FinchesBlog

The lessons of government and business targets

noreply@blogger.com (Brian Finch) — Thu, 23 Jan 2014 14:36:00 +0000

Old sayings like "If you can't measure it, you can't manage it" are not always strictly true but it is true that, without either direct or indirect measurement, it is hard to know whether the actions you are taking are actually working. This is why governments and business are so keen to set targets. But, as soon as you do so, you modify the behaviour of the people who must meet the targets. We read stories about the British National Health Service where patients are denied formal appointments in order to keep them off the waiting lists, or they are given pre-appointments with the same objective. This is because government has set targets for the length of waiting lists and the maximum time until a patient is seen or treated. If they are not formally on the list then they do not contribute to the statistics. And if those statistics are examined to determine the funding of an organisation or the remuneration of an individual then there are powerful incentives to make them say what is required.

A recent report showed that police forces in the UK are routinely misreporting crime data by redefining classes of crimes so that, often, what we think is a crime turns out not to be. Of course once targets affect this behaviour there is a knock-on effect on public behaviour since they stop reporting crimes to a police force that does nothing about them...what's the point? I have a recent personal experience arising from credit card fraud perpetrated against a business: what is the point in reporting the fraud to a non-police agency when there appears to be no action resulting from this: no attempt to catch the fraudster? That, in turn, has a corrosive effect on general public confidence in the police.

But let us not imagine that targets only change behaviour in the public sector. Try creating a fair and effective bonus scheme for a salesforce! Make it a monthly target and sales from months either side mysteriously move into one month in the middle. And what about off-balance sheet financing? The use of leasing and similar instruments in business is often used to make it look as if the organisation has a lower debt level than it really has. Whilst the debt level is usually not a formal target, though lenders may make it one, there are generally accepted unofficial targets set by bank and stock market analysts - so an incentive exists to adjust the published figures.

We must not despair - there is a way of both setting targets to guide behaviour whilst also protecting against unintended consequences. But that way is expensive and requires continual evolution to match the evolving ducking and diving of those who try to cheat. There must be an audit function that checks the reported figures and there must also be punishment for those who cheat. Unfortunately that punishment rarely exists in the public sector. False police statistics came to public attention because a young police officer testified to a committee of MP's but instead of being a national hero he is currently on a disciplinary charge and there is little chance that those MP's will step in to help him. It seldom works out well for whistleblowers. Fortunately there remain people who answer to moral outrage which makes them speak out against things that are plain wrong, regardless of the consequences for themselves. We should be grateful.

Plebgate and why Good Governance is about Trust

noreply@blogger.com (Brian Finch) — Sun, 15 Dec 2013 13:01:00 +0000

It has been some time since I wrote a blog on this site. This is because I can see problems but so seldom do I see their solutions and, after a while, I despair of just writing about failure. Nonetheless, I think the issue of trust is so important that it deserves an airing.

Forgive me for quoting background liberally from Wikipedia but I can't set out the critical facts any better;

The "Plebgate" scandal in the United Kingdom concerns an altercation between Conservative MP Andrew Mitchell, the former Government Chief Whip, and the police, which took place in September 2012. It gained notoriety initially for his alleged conduct and again, two months later when, subsequent to his resignation, CCTV and other evidence was revealed which appeared to call into question some of the evidence against him.
Leaked police logs, later backed up by eyewitness evidence, had suggested that Mitchell swore at police officers on duty at Downing Street and called them "plebs" (a pejorative word signifying someone of low social class) when they refused to open the main gate for him as he attempted to leave with his bicycle. Mitchell apologised but denied using the words claimed and in particular calling officers "plebs". However, finding his position untenable amid the media storm, he resigned from office.
The story returned to the headlines again in December 2012, when CCTV footage was released which threw into doubt the police version of events and it was revealed that an email purporting to be from a member of the public, which had backed up the accounts given in the police log, was actually sent by a serving police officer who had not been present.

The affair was revisited again in October 2013, after a report from the Independent Police Complaints Commission concluded three officers who met Mitchell at his constituency office, supposedly to clear the air, had given a false account of what was said while the findings of a subsequent investigation had been changed at the eleventh hour to recommend no disciplinary action be taken against them. This report prompted both Home Secretary Theresa May and Prime Minister David Cameron to criticise the conduct of the officers involved and bemoan the lack of disciplinary action.

The issues in this case are wide ranging and build on previous highly publicised instances of unreliable police evidence and subsequent cover up by senior officers. Why does it matter? Well, clearly, if a senior government minister can be brought down by an apparent conspiracy of lies then who is safe? But more important is the issue of trust. Our entire criminal justice system is built on believing what police say. If they not only lie but also engage in conspiracy and cover up then the whole edifice crumbles. Over twenty years ago I sat on a jury which was unable to reach a conclusion because one member would not trust the police version of events. I was horrified. If you don't believe the police evidence then where does that leave us? How can we convict the bad people in society?

I realise I am taking a step away, but the same principles arise in all aspects of society and including business organisations. So when local councils in the UK earn huge incomes from parking fines and fees but claim they are engaged in improving traffic flow and not in income generation then that damages our entire democracy because we all know they are lying. When business leaders earn eye watering sums of money, often from failure, then that erodes the trust of their work colleagues who are less empowered to eat at the trough. The consequences matter: staff motivation is reduced and honesty suffers at all levels. Why not manipulate reported figures to boost bonuses if the bosses are helping themselves? Why not use company assets for personal use if the bosses also appropriate such assets? Why be the only one who is honest? Why not take the odd back-hander?

Indeed, remuneration committees and non-executive directors bear heavy responsibilities.

Is Boris right to oppose an EU cap on bank bonuses?

noreply@blogger.com (Brian Finch) — Sat, 02 Mar 2013 11:00:00 +0000

My usual liberal instincts tell me that governments have no place in micro-managing markets: that what companies choose to pay their staff is no business of either politicians or bureaucrats in a democratic society. Such interference is the hallmark of tyrannies and, practically, has been shown not to work very well in the log run, leading to a misallocation of resources and economic activity. Even more to the point, in a world where the residence of individuals and companies can be changed virtually at the flick of a switch, it is a quixotic gesture. Either the individuals the regulations are aimed at will suddenly be employed offshore, or corporate structures will be devised that enable them to stay in situ but to be paid offshore, or the jobs will move to other people in other jurisdictions where the dirigistes hold no sway. As Boris Johnson has identified, the effect on the individuals' earnings is likely to be small but the damage to the business of the City of London, and to the EU economy, may be large.

