THE MT INTERVIEW BY MATTHEW LYNN: DEREK HIGGS

THE MT INTERVIEW BY MATTHEW LYNN: DEREK HIGGS - The man charged with the key task of reviewing corporate governance in Britain has been a skilled dealmaker, a champion of Warburg - that close-run failure - and an influential investor. The right stuff, the

by MATTHEW LYNN
Last Updated: 31 Aug 2010

The man charged with the key task of reviewing corporate governance in Britain has been a skilled dealmaker, a champion of Warburg - that close-run failure - and an influential investor. The right stuff, then, to stiffen City morality? Or is he a bit too trusting, dangerously old-fashioned even?

Derek Higgs is about to tread in illustrious footsteps. Nearly a decade ago, Sir Adrian Cadbury produced a groundbreaking report on corporate governance, which launched the Cadbury Code. That prompted lots of new rules and regulations on how boards should operate and how companies should be run. Early next year, Higgs is set to produce an updated Government-sponsored report on corporate governance, explaining how Britain can be saved from its own Enron or WorldCom.

The Higgs Code? It doesn't have quite the same grand, chocolaty ring to it as the Cadbury Code, yet if Higgs gets it right, it could turn out to be just as influential. In the past year the world has switched from celebratory to introspective capitalism. In 2000, people just wanted to talk about how great the system was. Now they just want to talk about how to fix it. His timing is good.

The review was set up by Trade and Industry minister Patricia Hewitt in the wake of high-profile American corporate collapses. The task is to look at how non-executives work and how they can get better at preventing collapses. Yet Higgs and his team know they will face plenty of flak.

To some it looks like a classic Yes Minister routine - here's a tricky issue, let's set up a review and hope it goes away. To others, Higgs looks too much a product of the existing system to be an effective critic of it - you might as well ask Roy Keane how to make football a more gentle game.

'He is a very good choice, because he will take a balanced view of the issues,' says Peter Hardy, who was a colleague of Higgs on the board of SG Warburg and went on to serve on a series of boards, including Kingfisher.

'But he will come in for a lot of criticism because he sits on so many boards himself.'

The Higgs Code would certainly be a step away from the shadows for a man who for the past decade or more has been one of the most influential yet hidden movers of British business. Through a long career in the City, Higgs helped shape the modern capital markets.

In the decade-long drama of Britain's attempts to create a world-class investment bank, he was one of the key players, as well as one of the authors of its failure to do so. In the late 1990s, he switched sides to become one of the country's most influential investors as chairman of Prudential's fund management division. Later still, he has become a ubiquitous non-executive, hopping from board to board.

Now he has been given the task of saving capitalism from itself. Big job, Derek? 'It is certainly a very difficult subject,' he replies. 'Because it is really about changing the way people behave, not just changing a rulebook.'

Changing behaviour rather than rules is the kind of challenge Higgs relishes.

There is not much ego about the man, which might explain why he has been content to spend much of his life as a coach rather than a player, as a manager rather than an actor. He ambles into a meeting room at the City headquarters of UBS Warburg, where he bases himself, with a cheery grin on his face. He cracks a couple of jokes about the complex-looking computers the trainees in the next room are learning how to use, and how fiendishly difficult they seem. Then he lets the conversation drift into alleyways and sidings that, although amusing, are not of huge relevance. It is engaging, entertaining stuff. But there is little of the desire to dominate, to impose his own will on any situation, that characterises the typical chief executive. He is in business, and interested in business, but not really a business person.

One reason for that might be because although he has spent most of his working life in the City, he comes at it as an outsider rather than an insider - a position that gives him a detached rather than an involved view of its workings.

He was born and raised in Solihull, the prosperous, conservative suburb where the posh people in Birmingham live. 'We called it Sol-ay-hull, not Sol-e-hull,' he remarks, quick to correct my pronunciation, but also with the kind of conspiratorial laugh that suggests he has long since left such provincial distinctions behind.

