Financial Times Briefings: Corporate Governance

My book on UK corporate governance is finally published.
ISBN-10: 0273745972

"Corporate governance describes the systems, procedures and behaviours by which an organisation is directed and controlled."

The book is designed as a quick, practical and accessible guide to what you need to know about UK corporate governance. It describes the basis of law and how voluntary codes, backed by a "comply or explain regime", were encouraged as government took fright over the effect of corporate scandals on capital markets. Inevitable accretions of bureaucracy have led to the voluntary approach being partly subsumed into law and describes how this trend is likely to continue under the influence of EU pressures to unify national practices.

The book covers the responsibilities of directors and boards and how the latter should be organised and managed. It also addresses the practicalities of how to measure, manage, discuss and justify corporate governance.

However, rules are not enough – both corporate scandals and anecdotal evidence suggest that behaviours are critical to good governance. Indeed too much legislation is counterproductive, turning into a box ticking exercise rather than something people really engage with. For the ill intentioned those laws and regulations merely provide neat targets for side-stepping and proving that their behaviour did not quite fit the definitions givem. Rules and codes, together with the prevailing climate of opinion can encourage appropriate behaviours and ensure the quality of the ‘Boardroom Conversation.’ But  if people think they can get away with sliding around the definitions while ticking the boxes then many of them will.do so; that climate of opinion is critical because it can discourage behaviour that falls just outside the definitions but that business partners believe is beyond the pale.

Furthermore, governance extends beyond the boardroom door. The blowout at BP’s Deepwater oil rig and GSK’s product quality failings at its Costa Rica drug manufacturing plant occurred despite compliance processes and safety officers and reams of risk assessments and governance procedures in annual reports. The behaviour of subordinates is also the responsibility of the board and an integral part of their governance duties – how do they make their policies stick?

The book emphasises that corporate governance applies as much to private as to listed companies as well as to a range of public bodies and not-for profit organisations. Good corporate governance contributes to business success, to successful fundraising and to dealing with business partners. It balances the needs and rights of different interest groups. It constrains the overmighty chief executive, chairman or shareholder to consider other stakeholders, appropriate levels of risk and to follow fair and transparent processes. It should reduce the incidence of corporate disaster as much as corporate fraud – better board structures and approach would surely have increased the chances of GEC avoiding policies that led inexorably to the company’s implosion? 

Key chapter headings include;

PART 1 – In Brief   

1          The executive précis:

2          What is it? What do I need to know?  Key terms/ concepts

The Background, Corporate Culture, Creative Accounting, Individual Behaviour, The legal structure, Current UK developments, Voluntary Codes or Legislation? The International Picture – EU, The Sarbanes Oxley Act etc

2.1            What is it for?  

2.2            Who is it for?  

2.3             Objectives

3.         Why do it? Risks/ Rewards

Compliance, Stakeholder demands, Corporate effectiveness, Public and Employee Relations, The costs, risks and rewards of good governance, Roes it work? Reasons for Corporate Social Responsibility

4.         Who’s doing it? Who has done it?   

What do success and failure look like?

  

PART 2     In Practice          

5.         How to do it

Role and Duties of Directors, The role of the Board, Integrity and Values, Shareholder rights, The Role of Markets      

6.                  How to manage it

           

7.                  How to measure it

           

8.                  The business case for corporate governance

9.                  How to talk about corporate governance      

PART 3 - Intervention

Executive intervention, Internal communication, Delegated Authority, Risk Management, Whistleblowing, When is my intervention needed? What questions should I ask, and who should I ask?   What are the decisions I need to make? What levers should I pull?            How do we know when we’ve succeeded or failed? 

PART 4 – Other Resources

websites, books, courses, consultants

Do directors of private companies have a duty to declare insider knowledge when puchasing shares?

Yesterday The Times reported on the settlement of a court case involving former shareholders in Uswitch who alleged that the Marquess of Milford Haven induced them to sell their shares, at an undervalue, to a company that they did not know was connected to him. Shortly afterwards the business was sold in its entirety for over £200m to a US company at a price per share some ten times what they had received.

The outline of the allegations points to an anomally in UK company law. For a company whose shares are publicly traded on an exchange, the directors are obliged by the Financial Services and Markets Act to disclose information about their share dealing and to make full disclosure of relevant information to shareholders through the regulatory news services. But this legislation does not apply to private companies. Shareholders in these businesses can only sue for deception or misrepresentation if they feel they have been wronged.

In another example, a friend of mine is a shareholder in a private company. After some years the shareholders as a whole appointed an outsider as chairman who, over a period, bought shares from individuals and became the largest individual shareholder. During this period there were expressions of interest from a foreign company in buying the business, though this has not yet come to anything. My friend thinks the chairman is very capable and has done a good job. There is no implication that he has done anything morally wrong. But UK company law offers very little protection if he had used inside information to buy shares at an undervalue. In this case, at least, the sellers would have known they were selling to an insider but would they have imagined that protections against insider dealing applied to them? Insider dealing is an offence defined in relation only to quoted companies not to private ones.