On the other hand...you can see their point...the interferers, the micromanagers, the bureaucrats the very indirectly elected politicians. They say that such large bonuses encourage individuals to take huge risks with other people's money. When the individuals who may receive the bonuses work for very large banks then the 'other people's money' is the public purse because a big risk that goes wrong must be covered by government intervention to prevent the collapse of the banking system. So the risk takers may not even be risking their jobs. When these risks are so large as to threaten the economic system then, the dirigistes argue, government must act to contain these risks. One way of doing so is to limit the incentives to take risk. Further, they may argue, the normal mechanisms of shareholder oversight of these financial institutions has failed. It has done so for two reasons; either shareholdings are so thinly spread that none has the power to influence or the institutional shareholders themselves employ large bonus schemes and are therefore part of the problem.

But then...oh how I wish for a third hand...voluntary codes of conduct have been put in place in the City of London that restrict the way bonuses are paid, spreading them over several years to try to limit the incentive to boost short-term profits at the cost of taking big long-term risks. Why can't such methods be extended to more individuals and permanent working parties be established, on a voluntary basis, to find ways to limit incentives that encourage bad behaviours? Are we sure that such voluntary mechanisms don't work?

I think, on balance, we the public need more information before we could possibly make an informed decision. And that is a big issue with these and other EU proposals: the democratic deficit of EU institutions. These matters are not debated and publicised in the public domain. Regulation within the EU is something that is done to us rather than something we can feel we participate in. That is why, in the end, the liberal in me revolts at EU regulation and supports Boris's protest

Banking scandals, corporate memory and incentives

noreply@blogger.com (Brian Finch) — Wed, 30 Jan 2013 12:36:00 +0000

I have not blogged here for some time, which is not because I have tired of the subject. Many people would yawn at the mere thought of corporate governance but it holds a fascination just because it is actually not some arcane discipline beloved by crusty academics and dull accountants: it is about everyday life. It is about "why do people behave like that and what can be done?". My slowing blog writing arises from my failure in the realm of answers. I find I keep coming back to words like integrity rather than being able to suggest smart procedures that will solve our problems.

And what a host of problems we have. As an example, it is hard to open a newspaper without reading about legal actions by regulators and law enforcement authorities against banks in America, many of them British. There is the Libor scandal that encompasses many of them, accusations of helping drug lords to launder their ill gotten gains, accusations of helping countries evade UN and US imposed sanctions. In the UK there is the massive scandal of miss-sold loan protection insurance. You may want to click across and look at Forbes list of scandals...

I am not just picking on banks but they happen to provide such good examples. The question is, why do these things keep happening? What is it about the structure of these organizations or the incentives they offer (which is surely much the same thing) that makes it keep happening? It is not as though such behaviour is good for the these organizations. If you look at the size of some of the fines and settlements then you must conclude that their size swamps any gains. You may argue that there are lots of such scams that do not come to light but I am rather inclined to think that, eventually, most of them do and then again, there is the size of the penalties: HSBC, for example, recently settled for $1.9bn.

Then Daniel Finklestein, writing in the Times, discussed the private interests of public servants. In doing so he evoked the 'Mandy Rice Davis principle'.

It was June 30, 1963, and the second day of the trial of the osteopath Stephen Ward, charged with living off immoral earnings while Miss Rice-Davies was his tenant. The dancer was asked about her claim to have slept with Lord Astor.
Do you know, asked Ward’s defence lawyer, that Lord Astor has denied these allegations of yours? And Miss Rice-Davies gave her immortal reply: “He would, wouldn’t he.”
He would, wouldn’t he. The Rice-Davies principle. Much (most?) of what people say and do in politics and in life can be most readily understood by appreciating their incentives, by understanding what they have to gain or lose.

He went on to mention the work of economist James Buchanan in researching such incentives in the public realm.

Finally, to complete my parcel of evidence, came a private conversation with a friend that ranged over these banking scandals and touched on the work of a mutual friend, Arnold Kransdorff, who writes about corporate memory and the perils of losing those memories. My friend then observed that there is nobody left in any senior position in the City of London who remembers the pre-Big Bang world. And there you have it.....

In those old, forgotten days, incentives were lower (still high but not so high) and an individual's reputation for integrity mattered - if you were rumoured to be a bit shifty then you were shunned and struggled to do business with or work for a City firm. What has happened since 'Big Bang' is that the rewards for success have grown so dramatically that they have overwhelmed the role of integrity as a restraint and have made it far more worthwhile to take the risk of being caught doing wrong.

The answer...? It comes from the top. First of all, the top team must talk about values and set an example and must live the talk. Too often the prime wrongdoers are the guys at the top. When they are seen to take outrageous rewards then you can hardly expect the little guys not to try to feather their nests too. But assuming a good example is set from the top and that they talk about values, promote values and reward values then they must also punish wrongdoers - when they get away with it then that encourages others to cheat. Secondly, rewards and incentives must be reduced to reduce the incentive to cheat. It is hard to do, seems to go against liberal economic sense but in the long run these incentives are not sensible because they encourage behaviours that have a massive long-term cost when you all get caught. Some of this is discussed in a book, The Value of Talent (due to be updated next year).

What 'Plebgate' has to tell us about trust

noreply@blogger.com (Brian Finch) — Thu, 20 Dec 2012 12:08:00 +0000

For non-UK readers 'Plebgate' may hover between insignificance and mystery. It is the news story that a British government minister was pressured to resign his post as a result of abusing two police officers who were on security duty in the street outside the prime minister's office. It appears they declined to open the gates for him and insisted he wheel his bicycle (yes, really, some British government ministers are not grand while others make a public appearance of not being grand), at which point he lost his temper. It was alleged that he called them 'plebs', a short form of the latin word 'plebian' that implies a belief in his higher social standing.

Police reports were leaked and an enormous public fuss exploded in the national press and continued for days. It was all made worse by the minister, Andrew Mitchell, sticking firmly to the formula that he had not used the words attributed to him but refusing to say exactly which words he had not said. This raised suspicions that he was trying to muddy the waters having used the 'pleb' word but not used other words; or that he may not have used the 'pleb' word but had used other, equally uncivil language.

Anyway, what has this to do with governance?

