Thursday, 31 March 2011

Do the UK's regulators need regulating?

Who guards the guardians?

Ian King wrote this in the Sunday Times.

For an organisation seemingly hell-bent on transparency and disclosure, the Financial Services Authority was unusually tight-lipped yesterday following news that, after an investigation that began in April last year, it will take no disciplinary action against Guillaume Rambourg, the former Gartmore fund manager.
Yet a statement from the watchdog is surely merited. It is no exaggeration to say the FSA’s investigation has contributed to the near-destruction of Gartmore and cost its shareholders millions. When news broke that the FSA was investigating Mr Rambourg, on June 1 last year, shares of Gartmore fell by more than 5 per cent. By the time he quit six weeks later, to try to clear his name, they were close to their all-time low. Gartmore went on to suffer a big decline in assets under management and, in January, fell into the arms of its rival Henderson.
Eerily, news of Mr Rambourg’s exoneration comes as the FSA threatens to reduce another business to rubble....
 It seems to me that if good corporate governance is to be enforced by regulation and by regulators that those bodies need to behave responsibly and transparently. Of course they may make mistakes and they may be unable to find evidence to support suspicions. That is reasonable. But to take almost a year to investigate and then to give no public indication of what has happened is an outrageous abuse of process. Lives have been shattered, careers destroyed, savings annihalated. Was it necessary to announce the investigation in the first place? Might the wording of the announcement have been framed to limit the damage? Was it necessary to take nine months over the investigation? Could all these losses have been avoided?

If regulators can cause such damage without having to explain themselves to anyone do we risk adopting the worst aspects of Russian abuse of administrative systems?

UK Bribery Act - Ministry of Justice Publishes Guidance

Implementation of the Bribery Act 2010 was delayed from April 2011 as a result of concern that it was unclear and onerous but it will now commence on 1 July 2011. The updated Guidance note from the Ministry of Justice was released yesterday.
Justice Secretary, Kenneth Clarke, said:
'I have listened carefully to business representatives to ensure the Bribery Act is implemented fully and in a workable, commonsense way – this is particularly important for small firms that have limited resources. I hope this guidance shows that combating the risks of bribery is largely about common sense, not burdensome procedures. 
 Hmmm. The main change from the previous guidance is that there is a surrounding appeal to common sense. That is welcome and, as long as the courts follow that in practice, is good news. The guidance emphasises that onerous bureaucratic procedures to document activities to demonstrate compliance are not really necessary. Which may prove to be bad news for the consultants, accountants and lawyers intent on making their fortunes from giving unnecessary advice on the legislation to companies and persuading them to introduce unnecessary systems.

The MoJ repeats that proportionate corporate entertainment will not be illegal. It opens up the idea that companies that list in the UK but have no activities here will not be caught. It suggests that foreign subsidiaries may be deemed to make their own decisions.

However, the key point remains that interpretation of the Act will depend upon the courts. Will they apply common sense? We will see what happens in practice.

Tuesday, 22 March 2011

Financial Reporting Council guidance on board effectiveness

In early March the FRC published a guidance note on board effectiveness, designed to help companies implement the Code of Corporate Governance. It might have been an important document but  in the event I fought equally against unworthy giggles and yelps of outrage and time and again I failed.  It all starts badly with "The board's role is to provide entrepreneurial leadership... etc". Now FTSE 350 companies, at whom this is aimed, have many qualities but their sheer size and organisational complexity means that very, very few of their directors are entrepreneurs. Moreover there is a fundamental misunderstanding if the FRC believes that entrepreneurial behaviour emanates from a committee.

But stick with it, although the document reads like a list of thoughts for the day there are some useful thoughts, albeit they would have benefited from some focus. But then I came upon..."The CFO has particular responsibility to deliver high quality information to the board on the financial position of the company". Well, that's a revelation! Who would have thought that's what a Finance Director is meant to do? Such banalities really do not help the reader and nor do they encourage the reader to continue.

Still, I read on, although I was continually irritated by a peppering of references to "high-quality information" and "high-quality decisions", as if anyone tries to produce anything different. If nonsense was expunged the document would be half as long and definitely worth a read together with the newspaper in the morning. There is useful stuff here.

