Business is leading a counter-revolution against corporate reform. John Plender sees a problem for Lord Simonby John Plender / October 20, 1997 / Leave a comment
Is british business a victim of excessive accountability? Not if you believe John Kay, who compares corporate democracy in Britain with the sham democratic process that prevailed in communist eastern Europe.
But now we have the Hampel committee on corporate governance leading a counter-revolution against the reformers. In its interim report published in August (timing that arouses suspicion), it says accountability is being emphasised at the expense of efficiency. Who is right?
The answer becomes obvious if you look at the composition of Ronnie Hampel’s committee. Six of the 11 members are from quoted companies. By some unhappy freak of fate shares in five of the six, at the time of writing, just happen to have underperformed the FT All-share index since the start of the year. For these men accountability is thus a career threat.
Then there is the small matter of the individual members’ own governance arrangements. Sir Nigel Mobbs of Slough Estates, for example, has been criticised for combining the roles of chairman and chief executive, while the Slough board has fewer independent directors than is necessary to make this concentration of power look acceptable. Slough’s poor longterm record would justify a place on any activist institutional shareholder’s hit list.
Chris Haskins of Northern Foods is also open to criticism on the score of combining the roles of chairman and chief executive. His company has been going through a bad patch because of problems in the dairy industry. Clive Thompson, chief executive of Rentokil Initial, is on a two-year rolling contract, which is not best practice as defined by the Greenbury committee, and Michael Hartnall, finance director of Rexam, is open to the same criticism.
Hardly a surprise then, that the committee attacks a so-called “box-ticking” approach to corporate governance. It proposes replacing the detailed prescriptions offered by the Cadbury committee on corporate governance with broad principles.
The governance process does carry a risk of excessive bureaucracy. But this plea for more power and less responsibility in the boardroom is so transparently self-interested that it invites robust scepticism. The committee is, of course, accountable to no one.
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britain’s institutional shareholders are famously supine, yet they show occasional signs of activism. The latest instance is at GEC, where nearly 40 per cent of the votes were cast against the company’s share incentive proposals last month.
Yet a majority of institutions still fail to vote on AGM resolutions. And there are plenty of companies like Slough Estates where institutional inertia gives underperforming management an easy ride. Pay inflation remains endemic in the boardroom, while most share option and incentive schemes are merely ways of accelerating the transfer of value from owners to managers, regardless of performance.
Why does this still happen? Look at the people involved. The dissenting shareholders are invariably public sector pension funds and mutual insurance companies. Unlike director-trustees of private sector funds and the directors of proprietory insurers, neither of these groups stands to lose if the incentive scheme gravy train is derailed.
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meanwhile ronnie hampel and his fellow counter-revolutionaries are becoming increasingly bold. They now question the link between good governance and corporate success. Yet it seems obvious that corporate disaster is routinely accompanied by bad governance. Look at the British Gas “fat cat” disaster. Or take Wickes, the DIY group that recently ran into trouble. Before it hit financial difficulties, the roles of chairman and chief executive were combined in the hands of one Harry Sweetbaum. Two of the non-executives up for re-election were aged 75 and 79. Executive directors were on two-year rolling contracts. No adequate explanation was offered for the payment of an uncovered dividend.
This should be evidence enough for anyone but a purblind governance counter-revolutionary. In implying that accountability and business prosperity are in conflict, Hampel does signal disservice. The benefit of explicit rules rather than vague principles is that they are more likely to minimise sloppy boardroom behaviour and reduce the corporate accident rate in a downturn-which may not be far away.
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high levels of boardroom pay inflation combined with institutional inertia undermine the public legitimacy of business. Since these problems arise in part from potential conflicts of interest among the institutions, Labour’s pre-election commitment to require institutions to disclose how they exercise their votes was sensible. Hampel is against this. And at the DTI Lord Simon, former chairman of BP, retains responsibilities for corporate governance. Before joining the government, he was-you’ve guessed it -deputy chairman of the Hampel committee. His verdict on his own work will make fascinating (and possibly depressing) reading.