It is actually all about trust. Our society is built on trust...does not function properly without it. That is the main reason why corruption is such a problem - the economic misallocation of resources is bad but corrosion of trust is far worse. Business depends on trust: you can't spend all your time in law courts getting redress from people who have tried to cheat you. So when it now turns out that police officers leaked the details of the original exchange and the ensuing investigation; and then allegedly went on to embellish the facts: that undermines civil trust.

Years ago I was a juror in a trial for possession of a knife as an offensive weapon. The defendant claimed in court that it was a tool he used for wire stripping but the policeman who had arrested him said that he had admitted it was for self defence. Eleven jurors found the man guilty but one found him not guilty and would not budge. She did not trust the police, so a man who was clearly guilty escaped justice (believe me, one look at the knife was enough to know its purpose). In much the same way, because trust in some aspects of the evidence is undermined, Andrew Mitchell looks likely to be allowed to return to front line politics despite having admitted that he behaved in an undignified and ungentlemanly manner (my words here). This trivial affair will result in the institution of policing being damaged - maybe other guilty people will escape justice because jurors don't believe police evidence - and engagement with civil society will be damaged as some potential voters think all politicians are smarmy liars who secretly despise them.

The Starbucks Tax Scandal

noreply@blogger.com (Brian Finch) — Tue, 04 Dec 2012 16:01:00 +0000

Poor Starbucks. They seem to have been informally voted the leading corporate tax dodger in the UK by that independent, impartial and totally just tribunal: the press. Admittedly other US based corporations such as Amazon, Google and Apple have been held up to opprobrium too for contriving to shift taxable profits out of the UK, but Starbucks seems to have been awarded the crown.

Now there is a good point of public interest in this story. Clearly it is a sound argument that, if UK companies are unable to shift their taxable profits from the UK whilst foreign competitors can, then they will be at an economic disadvantage. Clearly, also, it would be madness for UK public policy to allow this to continue. But where does responsibility lie? When I started writing I intended to observe that there is an old maxim that nobody is obliged to arrange their affairs in a way that renders them liable to tax. I intended to qualify that by observing that people may not, however, arrange their fairs to flout the law. But that principle has been taken further and legislation was introduced years ago in the UK to make arrangements whose sole purpose is to avoid tax unlawful. In more recent times a new constraint has been developed, that of public opinion. As ideas of corporate (and personal) social responsibility have developed, so pressures have grown on those who seek to avoid paying tax.

I do wonder whether this is not, at least a bit, unfair. Is this not a scandal relating to the ineptitude of the tax authorities as much as anything else? Why do they allow companies to charge UK businesses fees from corporations they own abroad that drain away all their taxable profits? It is, after all, pretty clear that the businesses that stand stark naked (of profit) before them are, in fact, successful businesses that are playing the system. If they are allowed to get away with it then they will obviously all pile in. Whilst it is useful that journalists have revealed this scandal, the most appropriate outcome would be if it embarrassed the tax authorities into taking actions they should have taken years ago to limit these fees from connected companies that are allowable deductions against tax bills!

I don't say that the corporations or the individuals who have been a previous target of investigative journalism are simply freed of responsibility and can place all blame on governments that let them get away with it. It may be stretching a simile, but that is rather like a thief blaming his misdeeds on the householder who leaves a window open. There is a responsibility to be a good citizen and the public may take revenge if you are not.

Rodial and the governance responsibilities of newspapers

noreply@blogger.com (Brian Finch) — Mon, 13 Aug 2012 13:56:00 +0000

Newspapers have special governance responsibilities. There has been much reported on corrupt practices of British newspapers in paying public officials for information that informs news stories and also on an apparently widespread historic practice of hacking into people's voicemail to gain information for reporting. It is worthwhile pointing out, in passing, that while those journalists implicated were acting improperly their motivation was, generally, to investigate news stories that were of public interest.

There is another area where the news media has responsibilities that has, so far, received less attention. I recently spotted a very peculiar article that illustrates this, in the Sunday Times (Kiki Loizou, "How I Made It: Maria, Hatzistefanis, founder of Rodial", 5 August 2012). You may argue that there is nothing wrong in a reputable newspaper running a piece on the background of the founder of a controversial business. It did, after all, state quite clearly that Rodial had sued a docter who cast doubts on the efficacy of their products and quoted the business founder as saying she had no regrets in having done so. However, let us examine this by taking a wholly hypothetical and extreme position. Let us suppose that none of Rodial's products have the effect their manufacturer claims and that it is a business that preys on the credulous and the desperate. Would it then be right for a reputable newspaper to be offering helpful publicity without calling it an advertisement?

You may argue that the article was balanced but I think that is questionable. At the time of the legal action against the doctor it was claimed its purpose was to make it too expensive for her to defend herself when she thought she had merely expressed a reasonable opinion - the intention, it was suggested, was to shut her up. The doctor had expressed only mild doubts, not an all-out assertion that the claims for Rodial products were balderdash, and she had merely asked for the company to publish scientific proof for what seemed to be extraordinary claims. See my previous post on this matter. No peer reviewed evidence for efficacy has ever been published. Loizou's article does not make any of this clear and it is pretty material. You may wish to look at Rodial's website yourself to inform your own opinion of the products and claims for them. You may disagree with me. The range has extended considerably over the last couple of years and the products that caused all the fuss - under 'bodycare' - are now a small element of the whole. I admit that, personally, I find the claims for this range of products hard to believe without seeing some convincing supporting evidence. A counter-view to mine might be that many of the skincare products sold by Rodial make claims that are no more extravagant than many cosmetic companies, which also offer no proof of efficacy to potential customers. Indeed, for example, a study published in the past year suggested that only two or three of the many anti-wrinkle creams on the market work at all - all the rest have no effect.

My problem with the Sunday Times article is that it provides unbalanced publicity for this company. Are there other articles in supposed 'papers of record' that are similarly unbalanced? Do not newspapers that claim to be 'papers of record' owe some duty of care to their readers? Is this not a governance matter? How did the article come to be written, did Rodial's representatives approach the journalist, is the journalist a user of their products? I do not suggest that News International, the owner of the Sunday Times, is worse than other proprietors. It just happens that they have recently been the centre of a public relations and media storm concerning governance, which might have made them a bit more careful.

Lessons from the Olympics

noreply@blogger.com (Brian Finch) — Mon, 13 Aug 2012 11:57:00 +0000

I have been absent from the blogosphere for a while but am pleased to find I have some new things to say about corporate governance, even if they arise from unusual directions. Take the London 2012 Olympic Games...what does that have to do with business management or governance issues? The link is that good news drives out bad news.

