Friday, 27 May 2011

Bribery Act Panic

There is a great deal of senseless panic being whipped up about the implications of the UK's new Bribery Act, that comes into force on 1 July 2011. An article by the City Editor, Chris Blackhurst, in yesterday's Evening Standard exemplifies the worst of the reporting. He talks about the harsh potential penalties and implies that these may be applied to 'gifts, hospitality and promotional expenditure'. Naturally the financial consultancies love this sort of stuff because it increases the demand for their conferences and courses on the subject and of course helps to sell lots of expensive consultancy - most of it a complete waste of money.

Oddly Blackhurst chose to ignore a previous article in his newspaper (11 March 2011) where UK Justice Secretary, Ken Clarke, is quoted saying;

a "common sense" approach would be used and stressed no actions could take place without approval by the Director of Public Prosecutions or the Serious Fraud Office - avoiding the "fatuous prosecutions" sometimes brought under health and safety law.
"Neither will bring silly prosecutions," he said, adding that it would be "completely safe" to take clients motor racing or to a football match.
"Taking customers to Twickenham is normal," said Mr Clarke - himself no stranger to corporate hospitality boxes. "But if you took them for a Caribbean cruise with the wife, that's different.
"It is normal business hospitality to get to know your customers better. No one is going to call that dishonest."
Now ok, I accept that at the end of that first article it quoted "Legal experts" as saying "Mr Clarke's assurances will not necessarily protect business figures from being jailed" and went on to quote someone from an outfit called "World-Check" saying "The guidance does not provide a defence to any of the new offences created." Except that World-Check and 'legal experts' may not be synonymous - and the former is a commercial company with a vested interest in panic.

I accept that the Evening Standard is right up to a point, the guidance notes from the Ministry of Justice as well as what the Justice Secretary has said could be ignored by the judges. But I don't think they will be. I think common sense will govern and I also think that the Director of Public Prosecutions - who can be replaced by the Justice Secretary - will act as a responsible gatekeeper and will prevent frivolous prosecutions.As a backstop this or a future government will simply amend the legislation if it does not work as intended. Reasonable corporate entertaining will not be caught within the ambit of the new law.

Whilst we await some case law to develop I urge company secretaries to read the MoJ guidance for themselves. But remember that if all this panic and selling frenzy from consultants and lawyers results in masses of unnecessary bureaucracy then that will set standards for courts to view as 'normal'. And you company secretaries and compliance chaps will have created the very rod that will be used to beat you.

Wednesday, 25 May 2011

Paying Executives for failure

There is an interesting reflection about golden handshakes for disgraced board members, by Chris MacDonald on his businessethicsblog. It was apparently sparked by news that Dominique Strauss-Kahn may be paid $250,000 severence by the IMF. But there is also a wider issue here about why failed as well as disgraced board members are often paid off handsomely and also why senior executives around the world have enjoyed such an explosion in their remuneration, capturing an increasing proportion of company income. Chris Bones, former dean of Henley Business School has written well about this.

I believe a substantial part of the explanation is an identification or affinity issue: ‘this guy is one-of-us, we must treat him as we would wish to be treated’. Identification is linked to an ‘oligarch’ problem, whereby, as well as competing with each other, senior politicians, business people and bureaucrats share a common tribal identity and common interests;

…years ago I took part in a business game conducted over a weekend between teams carrying out real projects for small sums of money contributed by the participants. It revealed that winning the game was easy if you cheated, as long as few others did. Getting on to the game’s ‘governing board’ and using that to increase our pay, as well as taking bribes from the teams, proved a winning strategy. By analogy, if the top guys in the world/business all help and cover for each other then, as a group, they achieve an optimum outcome. To achieve this does not require formal agreement or even informal discussion. I think it just happens through identification - it is why board remuneration committees pay their colleagues outrageous amounts that are unconnected with performance. It has nothing to do with an expectation that the beneficiaries will return the favour, although members of a remuneration committee who are still active in business will benefit from a general rise in the remuneration of senior executives and board members. It is much more to do with comparabilities (See business leader Paul Judge on this) where executive pay is compared with that of other companies who, at the next round, are then compared with your company - creating an upward spiral of pay, benefits and status.

Tuesday, 24 May 2011

The Board Challenge of the Dominique Strauss-Kahn Affair

Newspapers and blogs have been  full of reports on the Dominique Strauss-Kahn affair, but there is an important corporate governance aspect that has hardly been voiced. It has a wider application than this one incident or this one news-story; it is the question of what a board should do about reports of a sex-pest who occupies a senior role in their organisation.

DSK is clearly innocent until the result of his trial is known; but this is a general question. Has the board of the IMF done what it should? What, generally should boards do? They are at risk if they do nothing. They risk damage to their reputation but also possibly financial damage if they owe a duty of care to a complainant who can show that they knew or should have known what was going on and failed to act.

