Is British American Tobacco really Britain's best-run business?

Quantifying how well a business is run isn't easy.

by Jack Torrance
Last Updated: 07 Sep 2016

You might not expect a company that sells cancer-causing toxins to come top in a so-called
‘health check’ of Britain’s boards, but such is the difficulty in measuring how well a company is run. 

The Institute of Directors and Cass Business School published their second annual Good Governance Report today, ranking the members of the FTSE 100 from best to worst. While many publications have focused their attention on the fact Tesco came last, MT was more alarmed to see British American Tobacco take the top spot. Can a company whose products are so fundamentally repulsive to so many members of society really be said to be doing things ‘right’?

It’s partly testament to the difficulty of measuring good governance. The research is based on around 50 factors that its authors claim measure how well a company is run – from the percentage of non-execs on its board to the number of profit warnings it has had to issue and its score in MT’s very own Britain’s Most Admired Companies.

The challenge when converting all of that into an index is figuring out how to weight each factor. The researchers attempted to do this by incorporating the results of a perception survey that sought the opinions of IoD members, FTSE 350 execs and other experts.

The other problem with attempting to quantify governance is that it’s an awful long way away from all the other more familiar measures of corporate performance - profit, revenue, job creation and so on. The linkage to the bottom line is tenuous and uncertain: while one can (fairly) safely say that in the long term, well run companies tend to do better than badly run ones, in the short term it’s perfectly possible for companies to wilfully ignore all the rules in the corporate governance book and still rake in the cash.

So it’s no wonder the ranking throws up some odd results. For instance WPP, the advertising giant founded by Sir Martin Sorrell, comes fifth from bottom in the rankings, largely because it got a very low score for its remuneration policies (Sorrell is by far Britain’s highest-paid boss). Bloated pay packets can certainly be a sign of poor governance, but does Sorrell’s remuneration, determined in no small part by the company’s stellar performance, really indicate bad governance? On the flipside Royal Mail came ninth overall because it scored a whopping 931 out of 1,000 on remuneration. But should restraint in paying its directors really cancel out the fact it got a pretty middling score of 528 for ‘board effectiveness’?

Meanwhile BAT only scored highest in one category, ‘shareholder relations’, partly determined by the returns its investors have made. That’s obviously important (and BAT’s shares are up 38% in the last year) but a company that focuses too much on looking after its shareholders’ short-term interests might not be around in 10 or 20 years’ time.

Measuring corporate governance is never going to be easy and the report’s authors are brave to give it a go (how much they must have wished that second place Unilever - the poster child for sustainable governance - had scored a few more points). But they’ll have to tinker a bit with the weightings before MT is convinced that big tobacco represents the best of British business.

The best...

1. British American Tobacco, 793
2. Unilever, 778
3. Diageo, 775
4. Sage Group, 769
5. Next, 763
6. Kingfisher, 762
7. DS Smith, 761
8. United Utilities Group, 758
9. Royal Mail, 755
10. Admiral, 755

...and worst

91. Dixons Carphone, 671
92. Worldpay Group, 665
93. SABMiller, 664
94. Travis Perkins, 661
95. Investec, 661
96. WPP, 660
97. Associated British Foods, 655
98. Rolls-Royce Holdings, 648
99. Berkeley Group, 641
100. Tesco, 603


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