The UK press has engaged in a bout of national self-congratulation at the close of the Olympic fortnight, and it is well justified. Most things worked very well indeed. The stadiums were ready on time, were comfortable and visually exciting; the Olympic Park was a fun place that handled feeding throngs of people perfectly well and the capital's transport system coped with the extra journeys without breaking sweat. Above all the people of this country were really engaged. Hundreds of thousands of people, if not millions, went to see the Olympic torch carried by a relay of 8,000 people through the country to finish, eventually, at the Olympic stadium. I was one of those spectators who, alerted that someone I know slightly had been chosen to run one of the legs as a reward for his voluntary community work, went out on to a street near where I live to watch. I met dozens of other people I know by sight. I waved a flag and cheered, took photos and was uplifted by the experience. In another flash of inspiration the Olympic venues used a team of 70,000 volunteer stewards who smiled and cracked jokes and good humouredly chivvied the crowds to where they needed to go. I also bought tickets to a couple of events as well as going to free events held in London parks, where giant tv screens carried broadcasts of the competition to enormous crowds.

So yes, it was a triumph. I notice, however, that failings and lessons that might be learnt for the future are being overwhelmed by the good news and conveniently forgotten. Some examples...the ticketing was a fiasco that, in this digital age, should have been avoidable. Security was well handled...in the end...by the expedient of drafting in the army to help. Yet the problems that arose on the very eve of the games should have been predicatable months, if not years in advance. To make way for the expected throngs of visitors the authorities called on people to avoid London, which resulted in empty roads, empty shops and empty hotels. The experience of the Beijing Olympics four yours ago should have alerted everyone to the problem of empty seats at competitions, yet it was apparently a surprise all over again, and even if it is the fault of the Olympic organising committee it could still have been addressed well in advance. I could go on...but I will mention just one more thing, that general good sportsmanship was nearly, but not absolutely, universal. A member of one of Great Britain's medal winning cycling teams admitted on a tv interview having deliberately crashed his bike to get a restart. Instead of being disqualified (which should have happened), the matter was quietly forgotten. I also noticed that US swimming coaches implied drug use about a 15 year old Chinese competitor who clocked up a remarkable time to win a gold medal, yet were silent when a 15 year old American did the same thing...hmmm.

Going back to linkages...the same thing occurs in business. Failure and bad behaviour are forgotten if someone can associate themselves with a bigger triumph. Just today a book review in the newspaper brought to mind how individuals take credit also for triumphs that were not theirs: a new biography of the iconic Israeli general Moshe Dayan explains that he initially argued against policies which he later claimed credit for, after they proved successful. The lesson for us all is that we must struggle to stop failure being forgotten because lessons will then not be learnt and mistakes will be repeated in future - perhaps with more serious consequences next time. Individuals who should be removed from office may also go on to perpetrate further 'crimes'. In practice how do we stop the well-connected from evading responsibility? It is hard and may call for individual courage on the part of whistle blowers or on the part of those who seek investigation of the failures or bad behaviour that has been buried. When everyone around only wants to talk about good news and to forget the bad news it can be emotionally hard to go against the crowd but it needs to be done. Are you an Olympic champion, will you stand up and do it?

Dinosaur attitudes to governance in private equity

noreply@blogger.com (Brian Finch) — Thu, 03 May 2012 16:07:00 +0000

I have a report from a recent round-table discussion on making non-executive directors effective which was led by a director of one of the UK's major private equity firms. It was fascinating and horrifying for its old fashioned attitudes that are surely, to borrow a cliche, not fit for purpose.

Asked about where directors nominated by private equity firms owe their allegiance he seemed to imagine there was no issue to worry about here. Well.....Later asked about board diversity he merely trotted out the old mantra that if women have other priorities and don't get to board positions then that automatically means there is an inadequate pool of qualified women to serve as non-executive directors. And of course he opposes quotas for female participation at board level. No idea of making changes to make it easier for women's careers to advance to board level. No concept that aspects of approved career progression paths in the UK are too conservative. Needless to say this chap's executive team colleagues comprise just 12% women and not a single coloured face. He accepts that diversity improves corporate performance but, of course, that applies to others and cannot conceive how he could sensibly change the status quo. I too worry that quotas avoid the difficult questions but I think they are inevitable when such young fogeys are so common in this country.

A wonderful remark remark reported by my informants was to the effect that there was, however, a big demand for female non-execs in specific industries, such as cosmetics. What a ******!

Talking about finding senior people for companies he spoke about installing CEO's and Finance Directors: very revealing - no concept that HR is a key discipline that should improve the bottom line, as are engineering skills in many cases.

Where are the open and enquiring minds? Such attitudes as reported here are all too common, to the detriment of our nation's corporate performance; and they are most damaging when they are found in finance businesses such as banks and private equity because there they infect the companies these guys finance, so the virus is spread and reinforced.

Aviva shareholders revolt on board pay

noreply@blogger.com (Brian Finch) — Thu, 03 May 2012 15:40:00 +0000

It must be worth noting that there has been a 54% vote against the remuneration committee report at Aviva's annual meeting. This follows votes at other major companies indicating shareholder dissatisfaction over executive pay - not least rising pay in the face of falling performance. This groundswell of opinion seems to be an international phenomenon, with shareholders complaining in the USA and elsewhere. About time too! Next I'd like to see such votes having the power to compel management to withdraw their proposals. If that does not happen then I think we will see the rise of votes to remove directors from office. See Guardian article.

Damning Business Ethics Report from the USA

noreply@blogger.com (Brian Finch) — Wed, 18 Apr 2012 16:37:00 +0000

I am grateful to Norman Marks in his blog for bringing this latest annual report from the Ethics Resource Center to my attention. The team surveyed nearly 5,000 people across the USA.

Consider some disturbing headlines;

42% of respondents described their companies as having a 'weak ethics culture'
45% have witnessed misconduct. And we are not talking about pinching the odd pen

13% Health & Safety violations
12% Stealing
11% Sexual Harrassment
11% Substance abuse

65% reported the misconduct
22% suffered retribution as a result, including;

64% excluded from decisions or work activity by supervisor or manager
62% verbal abuse by supervisor or manager
55% not given promotion or pay rise
32% demoted
31% experienced physical harm to self or property
29% harrassed at home

62% still have confidence in senior maanagement but 34% do not believe their line managers display ethical behaviour

So we have two worlds; the significant number of wrongdoers on one side and a substantial number of people who are outraged by it and will act to denounce it, regardless of the very real consequences.