Early, for example, on the scene is set with a comment that  "An effective board should not becessarily be a comfortable place. Challenge, as well as teamwork, is an essential feature." Yes, absolutely right. This could have done with some expansion and there is some later on but these are important points to make you think. The balance between challenging your colleagues and working as an effective team is a tough one. More guidance on how you achieve that balance might have been useful.

I'd be interested in any reader responses to my disappointment with this guidance note.

Monday, 14 March 2011

Obama, Crowley, Manning and Corporate Governance

What do the conditions of incarceration of Private Bradley Manning have to do with corporate governance?

Manning is accused of being the source of material published by Wikileaks that may have compromised US security and has probably cost lives amongst informants whose identities have been compromised. On the one hand the allegations against him are serious whilst on the other hand he is being held in conditions that amount to torture. He has been held for nine months under conditions that include "nudity, prolonged isolation, harrassment and sleep deprivation." Prison psychiatrists have denounced the justification put forward for such conditions.

Challenged about this unconstitutional abuse of a remand prisoner, State Deparytment spokesman P J Crowley dubbed it “ridiculous and counterproductive and stupid.” and, as a result, was rapidly forced to resign.

So the link to governance is that we have improper behaviour by subordinates, associated with steps to cover it up and then a classic whistleblower who is promptly victimised. So the issue goes to the very top, to president Obama...

Obama: "With respect to Private Manning, I have actually asked the Pentagon whether or not the procedures that have been taken in terms of his confinement are appropriate and are meeting our basic standards. They assure me that they are. I can’t go into details about some of their concerns, but some of this has to do with Private Manning’s safety as well."

At the top you need ethical responsibility. Instead Obama asks the perpetrators of the questionable behaviour to self-certify that they are behaving properly. He also seeks to cut off debate by saying that there are things that cannot be discussed. All this is played out in the public realm where the checks and balances of governance ought to hold his government to account. Unfortunately the American body politic tends to be quite casual about morality in regard to their enemies; vide Guantanamo, water boarding, prisoners in general and now Manning in particular.

As with most corporate governance issues there are consequences to this behaviour. The moral standing of the US is further eroded and now both Republican and Democratic administrations are tainted as hypocrites. This will undoubtedly affect US interests when it seeks to speak for the 'free world'. The power of a nation lies in more than its military and financial power but also in its influence and moral standing. The parallel with corporations is that they too suffer real damage when their reputation is damaged through poor governance.

This is not meant to be a political post nor even about human rights: it is about the checks and balances in a system that prevent wrongdoing, abuse of power and behaviour that will damage the long term interests of a corporation. The example, from the world of government, illustrates the need for ethical standards and moral courage at the top and for stakeholders (in this case citizens and voters) to stand up and be counted when their servants go wrong. These behavioural issues are as vital to good governance as good systems and procedures.

NGO's and governance

There was recently an event sponsored by the UK government at which aspiring non-executive directors could meet organisations such as museums, galleries, artistic and cultural organisations that receive public money. It was an eye opener and a shocker. This was because of what they were looking for and what they were not looking for. Representatives of the organisations were very keen on recruiting, for example, scientific skills for the Natural History Museum or extolling the value they had obtained from a lawyer who had joined another public body. It quickly became clear that most of these organisations seek non-executive directors who will provide free professional services. What they are not looking for is people who will involve themselves in governance issues, who will challenge executives either by providing new ideas or testing those that are presented. They are not looking for people to contribute to new strategic thinking nor are they looking for the diversity in background and approach that leads to new ideas and challenges to the status quo.

In short they were not looking for the skills and approaches that should actually be the prime purposes of non-executive directors. Professional expertise you can buy in and is not so expensive in the context of these large organisations: a questioning, independent mind is, of course, less comfortable.

All these organisations may be lucky. They may hire excellent, innovative executives who will achieve great things and do not need holding to account and who do not need prodding to test new approaches. Or they may not; and the public purse will be wasted, organisations may become complacent and stuffy and may under-perform. Wilful misappropriation of public funds may occur and may go undicovered. My guess is that the latter is more likely than the former. What do you think?

