Wednesday, 15 June 2011

Tokyo Electric Power (TEPCO) and the nuclear plant at Fukushima Daiichi

There was a very interesting post by Bob Tricker back in April that addresses corporate governance issues behind the nuclear release at Fukushima. It is too long to reproduce but here is the link. The issues are, on the one hand, culturally specific to a Japan which is deferential to authority, avoids confrontation and manages by consensus. However it holds some broader lessons for all of us.

It appears that TEPCO has some record of safety violations and delaying the release of information, which may be putting it kindly, to shareholders, regulators and the public. It also has a large board of directors with only two non-executive directors - one of whom is a connected party. It is therefore a very large, complex company which has no real mechanism for constructively challenging the management team. You would imagine that a country such as Japan, which displays the cultural characteristics in business referred to above, has an even greater need than Western countries for some external, constructive challenges to groupthink. TEPCO and the 2009 crisis at Toyota demonstrate that companies that do not seek out challenges to their thinking deliver poor responses to crisis. Whether they are more likely to encounter a crisis in the first place is a more complex issue.

You could argue that I am being unfair and could point to BP's Deepwater oil spill as a counter-example. It seems that BP did not manage safety as well as it might, despite having genuinely non-executive directors. Well, I would not argue that the mechanism works infallibly to counter all business problems. I would argue that it is a mechanism that ought to respond well to crisis as the non-executives seek to understand what has happened. It also has a better chance of creating a climate of enquiry before disaster strikes.

Sunday, 12 June 2011

Some complexities of Corporate Social Responsibility

I can be a bit of a sceptic about 'green' and CSR issues because, although these are important and are undoubtedly part of the corporate governance discourse, they are often just a bandwagon of muddled thinking.

An article in the Times on 10 June illustrates this.
"Electric cars could produce higher emissions over their lifetimes than petrol equivalents because of the energy consumed in making their batteries, a study has found."
Unfortunately, the article is behind a paywall but here's the reference anyway. Quoting from a report commissioned by the government funded Low Carbon Vehicle Partnership, it says that electric cars actually give rise to more CO2 emission than petrol and diesel cars if you take into account their production - and particularly production of batteries - and disposal. What this illustrates is not that nothing should be done about global warming but that CSR issues can be fiendishly complex. Just jumping on any old passing bandwagon can be a mistake, so political and business leaders should take a cautious view and should try to avoid being steamrollered into knee-jerk responses to environmental and 'sustainability' lobby groups. In particular, calls for corporate reporting on environmental issues - an issue promoted by accountancy firms which see large fee opportunities - should be approached with caution. You can easily spend time and money reporting on your firm's CO2 use only to find it is hugely misleading. Of course you may not care about that if it was only a public relations exercise in the first place; but if you were genuinely trying to be open then it may be a  bit disappointing.

The main thrust of the press release that launched the report was to encourage people to take a 'whole life' view of vehicles rather than just focusing on basic petrol/diesel consumption. Interestingly, the Times seems to have had access to the report itself (which I can't find posted on the web), which seems to make electric cars seem even less environmentally friendly than the press release itself revealed.

Thursday, 9 June 2011

Eurasian Natural Resources Corporation ejects independent directors

It is not really such a surprise that the controlling shareholders of this FTSE 100 mining company have just exercised their control and ejected two of the non-executive directors. What is a surprise is that the London Stock Exchange decided to admit the company to its lists in the first place. It is also a surprise that the shares were then included in the FTSE 100, automatically obliging tracker funds to invest in them.

The governance of this company was always questionable. Consider that the business only has some 18% of its shares floated, the rest being mainly controlled by three Kazakh oligarchs, the government of Kazakhstan and another Kazakh company. Kazakhstan, it may be noted, is a dictatorship under president Nazarbayev. To add colour to this, it is the sort of country where a Uighur journalist, having fled to it across the border from China, seeking refuge after the ethnic troubles there, and having been designated a refugee by the UNHCR, but has just been shipped back to China by the Kazakhstan government although other countries had offered him refuge.

Anyway, City grandees were appointed as independent directors to ENRC, when it was floated in London, to demonstrate good governance. They included Sir Richard Sykes, former head of GlaxoSmithKline and Sir Paul Judge, former head of Premier Foods.

To be fair, those who bought shares in the company would have known what sort of business they were investing in. They knew they were a minority in a company dominated by a very small group of shareholders and the chairman, Johannes Sittard, was known to be a long standing business associate of theirs. They knew that Kazakhstan is a dictatorship and a reasonable person might have guessed that the key decisions would, in reality, be made amongst this small group of people despite the fact that they do not directly have seats on the board.

Surely those City grandees would also have spotted all this. Apparently that other investor in African natural resources, from a bygone age, Tiny Rowland, described non-executive directors as ' a bauble on a Christmas tree' - maybe the world has not changed so much. But why did these heavyweight directors lend their names to this company when their function was clearly just pr? Their careers have been impressive; they have often said impressive and sensible things in the past; they are already wealthy men, they didn't need the money, why prostitute themselves? (Though Sykes remuneration, at £250,000 seems extraordinarily high for a non-exec). I have remarked in a previous post that the essence of good governance often comes down to integrity.

A few months ago ENRC was involved in a much debated transaction, buying a mine in the Congo that had been expropriated by the government. This appeared to smell of receiving stolen goods and is now subject to litigation from the previous owners. In that instance Sykes was a vociferous defender of the company he now recommends shareholders to disinvest from. He is also now quoted as using the phrase 'mad oligarchs' whilst the other ousted director, Ken Olisa, is reported to have used the phrase 'more soviet than City'. I suppose a late conversion is better than no conversion.