It seems to me that larger private companies which allow their shares to be traded should produce, at least, a code of behaviour for directors and other executive shareholders. If it were possible to put something stronger in place through a binding shareholder agreement that would be better. If a satisfactory way could be found to extend the law to private companies then that would be better still.

Transparency International calls on FIFA to improve governance

Article by Aarti Maharaj in Corporate Secretary reports that Transparency International, the corruption campaigning and monitoring group, has produced a report that suggests, among other things, that a group of independent outsiders should oversee the current review.

 “FIFA says it wants to reform, but successive bribery scandals have left public trust in it at an all-time low. Working with an oversight group – taking its advice, giving it access, letting it participate in investigations – will show whether there is going to be real change. The process has to start now,” said Sylvia Schenk, senior advisor on sport to TI.

That certainly suggests a pretty low degree of trust in Fifa and its internal processes...probably well deserved.

Peter Day's radio 4 programme on corporate governance

If you missed it then it is worth listening to this programme on corporate governance. It covers too many issues too superficially and seeks too many easy soundbites but it assembled a group of mostly impressive and interesting people to provide those soundbites. And, Peter Day actually asks some very good questions. And, by the way, most of those issues are really important.

FTSE 100 CEO pay unrelated to performance

I have written before, quoting Chris Bones and Sir Paul Judge, about how directors have, over a number of years, captured increasingly huge pay packages that bear no relation to their own or their companies' performance. Further evidence is provided by the Manifest and MM&K Total Remuneration Survey 2011, quoted in Tricker and Mallin's blog. 


They report that "median FTSE100 CEO remuneration increased by 32% to £3.5million in 2010 compared to 2009, whilst the FTSE100 index only rose 9% over the same period." I am prepared to bet that the falling stock market and falling corporate profits in 2011 will not show up in reduced remuneration!

How does the board ensure its policies are carried out?

I started an online discussion on this topic on a forum for governance professionals and was startled by the responses. They read as if they resulted from quoting a particularly unimaginative textbook, referring to committees, escalation procedures, frameworks, second and third lines of defence, a performance management dashboard; oh, and before I forget, reminding each board member of their duties.

Now the forum members are meant to be people who work in the area of governance, probably many are company secretaries or internal auditors - and not a clue. Not just no clue about the answers - which are difficult - but actually no clue about the questions either: they just did not understand the problem. There are two distinct sets of issues connected with making sure that board policies are actually being implemented. The first is where the board policies are communicated but at some point in the process, by the time they get to the operational front-line they are changed or blocked or just not carried out. The executive directors probably believe the policies are being observed but there is a disconnection in the line of command and they are not. The second issue is where the problem starts at board level. Different executive directors may be in conflict and battling for resources and influence or there may be disagreement about the policy - in the latter case it is communicated and implemented with a lack of enthusiasm, which prevents it from working - in the former case there is deliberate obstruction. In any event the problem is not rules, procedures, mechanisms, frameworks etcetera: it is behaviours.

Even in traditional command-and-control organisations it was a myth that the leader would give an instruction and that it would be passed accurately down the chain of command and carried out diligently and immediately at the operational level. There were endless opportunities to obstruct or reinterpret direct instructions. In more modern, more flexible organisations there are infinitely more ways to delay or ignore and, perhaps counter-intuitively it is the network of frameworks and procedures that helps those who want to obstruct. Whenever there is a precise regulation there is an opportunity to misinterpret it. I believe that the answer to the problem I set lies in working to change behaviours. One respondent to the governance forum did come up with a solution that showed understanding of the problem. He proposed making executive board members accountable for particular board policies and having this tied to their remuneration. So if X is tasked with carrying out a policy and it can be shown that has not been done effectively then X is paid less. This could apply not just to one person but to a management team.

Unfortunately this is only half of the solution because it may influence those at the top but does not address the disconnection that can exist between policy makers and operational management. Merely punishing those at the top for not making something happen does not actually do anything directly to make it happen. It may sound a little vague, but the key to good management and effective governance is shared vision, shared values and shared understanding across the organisation. When the board makes sure that their vision and values are clearly communicated and that their goals and strategies are too, then that is a critical first step to ensuring that all policies are carried out. The next step is to make sure they are shared as well - so that you don't need to bombard people with detailed instructions because they will use their initiative within prescribed boundaries and it is clear to them what they should do and they are committed to doing it. You do this through excellent communication and through the reward system and through development of line managers to do what line managers are meant to do: to direct and develop their staff and to communicate effectively with them and to feed information back up the line. So the result is that good governance is not a system that is bolted on to an organisation like an external skeleton - if it is to work it must be part of the DNA of the organisation.