Although this survey was conducted in the USA I very much doubt that things are much different in the UK. It is not news that whistleblowers often suffer for their ethical stand but I am cheered to learn that nearly 80% did not suffer consequences.

Financial Reporting Council paper on "Comply or Explain"

noreply@blogger.com (Brian Finch) — Mon, 02 Apr 2012 15:15:00 +0000

In February 2012 the UK's Financial Reporting Council published a report on the "Comply or Explain" approach applied to its Corporate Governance Code. Compliance with the Code is a statutory requirement for listed companies and the report considers two discussion groups, involving representatives of investors and listed companies, that met to discuss the workings of "Comply or Explain".

There are two reasons for producing this report; the first is that the European Commission has asked for views on a proposal that regulators and not shareholders should decide if explanations of non compliance are adequate; the second is that a review of a sample of UK annual reports found a minority of those that had not complied on one or more principles had given only a 'perfunctory' (i.e. inadequate) explanation.

I offer two contrasting thoughts; firstly, that there is a risk that yet more regulation and bureaucracy will simply make declarations even more legalistic and unhelpful (defeating the object of the change); the second, that it is astonishing that company bosses can be so inept and so arrogant as to resist giving proper explanations in the first place. It reminds me of the unhelpful legal boilerplate approach that has been adopted by companies in response to requirements that they disclose the principle risks facing their business. GSK, as I have written before, provides a particularly risible example of this. I wonder whether the company secretarial staff who produced the 'perfunctory' explanations attended the discussions hosted by the FRC - I bet not.

Baroness Hogg, who chairs the FRC, might ponder whether the answer is for her organisation to adopt a more assertive approach - how about giving those companies whose explanations are inadequate a right kick up the arse? Hauling them in and admonishing them would be a useful first step, followed - if they don't release an adequate statement - by a public shaming. Try that for a while before laying on the dead hand of bureaucracy.

Maybe customers don't care about ethics at Goldman Sachs

noreply@blogger.com (Brian Finch) — Fri, 16 Mar 2012 16:02:00 +0000

I wonder whether my strictures against Goldman Sachs ethical standards are mere self-righteousness on my part. The thought arises from the evidence: a tidal wave of criticism and bad publicity after Greg Smith resigned from the bank and published a valedictory letter in the New York Times shifted the share price not one jot. See here.

It has long been an article of faith with me that dedication to the well being of your customers is what leads to success. Of course you worry about your own profitability but you put your faith into building a loyal customer base that does business with you because they trust you and because you deliver what they want at a good price. But why do they not desert Goldman? They probably believe the tenor of the letter, that they are described disparagingly as 'muppets' and that Goldman Sachs focuses exclusively on what can be earned from them. After all there has been plenty of previous publicity given to Goldman Sachs selling securities that the bank analysts thought were a very bad deal. Maybe customers believe it is only other customers who are patsies. Maybe they believe all Wall Street firms are the same. Frank Partnoy writes in the FT that clients you deal with through the markets are a very different thing from those you advise and to whom you have a fiduciary duty.

But, despite the evidence, I am unreformed and unrepentent. Even without evidence to support me I believe that unethical attitudes to outsiders (customers, suppliers, competitors and regulators) lead to unethical attitudes to insiders (colleagues, shareholders and the organisation). I believe that governance and performance are damaged in the long-term.

Robert Peston, for the BBC, points out that Goldman Sachs reputation for being a bit too sharp for its own interests has been around for a long time. But he too ends his article by expressing the view that they must mend their ways if they are to survive and prosper. Perhaps, like me, he clings to his moral certainties over the evidence of his eyes.

We will have to wait and see...I'll check that share price daily

PR Disaster at Goldman Sachs

noreply@blogger.com (Brian Finch) — Wed, 14 Mar 2012 12:33:00 +0000

Today a senior executive at Goldman Sachs has resigned and published a damning article in the New York Times explaining his reason; which is that he can no longer stand the culture of screwing the clients. According to him this is not the way it used to be and that the company grew with a culture of "teamwork, integrity, a spirit of humility, and doing right by our clients"

But to see this article as a PR disaster is to miss the real point. This is merely the broadcasting of a long-running corporate governance disaster arising from an inappropriate culture - sometimes referred to as a toxic culture. The writing was on the wall when the financial crisis broke and it was publicised that Goldman Sachs was knowingly offloading poor quality investments on to its clients.

Why is this an issue of governance? Because "governance describes the systems, procedures and behaviours by which an organisation is directed and controlled". Because abusing one set of stakeholders - customers - also implies an attitude to integrity that must permeate the organisation and affect the behaviours of staff and management in other ways.

Three particular quotes from today's Telegraph article are must reads;

"... These days, the most common question I get from junior analysts about derivatives is, 'How much money did we make off the client?' It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave.

"Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about 'muppets', 'ripping eyeballs out' and 'getting paid' doesn’t exactly turn into a model citizen."

Mr Smith believes the decline in the firm’s moral fibre represents the single most serious threat to its long-run survival and see his article as a wake-up call to the board of directors.

EU Audit Reforms

noreply@blogger.com (Brian Finch) — Tue, 13 Mar 2012 12:20:00 +0000

I may seem a little late responding to the EU Commission's proposed reform of auditing for public companies that was announced on November 2011. However, it often seems best to let the dust settle after the first outpouring of responses, to get a clearer view.

This is an important corporate governance issue, or rather several;

are boards too close to their auditors, preventing necessary criticism?
do auditors have conflicts of interest?
is there sufficient competition for audits?

The Commission is responding to the undeniable fact that banks that collapsed or have had to be rescued as a result of the financial crisis had clean audit reports. They believe those banks had not adequately assessed their risks and nor had their auditors and that SOMETHING MUST BE DONE!

Always beware when there is an outcry that "something must be done": it will usually be the wrong thing aimed at the wrong target. For example, the global financial crisis was not fundamentally a result of poor bank regulation but the result of global trade imbalances - which are the fault of governments (who do not seem to be in the firing line). If it had not been an investment bubble in US mortgages it would have been an investment bubble in dotcom businesses or in something else.