His upbringing was conventional, middle-England in every regard except one: his father Alan made lots of money but, out of devotion to high-minded, puritan principle, decided not to leave any of it to his children. Higgs had to make money for himself. That too has helped shape his life and career.

Alan Higgs was a self-made businessman, involved in a series of medium-sized enterprises in the Birmingham and Coventry areas - his main business was as housebuilder in Coventry. He was good at it, and ended up controlling a string of businesses, including a listed company. But he was also a man of stern, liberal views. He had made his money by himself and he thought his children should as well. 'He had a view that inherited wealth did more harm than good,' says Higgs. 'My sister and I both understood and respected his view.'

That can often be a common belief among wealthy self-made men. When George W Bush proposed big cuts in inheritance taxes in America, he was publicly criticised by figures such as Bill Gates and Warren Buffett, both of whom could be expected to take more than an academic interest in the issue.

Lots of rich men talk about how it would be better for the children not to inherit, but only a few actually follow through and cut their children out without a penny.

Yet when he died, Alan Higgs left all his money to a charity he established to help deprived children in the Coventry area. Derek and his sister were trustees, but couldn't touch any of the money themselves. At stake was a substantial sum of money. The charity still has pounds 20 million in funds, and has distributed pounds 6 million since his father died in 1979.

Surely, I ask, there must have been some part of you that was thinking to yourself: What's up with the old sod? Surely he could let us have some of the money? A million or two wouldn't have hurt.

Higgs answers: 'I had just been made a director of Warburg when he died, so I suppose I wasn't actually in need of money, although I can tell you new directors of Warburg in 1979 didn't get paid anything like what they do now. Maybe my sister might have minded a bit more, because she was a woman who had children and so on, so she didn't have the same opportunities to have a career and to make money that I did.

'I agreed with his views that initiative can be crushed by inherited wealth. I wanted for nothing as a child, so I didn't feel I had anything to complain about. I don't think I would have done anything very differently in my life if I'd inherited a large sum of money as a young man. As it happens,' he adds, 'I have made more than enough money, and that is more satisfying than just inheriting it. Working and making money is part of people fulfilling themselves.'

And what about the Higgs children, I ask. They must hear the family stories and feel a tad nervous.

Higgs laughs. 'They've all heard the story of my father, and I think they respect it too. But they also understand that I'm not quite as dogmatic in my views as my father was. Even so, I have already given money to my father's charity, and I might well give some more.'

Ironically, early in his career, Higgs had the chance to see close-up what inherited wealth, status and privilege could do to a family - and to confirm the rightness of his father's view that the effects were more often bad than good. At Barings, the first bank he went to work for in the City, the aristocratic sons of the founding family regularly favoured blood over talent, with consequences that became woefully apparent when the bank collapsed in the 1990s.

As a young man, Higgs had brains and came from a wealthy family, but he didn't have much breeding. He went to Solihull Grammar School, and from there to Bristol University, where he read economics and accountancy. After graduating, he wanted to get away from Solihull and the provinces, moved down to London, and qualified as an accountant.

In 1969, he went to work for Barings, his first taste of the financial markets.

'I was an outsider,' he recollects. 'I didn't quite feel I fitted into the organisation. At Barings in the 1960s, it was still the case that if you didn't come from a grand family, then you certainly knew it.'

The City of those days was still a closed, insular place, steeped in tradition. It was far from the globalised, multinational, polyglot place it was to become over the next three decades. It was hostile to change and newcomers. But a grammar school boy from Solihull was hardly someone who had crawled out of the back-streets of Cairo. If Barings had trouble absorbing him, where were they planning to find new talent exactly?

Times were changing, however. The old institutions such as Barings might have been mostly concerned with who had which old school tie and where everyone was going to go shooting at the weekend. But a newer, brasher and harder breed of bank was emerging. One of these was SG Warburg, then about to start its two-decade run as the City's most powerful investment bank, and a place where the young Higgs would feel more at home.

