Viewing the big picture with Canada's CFO of the Year: in an interview, Peter Currie, CFO of the Royal Bank of Canada, reviews Sarbanes-Oxley, the developing Basel Accords for financial institutions, corporate governance and the evolving role of the CFO.

The ability to attract foreign capital to the U.S. market has never really been a front-page issue--America is known as the safest and deepest capital market in the world. However, during the last several years, concerns have been mounting over the current account deficit and the increasing flow of U.S. capital to foreign markets.

These worries have been compounded by three years of painfully slow economic growth, little reinvestment in plant and machinery, historically low interest rates and a decrease in the value of the U.S. dollar--not to mention the politically and financially destabilizing impact of the war in Iraq and a serious crises in investor confidence triggered by widespread corporate malfeasance.

Against this backdrop, many observers are now voicing doubts about the general health of the U.S. market and its ability to attract foreign capital. With the implementation of the Sarbanes-Oxley Act, both Congress and the Securities and Exchange Commission have attempted to improve corporate governance, and thereby restore investor confidence. Meanwhile, international regulators like the Basel Committee and the International Accounting Standards Board are working hard with the United States to develop one set of generally accepted standards that will increase financial transparency and create uniform disclosure practices in companies around the world.

The combined impact of all of this isn't yet known. Has Sarbanes-Oxley helped restore investor confidence, or has it merely had the perverse impact of increasing costs while creating highly risk-averse managers and directors? Furthermore, have the onerous compliance rules of Sarbanes-Oxley Section 404 scared off would-be entrants into the U.S. market, and--when you throw the changing international rules into the mix--will the playing field get so lumpy that foreign issuers just may go home?

Peter Currie, named Canada's CFO of the Year in 2003 by FEI Canada and PricewaterhouseCoopers, is CFO and Vice Chairman of the Royal Bank of Canada. He addresses these and other important issues from the perspective of one of the world's largest and most successful banks, which has been gradually expanding in the U.S.

Has the increased risk and responsibility of the new regulatory environment hampered the ability of large organizations to attract top people to the senior executive spots or to the board of directors?

CURRIE: It has caused prospective directors to be somewhat more circumspect about jumping on the board. If nothing else, what Sarbanes-Oxley has done is to escalate the role of governance to be executed by directors. Having said that, there's a large population of prospective directors that don't even get addressed today that companies are going to have to start thinking about. Now, we actually have to look for people who are qualified, as opposed to people we know from the local country club. Now, we're going to have to look for people who may actually be subject-matter experts in areas like risk management, or finance, or information technology or strategy.

I don't think the pool of individuals will shrink, but that it will force companies to be more broad-minded. People who get approached to be on boards will also ask tougher questions. They'll be more selective. It will undoubtedly be more difficult for troubled companies or companies with questionable track records to attract good people.

People aren't prepared to take the reputational risk or devote the time to a company if they don't have confidence in its leadership, or strategy or its values. In that respect, Sarbanes-Oxley has changed the environment. But I don't think it's changed it for the worse, it's changed it for the better.

What is the impact on the CFO's role? Are less people interested in becoming a CFO as a result of the new risk environment and the heightened focus on compliance?

CURRIE: People are drawn to the CFO role, less for technical reasons but more because of a desire to have an influence on the strategy-setting and the momentum of a company. Sarbanes-Oxley and the various litigations that have occurred, primarily in U.S. companies, have shown some of the downsides of being a CFO. But there are all kinds of upsides in terms of having a meaningful impact on a company and providing leadership. In that context, it may attract different people to the role.

Do you see CFOs being more risk-averse in the future?

CURRIE: In the short term, some will definitely be more risk-averse. They'll think that taking the ultra-conservative route is the most prudent course of action. However, in my view, a CFO who's doing a complete job will simply weigh more factors in making decisions. This environment has caused CFOs to think more about the balance they have to maintain. Has it made our lives more complicated? Yes. It's introduced more variables. But, when we look back in two or three years, we'll say 2003 was a productive year for CFOs in terms of our growth in the roles we're undertaking.

Some people have argued that Sarbanes-Oxley will impede the innovative capabilities of companies in the U.S. Do you agree?

CURRIE: In the short term, that could happen, but it's a bandwidth issue. It will limit innovation because people are spending their time worrying about compliance. If investors look at companies and get the impression that [they] are being less innovative because they're concerned about being out of tolerance with legislation, they should ask themselves, "What business is this company really in, and do we have the right management group?"

That's because we're supposed to be able to walk and chew gum at the same time. We're supposed to be innovative, and grow the company, and comply with the law of the land, and have good governance and do the right things for our communities. That's all part of the package that managers are supposed to bring to the table. If they can't, then we have to put managers in place that can.

With the recent wave of lawsuits and investigations into bank lending practices, banks are being held accountable not only for preventing money laundering and fraud, but also for their clients' integrity. Is this just a short-term fallout from Enron, or can we expect to see more accountability placed in the banking sector in the long run?