Two little questions I would pose to the Commission;

1 Where were the regulators in all this?
If the banking regulators failed to notice the levels of risk being taken on by banks what makes you think that auditors would do any better?

Oh, and by the way, the banks own executives and risk committees failed to assess the risks correctly.

2 Will the proposals achieve what they hope without unacceptable consequences?
The main proposals, applicable to all listed companies, are to;

rotate audits every 6 years
forbid auditors from offering consultancy services
mandate open tenders for audit work
commission supervision of auditors

Auditors argue that it takes some time to get up to speed with a new client and that rotation every six years will add to costs. I am a little dubious about this argument; are they saying that we can't trust an audit in the first year - I hope not? The problem with consultancy services is that they create conflicts of interest and contribute to development of an oligopoly of huge firms. On the other hand, if a firm develops tax expertise, for example, in order to audit a client's tax affairs, how can you reasonably forbid them from offering that expertise in advance? The same argument applies to other consultancy services and, if implemented, must create duplication of work and added cost. Further, you would expect the development of expertise for provision of consultancy services to improve the quality of expertise available for auditing as well; so if you prevent that you are reducing not improving auditors expertise and the probability they will get it right. As for open tenders, how do you deal with simple dislike of a client for the auditor: are they to be forced to take the lowest bid? In practical terms you have to get on with your auditor if the relationship is to work but how do you write that into legislation? And finally to commission supervision of auditors....hmmm....not so sure that's the sort of thing we want the EU to be getting into.

But finally - what about behaviours? The thing is that people change their behaviour when there is legislation. So, in Italy, it is common for an audit team to jump ship to a new audit firm when the audit transfers. How do you stop that in a free society and does the practice not make a nonsense of rotation? And if auditors only offer consultancy to non-audit clients how does that reduce the dominance of the the big four auditors? Or if the cost of consultancy is pushed up due to duplication of expertise how does this help anyone? How else might behaviours change in ways that would thwart the intention of the proposed legislation?

But let us not throw out the baby with the bathwater. As executives, directors and investors we must ask whether any of the proposals could be sensible improvements to governance. Some rotation of audits seems a sound idea and audit committees should keep an eye on whether they are putting so much business with one firm that their independence is compromised. How about requiring audit reports in the annual accounts that report on these issues and that give a genuine assessment of risk rather than legal boilerplate?

Board diversity and female executives

noreply@blogger.com (Brian Finch) — Tue, 13 Mar 2012 10:02:00 +0000

It is a rather unattractive characteristic of a blogger to say 'I told you so'. You come over as a smug know-all. But I can't resist it. All of a suddent there is a flux of reports (see recent study published by "Women Like Us") and articles taking the same line on female representation on boards that I was promoting a year ago and, no doubt, others were trying to get heard in the public debate long before that.

Surely it is obvious that improving the representation of women on boards is about much more than merely opening up those board positions? It is primarily about encouraging the appointment of more senior female executives who will be available to fill the higher roles. If that does not happen first then the boards appoint 'token women'; you find a small group of women have many board appointments (to make up the numbers) and companies do not benefit from the improved diversity.

I know, I keep going on about this and getting really irate when David Cameron goes for the easy soundbites or Vince Cable threatens to legislate (again). Of course these folk don't want to address the hard part; which is improving childcare; and not penalising women for taking career breaks; and encouraging flexible working arrangements. The macho culture of working eighteen hour days, six days a week and dealing with emails on your mobile for much of the rest of the time is unhealthy, ineffective, inefficient and is almost as if designed to exclude women. However, changing attitudes is hard to legislate for. EU Commissioner Barnier, who loves threatening to legislate, might also take note.

Anyway...Kate Walsh in The Times writes (11 March 2012);

"THE proportion of women holding senior executive management positions in FTSE 100 companies fell last year despite the government’s efforts to address the gender imbalance.

Research from Korn Ferry Whitehead Mann, the headhunter, found that female representation on the management board — the level just below the main board — fell more than 2% last year to 15%.
This was not on the agenda at the London Stock Exchange’s event to mark International Women’s Day last Thursday and will make for uncomfortable reading for Lord Davies, the former banker and trade minister, who has been pushing companies to have more women at the top level.

Despite an increase at the most senior level — where female representation grew from 12.5% to 15% in the past year — the board below, which provides the pipeline of future talent, has seen a 2.2% decline.
The research also identified 17 FTSE 100 companies with no female representation at management board level. These include Associated British Foods, owner of Primark; Wm Morrison, the supermarket chain; Schroders, the fund manager; Tate & Lyle, the food giant; and Shell."

There is no sensible reason why women cannot have children and hold senior jobs. Yes there will be compromises, they will need family help or childcare and will miss some family occasions but really the myth that 24/7 dedication to work is essential is just that, a myth. It benefits timeservers over balanced and capable; and favours men over women.

A good quote from David Frost (the one who was director general of the British Chambers of Commerce) "Our flexible labout market has long been acknowledged as a significant competitive advantage and a driver of investment and growth in this country - it's time we made best use of it"

Communication, social media and crisis management

noreply@blogger.com (Brian Finch) — Mon, 27 Feb 2012 16:35:00 +0000

In the new world we live in, companies need a policy on social media. I can imagine the reader of that sentence looking aghast, thinking about the extra burdens already faced as a result of new legislation ranging from health and safety to employment and beyond. Social media too?

Social media is a part of our environment and also a new tool for us to use. In its first role we have to control the way our staff use it. We cannot have them publicly criticising the company or their line manager or bullying a work colleague through their Facebook page. Nor can we have trade secrets or new marketing initiatives betrayed through unrestricted chatter on online forums. Of course actions such as these are already covered by specific or implied terms in employment contracts so you can argue that nothing new needs to be done. Why is something written on a Facebook page any different from writing a letter to a newspaper when either would be a breach of discipline? I think the difference lies in the lower barriers to on-line action. It is so easy to say something rude about a colleague in an off-the-cuff comment on Twitter: you are typing a short message and add a few different keystrokes and hit send; and it has gone, irretrievably. On the other hand, getting out a sheet of paper and a pen and sitting down to write a letter takes that bit more effort and intent. It then requires the result to be folded and put in an envelope, a stamp put on and the final missive taken to a post box. Even at the last moment it requires a physical movement to post it which gives an instant to reconsider.