'He wasn't ever an egotist, but that wasn't the way at Warburgs,' says Sir David Scholey, the former chairman of Warburg, and one of Higgs's main mentors during his career there. 'At Warburgs, Warburg was the personality. But Higgs was always as steady as a rock. He is thorough and reliable.'

Higgs made his mark. Within a decade, he was a director of the bank.

Over the next decade, the 1980s, he was to be one of its main dealmakers.

Warburg was into the best part of its long upwards curve. It had done all the hard work of establishing itself against the old school. In that decade it was to become the City's most successful bank. Higgs had booked himself a first-class berth on the bandwagon.

'If you were going to take any 25-year period to be working in the City during the course of the last century, then the period between about 1970 and 1995 would have been it,' says Higgs. 'It was an amazing period of opportunity and change. I don't think people have that any more, the ability to spend 20 years or more working in the same institution with the same group of people, and I think that's a shame.'

Warburg built a reputation for tough tactics. In the rough and tumble of the multitude of 1980s takeover battles, it was usually in the thick of the action. By reputation, it was brainier than the other banks, worked later into the night and was single-minded in pursuit of triumph for its clients. Among City bankers, Higgs established himself in the Premier League. 'He has very good judgment, but he is not actually really commercial in an entrepreneurial sense,' says John Ritblatt, chairman of British Land, who was one of Higgs's main clients as a banker and who recruited him to his board after he left the City. 'I would come up with an idea for a deal, and then I would say to Derek: 'How do we do it?', and he would always know how to execute it superbly.'

Those 30 years of financial history were interesting, I suggest, because the verdict on it is still so contested. Some argue it was one of the most successful periods in the City's history. It established itself as Europe's dominant financial centre, humbling rivals such as Frankfurt and Paris. It generated wealth and jobs on an enormous scale, making London the wealthiest city in Europe by a wide margin. Yet, it can also be argued that it was ultimately three decades of failure. Over the same period, it went from being run by British banks and brokers to complete foreign domination. A world-class British investment bank never emerged, and the City is now the plaything of American, German and Swiss banks.

Higgs nods vigorously. It is a question he has thought long and hard about, and although he doesn't believe that ownership matters much, he still thinks it a shame that no major British institution emerged from the City. The bank he devoted much of his career to gave it its best shot, he thinks. And it was only by a whisker, he suspects, that the bank he would like to have seen created - Morgan Warburg, born from the planned merger between Morgan Stanley and Warburg - doesn't now rank alongside Goldman Sachs and Credit Suisse First Boston as one of the world's leading investment banks.

So what went wrong?

'I think there were a lot of people in the City who didn't really believe in the integrated investment bank model,' says Higgs. 'In the 1970s, I had been to work in America, and I could see that all the old distinctions between brokers and bankers had to go. I was an early believer. But most people in the City resisted that idea. Even after Big Bang, the majority of people didn't want to change. They might have bought a stockbroker or a bank, but they carried on with the same old way of doing things.

'After that, the Americans came in and just set up their own brand-new operations from scratch, and that proved to be the right way of doing it. They weren't carrying any historical baggage with them.'

Over his years with Warburg, Higgs advised on a lot of deals, but the one he most wanted involved the bank itself. And that one was a failure.

Warburg came up with a merger with Morgan Stanley to create a bank strong in both London and New York. If it had happened, Higgs believes Morgan Warburg would be where Goldman Sachs is now: the world's leading pure investment bank. He doesn't mention it directly, but there would have been another tantalising prize as well. He might well have been in charge of it - and he, not Goldman's Hank Paulson, could have been the world's most influential banker.

Fate didn't play out like that. At the last minute, the deal collapsed. Warburg, having offered itself for sale, was fatally wounded.