The IMF is a special case, where the Managing Director (DSK) is also chair of the board, reporting to a board of governors comprising nominees from shareholding countries – who do not get involved in detailed oversight of management processes. But what would be the situation in a corporate board? These situations may be rare but are not unknown. It is clear that responsibility falls on the chairman to institute an investigation whenever serious matters regarding the conduct of a director come to light. It is clear that any director who becomes aware of an issue should report it to the chairman. If the subject of concern is the chairman then a senior director should institute an investigation after having obtained the consent of the board. UK public companies have a Senior Independent Director who should perform this role. What should not happen is for these matters to be swept under the carpet. Waiting to see if they come before a court is not a good option.

This week’s reports that Fred Goodwin, late of RBS, had an affair with a senior colleague highlights another aspect of the same issue. Whilst it is common for partners to meet through work, an intimate relationship where one party is the chief executive, particularly in a bank, risks conflicts of interest that may affect financial probity. One is reminded of the affair of Paul Wolfowitz, president of the World Bank, who was accused of impropriety in having a relationship with someone who worked, indirectly, for him. One wonders whether this matter would have been pursued if its subject had not been a controversial figure who pursued controversial policies and had been appointed by an unpopular US president. But at the very least, such a relationship should be reported to the board so that they can monitor behaviour in the knowledge of the relationship. But generally I cannot believe that these work relationships are ever actually a secret – I recall working at a bank and stepping into the lift late one evening. The chief executive was also in the lift, going down to the basement car park with a young female lawyer who worked in the organisation. It may have been entirely innocent but I knew instantly that it wasn't. In reality board members pick up what is happening pretty quickly too but too often choose to ignore it. The likely outcome of doing nothing is not good and, in a world of Twitter and Facebook, will become less and less of a good option.

Sunday, 15 May 2011

Burson Marstellar contributes to corporate governance thinking

There were newspaper reports last week that Burson Marstellar had been retained by Facebook to get negative stories about Google into the press. 
Paul Cordasco, a spokesman for Burson-Marsteller, told the Guardian on Thursday that the assignment was "not at all standard operating procedure" and was against the company's policies. He added: "The assignment on those terms should have been declined."
Which raises a number of interesting governance questions;
  • at what level in the company was this assignment approved?
  • what are the company's policies and how are they communicated to staff? 
  • how does the company control what staff do?
Subsequently they added about the former journalists, who were trying to interest papers in these stories, that
The pair will receive receive extra "training" and Burson-Marsteller said it intends to redistribute its code of ethics to all employees in the wake of the scandal.
Could BM maybe publish this code of ethics as well as explaining what their systems are for controlling what their staff do? Because I find it very odd that a pr company does not have control systems that vet new assignments for issues such as appropriateness, ethics, conflicts of interest etc. If they don't then that is a huge governance issue because corporate governance is not just about boardroom behaviour but also about how the board communicates its values and controls how its people carry out company policy.

In the past BM has been accused of acting burnish the image of some pretty nasty African dictators and stepped back from such activities. In light of that is the company really saying that they don't have a system in place for new assignments to passed through an approval process?

Tuesday, 3 May 2011

David Sokol, Berkshire Hathaway and Integrity in Corporate Governance

Much has been written about David Sokol advising the Berkshire Hathaway board to acquire a company, called Lubrizol, in which he had recently bought shares. There has been much debate in public about whether he made sufficiently full disclosure and whether the board asked the appropriate questions. The point that emerges is that rules and procedures can only take you so far. In the end we rely upon personal integrity and a shared understanding of ethics.

The rules and procedures are just a starting point - any investment professional would ideally not invest on their personal account anyway. Sokol's earnings at Berkshire Hathaway are not made public but his role at MidAmerican, an 89% owned subsidiary, are reported to have brought him $24m over 3 years. One would guess that his other roles would have added substantially to this. His profit on Lubrizol was just $3m. I say 'just', that is a lot of money but surely, for someone on such a scale of earnings, it should be possible to abstain from personal investing without feeling poor?

I understand that the sort of executives sought by Berkshire Hathaway are natural dealers but surely...? But ok, suppose he could not resist...then, whatever the BH disclosure rules may be, surely if you advise a purchase of shares in a company where you hold shares you over-disclose: you detail what shares you bought, when you bought them and any surrounding circumstances such as advice to or even conversations with other people concerning the target company. You disclose who told you what that may have led you to buy shares. You cannot be too clean.

I understand that Sokol's lawyers claim he was not asked the right questions. Maybe not. But that ain't the point. My set of personal values says that no questions should have been necessary. Maybe this was just one of many investments and he forgot (actually it wasn't because he claims to make only a handful of trades each year). But if you are an investment adviser then, regardless of whether rules oblige you to do so, you should keep your own detailed register of interests so that nothing can be forgotten and so that all trades are reported to those you advise.

Like I said...rules are a starting point and then corporate governance is about personal integrity and a shared understanding of ethics.