lower and lower corporation tax in the UK. “The UK is becoming a pretty low corporation tax regime. When I did my exams we’d set aside 52% for corporation tax; soon it will be down to 21%. This feels like a fair amount of tax to pay on profits considering the other taxes paid.”
Individual businesses and the business lobby groups haven’t done a great job at getting their side of the debate across, says Freestone. He points to the Total Tax Contribution of the 100 Group, 2012 Survey published at the end of last month and the fact that FTSE 100 companies contribute almost £80bn a year to the Exchequer. “The debate on corporation tax fails to recognise that it is actually quite a small proportion of the total tax contribution – something like 10%. And while this is falling the other 23 taxes borne or collected by businesses are going up.”
This policy of lowering corporation tax to improve compliance and stimulate more economic activity has, he says, been pretty successful. “Look at the way unemployment has not gone up during this recession at the rate people thought. Maybe there is a bit of a trade-off.”
His other concern is lack of understanding about legitimate deductions. “Not all tax avoidance is wrong. There is aggressive avoidance and schemes set up to avoid tax and I think that’s wrong. CFOs are increasingly saying they don’t want any part of that. But not enough is said about things like increasing pension contributions or R&D tax credits. These are legitimate deductions. If we are going to start portraying as avoidance legitimate investment or government-formulated schemes or the desire to increase investment in new plant or research and development in the UK we really will have lost the plot.”
The global tax system is struggling to keep pace with a changing world, he says. “Our tax system was designed for a world of physical goods moving between places. Transfer pricing is an extremely complex area. And the system hasn’t been redesigned for managing global brands or intellectual property or intangibles crossing borders. That’s a real challenge.” He cites the example of a customer downloading an ebook. “Where you charge the VAT is complex. That is one area that will change, but all this needs careful thought.”
While there are international accounting bodies to deal with these challenges, Freestone suggests they might not have kept pace with developments. “They apparently haven’t worked out that the world is moving rapidly and is very complex.”
According to David Arculus, a non-executive director on the Pearson board, Freestone is “a very good financial director” who manages to be both structured in his approach and inspiring. “He’s also very positive and always thinking what we can do rather than what we can’t.” Crucially this approach fits well with the “loose-tight structure” that Pearson has adopted, allowing local businesses a high degree of independence. “For that to work, you really do need tight financial controls,” says Arculus.
Freestone came to accountancy (qualifying with Touche Ross, now part of Deloitte) via a degree in economics, with the aim of pursuing a career in
We are becoming a software business with the same great [educational] content but built-in interactivity that allows feedback and an idea of how well children are learning
business. “I wanted the chartered accountancy qualification because it was well respected and I knew once I got through the exams there would always be well-paid work.” His early career was spent in the pharmaceutical and chemical sectors at Amersham, ICI, Zeneca and Henkel. He still retains an interest in the latter, as non-executive and founder shareholder of innovative chemical manufacturer eChem, which formed in May 2000 following a management buy-out from a European multinational.
He joined Pearson as deputy CFO in 2004, becoming CFO two years later. He declares the business in good shape but admits 2012 was a tough year. “It was a hard year, but talking to my peers it seems it was a difficult year for everyone.”
It was certainly an eventful year. Pearson completed its biggest ever takeover, acquiring online learning firm EmbanetCompass in the US for £650m; it merged its iconic Penguin book business with Random House (a deal Freestone doesn’t expect to complete until midway through 2013 after tackling considerable regulatory hurdles); and there was a change at the top with Dame Marjorie Scardino standing down after 16 years. She was replaced by John Fallon, previously head of the education business outside the US.
The appointment of Fallon – a move Freestone appears genuinely pleased with – isn’t expected to herald any major switch in strategic direction for the company. “There has been a slight shift in priorities but not in strategic direction,” he says. “But that change is a healthy check on what we are doing. John asks me different questions [to] Marjorie. That’s great because when you look at things from a different angle you see things differently.”
On the perennial question of the future of the Financial Times (which some analysts felt would be put up for sale once Scardino departed) Freestone says: “The FT is not for sale; it’s as simple as that.”
The real challenge facing Pearson, says Freestone, is how to adapt to an increasingly digital world. The business is in a period of profound change, having to evolve from being a book publisher to being a software company. “The broad strategy will stay the same under John. We want to be the world’s leading player in educational software and we’ll continue to invest in new products. We try to invest 8% of education sales in innovation and we prefer that to be a long-term game.
"We don’t want that investment to move too much based on year-to-year results. But everything we are investing in has to be delivered via a tablet or e-reader. It won’t be long before all school content is digitally delivered and the textbook is a thing of the past. We are becoming a software business with the same great content but built-in interactivity that allows feedback and an idea of how well children are learning.”
This kept Freestone busy, with a small investment in device maker Nook (although Pearson remains “device agnostic”, Nook’s strong presence in the US education market made the investment a potentially smart move) and the divestment of the 50% of FTSE it owned to the London Stock Exchange (owner of the other 50%).
Freestone says having a clear strategy is as much about knowing what you don’t want to do. “We have to ask what we are going to stop doing. Ultimately it’s for John to decide where we place our investment. We’ll have to stop doing some things. For example, we have to start managing down our book infrastructure and the business associated with books. We want to hold a lot less book stock than we used to.”
You get a clear measure from Freestone of Pearson’s long-term plans. This desire to encourage long-termism fits with his third objective at the Hundred Group. He says that there is a need to try and move away from short-term thinking in the City. “You can’t characterise the City as one entity. But John Kay’s report last year highlighted some of the issues and was somewhat lightly dismissed. We have to make sure investors who take a long-term, considered view have better rights than the high-frequency traders.”
He cites Invesco Perpetual fund manager Neil Woodford, whose average length of ownership is 16 years. “At the other extreme you have all these traders, often dealing in derivatives and contracts for difference, or the automatic algorithmic trading where there is no connection between the company and who owns the shares. People on the share register for 10 years and those on it for three minutes are all treated equally.”
On the challenges facing accountancy, Freestone naturally returns to IFRS and excessive technical complications. But he also turns to audit. He seems confident common sense will prevail in the debate on audit quality. “A level of balance is required. We will probably end up in the right place.”
He thinks a good CFO will be putting pressure on everyone to reduce costs and to use regular tenders to get the best deal. So why not do the same with audit? “We’ll end up with a tendering requirement every 10 or 15 years and we might see the EU demand we rotate auditors every 20 or 25 years. I don’t think that would be too onerous. But we must lobby to make sure we don’t end up with a situation where companies have to change auditors too often. We don’t want to set rules in order to manage perception up and in the process manage quality down. That’s something no CFOs, auditors or shareholders want.”
1977 Manchester University
1980 Touche Ross, Manchester
1985 ICI and Zeneca Agrochemicals
1995 CFO, Henkel UK
2000 NED/founder shareholder, eChem
2000 Group financial controller, Amersham
2004 Deputy CFO, Pearson
2006 Group CFO, Pearson