UK: Corporate governance - horses for courses.

UK: Corporate governance - horses for courses. - Robert Heller reflects on some racing uncertainties and corporate practice.

Last Updated: 31 Aug 2010

Robert Heller reflects on some racing uncertainties and corporate practice.

Suppose that Sir Denys Henderson, the embattled chairman of ICI, shared a fancy for the turf with an intimate and even more enthusiastic colleague. Suppose further that investigation revealed that the group operated two companies, Equus 1 and Equus 2, which invested in horseracing. Suppose, still more strangely, that the investment was so misplaced that £7.7 million of ICI's money had to be written off. Finally, suppose that the animals were raced in the name of the very close colleague - who, with other associates, had been granted 20% of the equity.

You do not have to do any more supposing to determine the consequences. Sir Denys would be gravely compromised as chairman of ICI, and another champion might well have to bear the cudgels against Hanson.

But it is, of course, Hanson that has perpetrated all of the above actions. Yet nobody has suggested that Lord Hanson should step down because of his frankly bizarre misjudgement in the matter of Cheval 1 and Cheval 2 (the real names of the companies concerned), or that the prime Chevalier, Lord White (who is not a Hanson group director), should break his connection with Hanson Industries, now the 75th largest company in the United States. Different standards evidently apply to an establishment company like ICI and an entrepreneurial creation like Hanson, still dominated by the two geese who laid the golden eggs.

The standards should, of course, be the same. If Hanson is big enough for an ICI bid to be feasible, it is big enough to abide by the same conventions of "corporate governance" - which, as one commentator rightly observed, is at stake in "l'affaire Cheval". Even if the horse-loving peers owned Maxwell-sized stakes in Hanson, instead of a mere smidgen, that would make no difference, except to the extent that minorities in proprietorial companies deserve even more protection than majorities.

The issue remains the same. Lord Hanson, who even bought the ICI stake without reference to the board, can deploy his group's resources with great freedom; Sir Denys cannot. Yet both operate under precisely the same system of governance, which strongly (and rightly) suggests that no such system exists.

"Governance" lies in the hands of the shareholders, which, de facto, means institutional investors. That might result in some very piquant situations. For example, Prudential has often been a force in cases (uncommon, but on an interesting rise) of institutional pressure enforcing chief executive departures. Yet the Pru had the poor taste to award its chief executive a 43% pay rise after a year in which profits fell by 35% - and after £400 million (eight times the Cheval disaster) had vanished through an ill-conceived and worse-executed foray into the estate agency business.

Can anyone seriously envisage other institutional investors demanding and enforcing management changes at the Pru? Apart from anything else, many like inhabitants of the City of London have still to expiate greater or lesser sins of commission of their own. In that context, I was thrilled to read the view expressed, in a Financial Times interview, by Lord Alexander, chairman of National Westminster Bank: "The quality of management needed in other industries is now necessary for banks." The thrilling word is "now". When didn't the banks need management?

Anyway, what did "management" have to do with simple honesty and legality, like not claiming the failed Blue Arrow issue as a rip-roaring success? That was as straight an issue of corporate governance as Chevals 1 and 2, or the inappropriate salary rises that have been making sometimes silly headlines.

Independent directors are supposed to prevent boardroom shenanigans. But did the non-executives at Hanson know any more about les chevaux than the shareholders? And, irony upon irony, the chairman of the Pru is also the president of the Confederation of British Industry, which, of course, is dead set against wage-push inflation in the British economy. Any significant company should have the minimal "corporate governance" of a non-executive committee that passes on executive remuneration. But such governance can be minimal indeed.

In last month's column I noted that John Akers of IBM could hardly dodge his personal responsibility for the grave defects he saw in his company. Yet his $4.6 million pay package for 1990 represented a 138% increase over the previous year. Beside that, the 43% for British Telecom's Iain Vallance and the Pru's Mick Newmarch or the 86% for Robert Jones of British Gas are, relatively, chicken-feed.

You can see how it happens. Executive pay is increasingly subject to various formulae, approved by the corporate governors, which tie income to earnings. The formulae are retrospective, so you can easily find somebody like IBM's Akers cashing in heavily on Year A while Year B is plunging into loss.

There should, of course, be a downside risk: Sir Francis Tombs of Rolls-Royce and British Airways' Lord King and Sir Colin Marshall were absolutely right to take less salary in their current bad patches. Uproar might have resulted had they pocketed large rises. But what if their salaries had merely marked time?

"Corporate governance" is not, and cannot be, a hard and fast issue, even on pay. Whether chief executive pay should be tied to profits is a harder and faster question than most - and the answer is not necessarily today's foregone conclusion. To what real extent can the chief executive personally and genuinely raise the real profits of the company? In any event, the end does not justify the means. If Equus 1 and 2 had made ICI £7.7 million, Sir Denys would still have been culpable for hazarding the company's money on a very personal hunch. And so, whichever way you look at it, are Lords Hanson and White.

About that bottom line ...

A new way of measuring company performance suggests that the climb out of this recession may not be so difficult for management as feared. The measure, derived by independent consultants Dennis Henry and Geoff Smith of P-E International, shows that most companies which lost profits this year could have held their bottom line by a 1% or less improvement in seven basic elements of their business.

The research looked at seven critical factors: the volume of goods produced, their selling price, usage and price of raw materials, fixed costs, labour costs and productivity. It then determined just how much a 1% improvement in all of these factors would affect the pre-tax profit of each of 174 UK companies. It found that many companies' profits would have jumped easily, though some would not, depending on the nature of the business.

Henry and Smith then worked out what actual average change there was across these factors for each company in the past year. The majority of companies (135 out of the 174 total) either improved on these factors or else saw them fall by 1% or less. Management, in fact, has done a good job of minimising the slippage in real factors.

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