If it had been a client, Warburg would have advised it to put itself up for auction. As pragmatic bankers, that's exactly what they did, and a few weeks later Warburg was sold to Swiss Banking Corporation and is now a division of UBS. 'We were all very upset by that,' says Peter Hardy, a fellow director at Warburg and later a director of Kingfisher. 'We had the chance to build a really great global bank, and it all ended up as a terrible mess.'

The sale was a perfectly reasonable deal, but it meant Warburg became essentially the London office of a Swiss universal bank. The dream of a rival to Goldman had been stamped out.

'History tells us that we failed,' says Higgs. 'And that was a great shame for all of us involved, because we really believed that we could do it.'

He jumped to the other side of the fence, taking a job in 1996 as chairman of the Prudential's fund management business. From being the City's most powerful banker, he was now its most powerful investor. 'I decided I needed a change,' he says. 'Investment management is all about encouraging people to out-perform. If you could just tell people what to do, you might as well do it yourself.'

Higgs set himself a limit of five years in that job, and when the time was up he headed for the door. At the Prudential, he hadn't taken any non-executive jobs. It would be improper, he felt, to be an investor and a director, and there is almost no company the Prudential doesn't own shares in. After leaving that job, he collected a series of directorships. At British Land, he became deputy chairman. He also joined the board of Egg and Allied Irish Bank, as well as chairing Partnerships UK, a boutique investment bank that handles the complex technical work on financing private/public partnerships.

But his big task - and what may turn out to be the legacy of his career - is the review. The appointment was made in the wake of the Enron, Arthur Andersen and investment banking scandals of the past year. The puncturing of the bubble has left a trail of wrecked companies and a maze of incestuous relationships between bankers, analysts and their companies. 'Derek Higgs brings a wealth of relevant experience as a non-executive director, executive director and institutional investor,' said Patricia Hewitt on announcing the appointment. 'A well respected figure in City and business circles, he is admirably equipped to lead this review.'

Among his City peers, he is regarded as the kind of steady, purposeful man they would like to have on their side at a moment when the financial markets are under attack. 'I think his kind of personality and experience will make him the perfect person to think about the responsibilities of chairmen and their non-executives,' says Scholey. 'There is a cycle in scandal in the financial markets, just as there is a cycle in everything.

By the standards of the last 150 years, I don't think we have seen anything that bad in the last year. Money begets greed, and greed begets scandal.

We are at a high point in sanctimonious lecturing about that, and I think Derek will be the right man to calm it down and give it some perspective.'

Is calming things down his objective, I ask, or is he going to try to do something more radical than that?

'I think the real issue is independence and integrity of mind,' says Higgs. 'And you can't exactly legislate for that. What you need is a certain bolshiness, a willingness of people on boards to speak up more and say what they really think.'

Before he completes his review, Higgs will be subjected to a waterfall of advice and submissions. The CBI is suggesting annual reviews of non-executives by chairmen. The Association of British Insurers wants them to be paid more, with evaluation by outside consultants. Lord Young, in an Institute of Directors lecture, has suggested they be abolished. The IoD itself wants a limit on the number of directorships. Get 10 different trade bodies into a room and you'll get 20 different views - 10 before lunch, and 10 after.

Higgs is trying to pick his own delicate path through that minefield.

What he thinks he can bring to the review is a more subtle interpretation of how non-executives actually work. They have a voice, but little actual power.

'If you have had some success as an adviser, then you do know something about indirect influence,' says Higgs. 'You get to know which are the levers you can pull and which ones you can't. Sometimes it is like pulling on a piece of string.'

A stern, rather puritanical spirit is the quality Higgs is likely to bring to his subject - precisely the qualities his father imprinted most strongly on him. Higgs is someone who would always put principle before personal gain, which explains why he didn't mind that his father left all his money to disadvantaged children. That is an admirable view. But it might also be dangerously old-fashioned.

If the world was composed only of Higgses, his review would probably not be necessary. The big question for his completed code will be how much he appreciates that not everyone is as morally rigorous as he is.

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