Tuesday, 8 March 2011

The politics of corporate social responsibility

Rather than get on with my work I foolishly clicked on a link on an email that took me to a report on Justmeans that cited Ethical Consumption magazine in branding Starbucks "the most unethical coffee chain in the UK". And that got me so cross that I am sharing my rage with you. Now forgive my pedantry but, what does such a headline mean? So Starbucks may be more unethical than other coffee chains but maybe better than other sandwich bars and cafes? Who cares?

But worse than the nonsense in this is the train of trendy but misguided political assumptions. There seem to be some quite fair criticisms in the article but some of the factors that have led to the overall judgement are blatantly dependent upon your political viewpoint. For example, Starbucks is slated for resisting unionisation of its US outlets; well they have a lawful right to do so and many employers in the US and UK do that...within the law. They are slated for sharing in their employees tips in the USA and being taken to court for it. Well, that sounds terrible, except that that is not what it was about - the company thought the shift supervisors should share in the tips, not Starbucks itself. That does not sound so terrible to me. Having reported that judgement was against Starbucks, the next sentence tells us that judgement was overturned on appeal. So Starbucks acted legally and, as far as we know, morally correctly.

And we get from the article "In the year 2009 when the company slashed costs by $580m, CEO Howard Schultz still got a 25% pay rise." Ok...and why is that necessarily so terrible? The CEO was employed by the shareholders to improve profitability. In fact he had stepped down as CEO and returned in 2008 when the company was in considerable trouble. As far as the shareholders are concerned he did a very good job and was handsomely rewarded. Remember that those shareholders include pension funds and charities: they include you and me. Of course the employees who lost their jobs when costs were slashed would not be happy but the employees who kept their jobs because the business did not go broke would be happy.

This is what the company said
Schultz greatly exceeded the board's expectations, the filing said. "He drove the Company to achieve strong financial results for the year despite the extraordinary challenges facing the Company in a period of unprecedented global financial turmoil, and made significant progress in transforming Starbucks and returning the Company to sustainable, profitable growth while preserving its values and guiding principles."
  Unfortunately too many people in the CSR debates hold a political perspective that colours their judgements. It is entirely possible to believe that Corporate Social Responsibility is a good thing without distorting the facts and without attacking companies and individuals unfairly.

Unintended consequences of sustainability

Serendipity has struck. I just recovered a spam email from my trash bin that reports from the Sustainability in Packaging Conference 2011. This just happened to coincide with a BBC news report on Swiss researchers discovering that recycled cardboard packaging contains high levels of potentially dangerous chemicals that leach through inner membranes and contaminate food. So this second report casts an interesting light on the first. It shows us that this whole concept of 'sustainability' is horribly complicated and that any pretence of meaningful reporting in corporate annual statements contains a material risk of being nonsense.

Of course it is laudable that food companies have tried to use recycled newspaper packaging rather than entirely new materials; and the reported problem that has arisen was unforeseen. Recycled materials are also cheaper than new ones but it is perfectly reasonable for an ethical approach to also improve profitability. But this does illustrate that it is often far from clear that particular steps towards reduced environmental impact achieve their objectives without unintended consequences.

Take the issue of power from offshore wind turbines. Surely that is a no-brainer? Yet the weekend newspapers reported that offshore wind power in the UK will require a £100bn subsidy whereas the same carbon reduction effects could be attained by switching some coal fired power stations to gas, at a cost of £7bn. Now, I guess that part of the rationale is to achieve a more diversified energy supply, but this also illustrates that an apparently good environmental thing may not be so good after all.

Wednesday, 2 March 2011

See Professor Bainbridge on the evils of over-regulation

This is the first time I have ever just written that folk ought to read an article on another blog. And, in turn, Prof Bainbridge is reblogging Marc Hodack but read it. They discuss why excessive regulation stifles the capital markets with no observable economic (or governance) benefits. There is no new data here - just sensible argument. In Europe we may not have Sarbanes Oxley or Dodd Frank but we do have Commissioner Barnier and the EU harmonising/dirigiste tendency, not to forget our very own UK government's tendencies to make too many laws. They all forget the law of unintended consequences. They all forget that, once made, laws tend to become ever more complex and are rarely swept away into the dustbin - however bad they turn out to be.