CURRIE: Banks are in a very unique position in society. In the simplest form, we take cash from our customers as deposits and safeguard it, and lend it out to other people to invest in activities to create economic growth. Our shareholders benefit from our ability to efficiently manage the spreads between our deposit rates and our lending rates. To the extent that we're lending out other people's money, we have a unique responsibility to know whom we're lending to.

Will lending strategies or practices change as a result, or are things in such a state of due diligence that business will carry on as usual?

CURRIE: In the past four or five years, we've seen very thin pricing, specifically in the corporate market, because it's been very competitive, with a surplus of lenders over borrowers. As a result, some marginal loans have been made to certain companies. If you look at some of the economic difficulties of the past three years in the U.S.--in certain industries and in the cold hard light of day--you wonder how loans got made on a cash flow basis to companies with no revenue.

It was because some people in the financial services industry were going exclusively after revenue growth. Today, however, more careful due diligence will be done in corporate lending, and banks will probably tend to be more conservative in their lending practices. [This] combination will ultimately result in a normalization of pricing in the lending market.

Royal Bank of Canada has recently entered the U.S. market. Do you think other companies that may not have your resources base will be scared off from the U.S. equities markets as a result of Sarbanes-Oxley?

CURRIE: I do think it may have scared some smaller fliers away. However, the U.S. market is still the largest and most vibrant market in the world, and a lot of larger companies will still be attracted to it. Most of us realize that while some of the provisions of Sarbanes-Oxley are a little arcane and onerous to comply with, on balance, what Sarbanes-Oxley means is good corporate governance. Good corporate governance is good business, and that's what our owners want us to engage in.

Basel Accord is now in it's third draft, and is expected to be ready for adoption early in 2004. Some suggest that Basel, instead of creating a level playing field, creates competitive advantages based upon size and the home country of the financial institution. What will the impacts of the accord be on your bank, and other banks looking to expand into international markets?

CURRIE: Basel will create a level playing field environment for competition and allocation of capital. However, the problem is that it may not be applied uniformly, and we've seen ongoing debates between the U.S. and the Basel Committee.

My guess is that in the United States, there's a very real possibility that it will only be applied to banks with significant international operations. That's fine if you take the U.S. as a closed market. From an international perspective, companies that adopt Basel may be disadvantaged in the U.S.

Take the Royal Bank, for example, which is now moving into the United States. We're competing against organizations that fundamentally have a different set of rules. That, to my way of thinking, is inappropriate. It would also be inappropriate if we found out that European banks wanted to adopt only certain elements of Basel and certain U.S. batiks wanted to adopt other certain elements, or implement them at different paces.

There's also another wild card here. Even if Basel leads to a 15 percent lower capital requirement than you're otherwise used to, it's unlikely that the rating agencies or the local regulators will let you do that. So you've got this free capital under one measurement, and yet your regulators, who are important to banks, and the rating agencies--who are really important to banks--may still require a higher level of capital in reserve. It's a bit of a hodgepodge. It's also highly questionable as to how and when it's going to

Capital market stability has been one of the main concerns addressed by both Sarbanes-Oxley and the International Accounting Standards. With the added certification requirements imposed by Sarbanes-Oxley, it would seem that the international standards are even less likely to be accepted in the U.S. without full reconciliation.

CURRIE: We do see an increasing convergence towards international accounting standards. Good work has been done in the U.K., U.S. and Canada to find common ground. Today, we're in a somewhat volatile environment because we've had Sarbanes-Oxley come in and say, "You must comply with U.S. GAAP in order to participate in our capital markets." It's certainly added another level of complexity.

If the uniform international adoption of Basel is unlikely, and the uniform international adoption of the IAS (International Accounting Standards) as a standard for filing on international securities exchanges is unlikely, where do we stand in harmonizing disclosure? And what does this mean for the goal of a level playing field and seamless capital mobility?

CURRIE: I actually think that global capital markets are pretty efficient. In terms of accounting, we're much further evolved in terms of having more common standards and more common understanding of reporting than we have ever been. As an observer, I'm much less concerned about it now than I was 10 years ago.

Is there still cause for concern that major parts of the global economy are operating on different parameters? Sure. For example, we should all be concerned about the fiscal health of the Japanese banks, which are mammoth in terms of their influence on world economics. They operate under very different parameters. Then there's the whole situation in China, which to my knowledge and for all intents and purposes--doesn't yet have any uniform accounting standards.

If we're going to worry about something, let's worry about that before we worry about things like mark-to-market on derivative instruments in Spain. Some of this stuff, we should just deal get on with it.

Arguably, corporate governance and accounting practices in North America are the best in the world. At what point have we put enough emphasis on corporate governance and financial control?

CURRIE: We're probably at the point where we've had enough in terms of new, pure compliance guidelines. However, this gets back to my point about the difference between compliance and governance. The Royal Bank has been concerned with corporate governance for the past 20 years, and we will continue to be so. It's just good management.

Ramona Dzinkowski is a Canadian economic researcher and journalist who is working with FEI Canada. She can be reached at [e-mail].