The ease of use of social media creates a case for giving staff simple, clear policies on what they may not do online. But we may not want to put everything out of bounds. A company may, for example, be quite happy for its software engineers to discuss a technical problem through an online forum and get a solution, as long as that does not mean giving away trade secrets. Good intent, however, is not enough on its own. If your company faces the misfortune of a serious accident or some other crisis you actually may not want your staff defending you online any more than you want them criticising you. It muddies the message and may have legal consequences.

Social media also provide tools to engage with customers and employees in the normal course of business. You can build loyalty, win repeat business or access your customers networks. Facebook provides the space for discussions, offers, news and competitions. It can be linked with Twitter, Youtube, LinkedIn, Google+ and others. When Carnival Cruises sister company Costa Cruises suffered a disaster off the coast of Italy its Facebook and Twitter presence gave it a platform for expressing regret, concern and reassurance without saying anything that might give rise to legal repercussions. Yet they made a mistake; after five days the company announced a pause in its online communications, forgetting that online never pauses: it just continues without you. The next five days merely provided space for negativity to expand so that when it returned to communication mode its posts attracted hundreds of negative comments. A more sensible policy would have been to view this media as a communication and not an advertising platform. Once a company recognises the online environment as a channel for genuine and sincere communication it is obvious that you cannot tune out for a bit. You don’t turn to a friend and say, “I don’t want to talk to you for a few days, I have stuff to do.” So companies must ask themselves what they want to achieve from these channels and understand their side of that bargain before setting out on this journey. As I said at the beginning, companies need a policy on social media. Online is out there with or without you and it makes sense to think through how to use it and how not to use it and to express that clearly to your staff.

Corporate social responsibility or corporate performance?

noreply@blogger.com (Brian Finch) — Sun, 26 Feb 2012 16:22:00 +0000

In the Sunday Times today (unfortunately hidden behind a paywall) Dominic Lawson points out that Fred Goodwin, former head of RBS, was chairman of the Princes Trust and his company had extensive corporate social responsibility programmes; yet was that what society needed or did it need better business decisions? Of course there is a legitimate argument that good management and good corporate social responsibility are not mutually exclusive choices. I do think that genuine commitment to and success in each leads to success in the other: the attitudes of respect for colleagues and commitment to motivate people to achieve will lead to management success but will also lead to an attitude that is supportive of social responsibility. The problem arises when social responsibility programmes are used as a smokescreen to hide the blemishes on the company's face.

Good corporate social responsibility is a result of a sincere intent to engage with staff. One of the things that motivates staff is proven to be a sense that their employer cares about them and cares about the wider society. This also means listening to staff and being responsive to them and thinking about the consequences of your actions. So BP may have been active in promoting its involvement in green causes but its board must have been aware years before the Gulf of Mexico oil spill that there was criticism of the company's cost cutting culture and suggestions that it could compromise safety. If I read that in the press years ago then board members must have done so too. Did they not see some disconnect there? Good business management and good corporate social responsibility would have led to the same conclusion, that a cost-cutting culture was inappropriate and inimical to a safety-culture.

Olympus: you really couldn't make it up

noreply@blogger.com (Brian Finch) — Tue, 10 Jan 2012 13:28:00 +0000

Readers may feel I go on too much about the scandal at Japanese camera and medical equipment firm Olympus but, although everything about it seems so extreme that it has become a parody of a corporate scandal, still it holds important lessons for corporate governance everywhere.

This story illustrates how good corporate governance demands that three key groups of stakeholders must act to preserve it; directors must live up to their responsibilities; investors must apply proper stewardship and regulators must act to protect the public interest. If directors fail in their duties then external directors must act, if they fail then investors or regulators must act. In contrast, the case of Olympus seems to illustrate more of a national conspiracy amongst all parties to preserve the corrupt status quo.

The two latest acts in the comedy are; firstly that sacked CEO, Michael Woodford, has given up his attempt to be reinstated because the major Japanese investor groups refuse to act swiftly against the disgraced management; and secondly - you really couldn't make this up - that the firm is suing most of its own directors, who had a hand either in falsifying the company's accounts or in protecting colleagues who did, yet they remain in office until March and seem to have a hand in choosing their successors. Meanwhile the police, stock exchange and government regulators are 'investigating'. This has been going on for months - since October. All of which clearly suggests that it is unsafe for foreigners, who are outside the coterie of Japanese conspiracists, to invest in Japanese companies. Who knows what else is going on elsewhere? Regulation and the rule of law patently mean nothing in Japan. "Steady on," you say, "What about Russia, which is far worse, or China where you can also be dispossessed in an instant?" Well, the difference is that we thought Japan was 'one of us': a politically stable and reasonably honest country governed by law where investors are protected by the authorities.

There are also other stakeholders who should have acted and could have influenced events. The auditors are clearly culpable. How on earth is it possible for successive auditors to miss a hole in the accounts that was over $1bn? And what are the Japanese authorities, whether accountancy bodies or police, doing about this and why is it taking so long? The other guilty party comprises the company's banks, who have extended credit in this situation. You can argue that it is not the role of banks to change management, their role is to lend at profit. That, however, is a simplification. In Japan the banks seem to be part of the conspiracy of the business elite. They have continued to lend, without apparent conditions, to a company that has been teetering on the verge of collapse. They have provided critical support that has enabled a corrupt management to stay in place: in a western context, banks would have demanded both good security and immediate management changes to protect their investment.

Governance on Olympus

noreply@blogger.com (Brian Finch) — Mon, 19 Dec 2011 13:13:00 +0000

Sorry for the dreadful pun of a title. Its poor quality gives some indication of the struggle I have had, and continue to have, with this important case study in appalling governance. The big question I have been thinking about is what lessons there are for corporate governance outside Japan where this company is based. Is it just too specific to the curious business environment of that one country to have wider significance?

I must start with a brief summary of the salient facts. In April 2011 an Englishman, Michael Woodford, was elevated to the position of president and chief operating officer of Olympus Corporation where he had worked for 30 years. The man he replaced, Kikukawa, was elevated to chairman. Woodford was appointed CEO in October but then removed after just two weeks. He claims this was because he queried transactions that had been brought to his attention by an article in Japanese financial magazine Facta in July.

