Robert Heller ponders the implications of the recent spate of business scandals.
Great bull markets customarily expire in a spate of scandals. But one strange aspect of the world's 1991 crop is the predominance of British frauds and fiascos - one field of activity where the country can genuinely claim leadership. While characters such as Asil Nadir of Polly Peck and institutions like BCCI did only part of their business in Britain, they won much credence from their London links. The Australian busters, too, found Britain the happiest of hunting grounds.
True locals, from the Guinness gang to Robert Maxwell, were not a step behind in bending, breaking or blasting through the law. Is there any link between rampant knavery and less conspicuous or illegal types of mismanagement?
All scandals are failures of control, both internal and external. All companies, above all those offering financial services, are supposed to be regulated, governed and monitored by external authorities. All businesses have internal systems to control the spending and custody of cash and to monitor and govern the activities of the executives. Here, the board and the auditors have clear statutory duties, but the demands of good management go far beyond those bounds. Knowing that the pension fund is secure does nothing to increase market share, raise productivity or shorten production and distribution chains. Nor, as head of Allied-Lyons, say, do you insist on unbreakable controls over foreign exchange dealings just to stop an employee costing the company £150 million and you your job.
Controls exist primarily to ensure that well-designed systems operate smoothly. That requires analysis, intelligent appraisal and effective monitoring - in a phrase, systematic management, precisely what's required to optimise activities like marketing and production. It's equally necessary for the creative activities: you don't simply hire scientific wizards and feed them with laboratory equipment and money; you systematically decide on the best field to explore and the objectives you want to achieve.
When the future SmithKline Beecham hired Sir James Black from ICI, the great pharmacologist knew precisely what he sought - an inhibitor of stomach acid. As a scientific achievement, the discovery of Tagamet was a nigh-perfect example of systematic exploration. The American management shared Black's aim: but it lost control to the scientists, and later lost huge amounts of market share to Glaxo, which coupled the systematic R and D that created Zantac with a well-planned and inspired marketing programme.
In British tradition, the inspiration is regarded with far more respect than the planning. Hence the many tales (which Zantac contradicts) or UK innovations best exploited by American firms, from penicillin and jet engines to digital computers and EMI's brain-scanners. In a curious paradox, the typical British company is beset with rules, regulations and procedures which tend to inhibit innovation, yet it approaches the latter in an undisciplined manner that (as with EMI) can snatch defeat from the jaws of victory.
In the same way, there's an abundance - many would say an excess - of rules and regulations in the City and in company law. But their administration is haphazard, left largely in the hands of self-regulatory bodies or august institutions, led by the Bank of England, whose main concerns lie elsewhere. The assumption is that good men and true will provide guidance and control over bad men and false without the need for amply staffed professional invigilation backed by the full force of clear law.
Similarly, corporate governance is supposed to arise from the influence of good and true outside directors on boardroom decisions. But the role of the non-executive is vague and woolly. The critical management decisions rarely, if ever, reach the board. And awful examples like the Maxwell empire, with its grotesque inter-company loans, are unnecessary to make the point that reaching the board and correcting error, however, gross, are not synonymous.
The case for an improved British version of the Securities and Exchange Commission has been made time and again, never receiving any rebuttal, other than misty fears that the institution would be excessively legalistic and interfering - in a word, un-British. The case for strengthening the powers of non-executives is also familiar, and will be fully aired by the Cadbury Committee: but nothing done within the board is likely to promise better governance than a change to the even more un-British two-tier system.
The problem of acting from within the unitary board is that non-executives become participants. Only in crisis do the non-execs attain separate power. In a recent US example, the outside directors of General Motors, appalled by its losses, forced the management to abandon milder plans in favour of a swingeing attack on insanely excessive costs. When the board at last acted, the world's greatest industrial company was nearly broke.
If mismanagement in the more tightly regulated US system can reduce the richest giant to corporate rags, the scandals and near-busts of Britain are scarcely surprising. Effective disciplines, all the way to the top, are essential for better management. Self-discipline is also a vital element, true. But it can never be left purely to trust.