This reported that Olympus had bought a series of small businesses that were peripheral to its main activities but apparently for very high prices. One of these, Welsh medical equipment maker Gyrus was acquired for $2.2bn, which included a $687m success fee to a middleman through a Cayman Islands registered company. A 31% fee is extraordinarily high and totally out of proportion to the size of the company acquired. Further acquisitions were queried in the days that followed and Woodford fled Japan, claiming his life was threatened. Japanese newspaper reports alleged that huge payments had been made to criminal underworld figures. After repeated denials of any wrongdoing by the company, a halving of its share price, and the opening of investigations by police forces and regulators around the world, it eventually admitted that these payments were actually an attempt to hide investment losses from the 1990's. Three board members resigned but the rest, who had all voted for the sacking of Woodford, remain. They have indicated there will be further resignations but not until after they have appointed new directors.

One of the many curious facts about this most curious scandal is that Japanese investors have been relatively subdued. Calls for resignations of all the board have mainly come from overseas investors which has led to a polarisation. Indeed the board of Olympus has spoken of issuing new shares, presumably to a 'friendly' party, which would have the effect of diluting the overseas shareholders who are vociferous in their criticism.

It would take too long to rehearse further facts of the case (for latest developments see here), I must turn to the issues;

How have internal and external auditors missed such huge losses (around $1.5bn) over so many years and what sanctions do they face?
Were they in collusion with management?
What are the Japanese regulators and police doing, since such a huge falsification of accounts is surely criminal?
Why are Japanese investors still so quiescent when they have lost over half their investment and they too have been seriously misled?
The board of Olympus comprised almost exclusively company 'insiders'. Will this be an impetus to corporate Japan to start appointing genuinely independent directors who will challenge management?
How on earth can the board that presided over this debacle still be in office and in charge of appointing their own successors?

The biggest question of all is why there seems a (possibly unspoken) conspiracy of collusion and closing of ranks between company executives, shareholders, regulators, police and government. Clearly Japan is a curious place where identity and loyalty are more important than cleaning the stables and punishing wrongdoers. The disgrace in this case does not just lie with Olympus but with corporate and government Japan.

Although a case like this occurring in the UK or USA would have resulted in arrests by now and a removal of the entire board I think there are still lessons on corporate governance for all of us outside Japan. The most important is that good corporate governance is not just about publishing codes of conduct: people may flout them. It demands that all stakeholders in the company live up to their responsibilities;

Auditors must do their job properly
Shareholders must not collude with the people who betray them
Lenders must not support disgraced management
Regulators must act swiftly and decisively to maintain trust
Directors must be willing to challenge their colleagues

And let us not be too compacent because we are not Japanese. I will write separately about the results of the investigation into the collapse of Royal Bank of Scotland, one of the biggest banks in the world. Despite having a board packed with big names from the world of business, we are told that nobody really ever effectively challenged a domineering chief executive in Fred Goodwin, neither fellow directors nor the regulator.

The Boardroom Conversation

noreply@blogger.com (Brian Finch) — Fri, 14 Oct 2011 15:03:00 +0000

Unless key figures in an organisation live company values and are prepared to speak up, corporate governance policies are pretty much meaningless.....see my piece on the Boardroom Conversation in Financial Director

Update for "women in the boardroom"

noreply@blogger.com (Brian Finch) — Fri, 14 Oct 2011 14:44:00 +0000

Politicians love easy wins: they love good news; so UK government ministers are positively ecstatic that their calls for greater representation of women in corporate boardrooms has borne fruit after just a few months. Figures published by Cranfield Business School show that FTSE 100 companies have moved from 12.5% representation to 14.2%. Whoopee!

But look more closely. Out of 21 female appointments to FTSE 100 companies in the past six months, 18 are non-executives. So there is no evidence that promotion of women within companies is improving. Also the number appointed to a wider spread of FTSE 250 companies was only 28 - so just 7 for companies ranked 100 to 250.

Now it is movement and it may be a good thing but it still misses a large part of the point - diversity in the boardroom is good but equality of opportunity is better and demands changes to recruitment, development and promotion practices below board level. How many of those 28 had kids?

See my posts on discrimination in recruitment and on discrimination against women in particular

Psychopaths in the boardroom

noreply@blogger.com (Brian Finch) — Fri, 09 Sep 2011 15:05:00 +0000

A recent Horizon television programme for the BBC discussed the physical differences of psychopaths, whether noticeably different brain functions or differences in key genes. One of the principal researchers in this field, who appeared on the programme, reported that he found no less than sixteen murders committed by members of one branch of his family, over several generations. He also found that he himself had the gene that predisposes its carrier to this condition, attributing his lack of symptoms to a happy childhood and proposing that the gene on its own does not cause the condition but needs to be triggered by stressful influences such as childhood abuse.

Towards the end of the programme a New York psychologist, Paul Babiak, recounted his research that shows psychopathic characteristics are found disproportionately amongst top executives. Why should this be found amongst the most successful? Because the characteristics of the psychopath revolve around a lack of empathy for others and a need to take big risk. So the psychopath can be ambitious, manipulative and ruthless, without qualms and they will be attracted to jobs that give high adrenaline surges. Of particular note is another aspect of Babiak's research that shows these people may get to the top but that , once there, they perform noticeably less well than their peers. This should not be surprising - business is a collective activity that calls for social skills far beyond a mere ability to manipulate others.

Perhaps none of this should be too much a of a surprise. Many of us will have come across such people; manipulative, bullying charmers who, you feel, would sacrifice anyone to their ambition, whether friend or foe. And yes, I have felt they talked the talk but actually lacked the substance to perform in that top job.

What implications for corporate governance? I think this raises serious questions for those people who believe that rules and codes, or even laws, will control corporate governance on their own. If one or more senior people in a corporation is driven to take risks and seek thrills whilst having no moral scruples about harming others then will they not simply ignore those rules if they can? And the more precise you make the rules, to strengthen them, the more chinks appear, through which the determined can wriggle. You have to have the rules, but more important, you have to have the collective ethos that, like a net, holds the errant individual tightly in its strands. To continue the analogy, if the individual can cut one of the strands of the net then the net is weakened but it will still hold him unless he can cut many strands. So the real constraint comes from shared values across the organisation, where people will not be bullied into doing things that are patently contrary to those well-communicated values and the constraint comes from individual ethical behaviour - which is shared values at a society level.

Financial Times Briefings: Corporate Governance

noreply@blogger.com (Brian Finch) — Wed, 24 Aug 2011 14:35:00 +0000

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?

noreply@blogger.com (Brian Finch) — Tue, 23 Aug 2011 19:07:00 +0000

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.