This whole sorry affair raises questions about integrity, about the judgement of people running the London Stock Exchange and about the regulatory regime under which this could occur. In the 'bad old days' of chummy, clubbable merchant banking types before Big Bang a handful of grandees would have had a chat and decided that there was a fishy smell about an outfit such as ENRC and it would have been blackballed, regardless of the potential for earning nice fees.

By the way, the shares have done quite nicely - up to over 800p from a flotation price of 540p in 2007 - though 29% down this year.

Wednesday, 8 June 2011

Directors personal responsibility

In the wake of the Berkshire Hathaway affair, where David Sokol, a senior executive, recommended a bid for Lubrizol, a company in which he had recently bought shares, I have been thinking more about personal responsibility. I strongly believe that rules and regulations matter. After all, I have a vested interest, with a forthcoming book on UK corporate governance (Financial Times Briefings: Corporate Governance). But rules can only provide a framework and a minimum standard of behaviour - they can never cover every situation. And only an ethical approach can fill in the gaps that are not covered by this framework.

Driving from the airport this morning I heard two juxtaposed items on the radio that illustrate this. The first piece reported on a football match in Chechnya to celebrate the opening of a new football stadium in the capital, Grozny. The local side, bizzarely, included Ramzan Kadyrov, the country's president, as striker and he scored a hattrick in his side's victory over an international all-star's side. But it was this team of former international players that interested me. It included two former England internationals, Robbie Fowler and Steve McManaman, who were interviewed. Both insisted they were not interested in politics, just in playing football. Yet this was not just an ordinary football game. All its unusual features proclaimed this fact. The presence on one team of the country's dictator, a man accused of personal involvement in murder and torture, whose opponents, as well as local  journalists and human rights activists, have a habit of being killed, proclaims that this was not just a football match. This was clearly not an instance where politics relates to polite political debate but an instance where the event was an integral part of a plan to confer legitimacy on a much harsher political reality.

The other item was a report on UK banks misselling of Payment Protection Insurance that was meant to protect people who were unable to repay loans. It seems clear that at some level of the hierarchy within not one but a numberof banks a decision was taken to encourage and incentivise staff to sell of these instruments in reckless disregard of whether they were suitable to the customer. I am sure that staff were not actually told to sell this insurance to everyone, whether appropriate or not. However, some people within the organisations must have realised there was an absence of the controls that would ensure the insurance was only sold where it was appropriate. They were either reckless or dishonest or were unable to make themselves heard within the management system: which would probably point to someone else having suppressed their concerns.

Both of these stories point to the need for individuals to take responsibility for their actions. Whether it is footballing whores or banking executive whores it is always important to accept personal responsibility. It is easy to recognise the thirty pieces of silver you are being paid but, usually, it is also easy to recognise the reality of what you are being asked to do in return. The biblical story of Cain and Abel reports Cain saying "Am I my brother's keeper?" and it carries two lessons. The obvious one is that Cain was involved in a cover up: the more difficult one is that, yes, you do have responsibilities for your brother.

At the heart of corporate governance we find integrity and ethical behaviour and it is actually not that hard to spot the right thing to do. What is sometimes hard is to turn away the thirty pieces of silver but it is down to each of us to behave properly and to speak up when others do not.

Thursday, 2 June 2011

The FIFA bribery scandal: and Sepp Blatter

Well, how can I not write something about this spectacular news story. Even though it relates to a not-for-profit, global sports body it has so much to teach us about corporations.

To summarise the key facts; evidence is published, including some from internal whistleblowers, that seems to confirm what many people have talked about for years about FIFA - many people connected with it are corrupt and the right to stage the World Cup every four years seems to be bought and sold. Meanwhile the chap who has been president of the organisation whilst all this widely publicised misconduct has been going on puts himself forward as a reform candidate and is re-elected unopposed.

So, to the lessons;
  • Vested interests rule. If an organisation is doing well then there is little stomach for doing anything about a bit of corruption. FIFA has grown spectacularly under Sepp Blatter's stewardship, with annual income more than doubling since 2003. Over the four year reporting period to 2010 they have invested nearly $800m in football development around the world, being channelled largely through member associations. 
  • Wrongdoing thrives in organisations that operate under a single dominant personality. It derives from an absence of checks and balances and from all decision making being channelled through that individual. This person, to preserve power, will be reluctant to act against the interests of political supporters almost regardless of what they may do. This is regardless of whether the individual is personally corrupt.
  • Publicity for wrongdoing does have an effect but only if it threatens the performance of the organisation. So, only when the bad publicity for FIFA grew to an extent to threaten the image of organisations that sponsor the World Cup did official denial that there was any problem turn into some limited action.
All the rest is detail. I could write about systems and procedures, and those do matter, but they will not be effective if there is a dominant individual operating under big vested interests who are tolerant of a bit of corruption. Sure, the proposal to award future venues for the World Cup through a vote of the 200-odd member organisations, will make it a little harder to bribe to a result than the present system where there are only 24 voters. The largesse will have to be spread more widely. But, on its own, that change will not be sufficient to root out corruption.

In order to have a reasonable hope of preventing wrongdoing, there have to be independent powers who are able and motivated to oversee and control the executive management of an organisation.

Bribery Act Panic (2) A consultants' feeding frenzy

Like the 'Bribery Act' the 'Health and Safety at Work etc Act' was broadly a good idea. Data from the Health and Safety Executive illustrates how injuries in the workplace have declined over the years and it is important to remember that many of these injuries were not just minor burns, cuts or bruised knees but will affect entire lives. So achieving significant success in reducing this suffering is neither trivial nor is it justly described as 'bureaucracy gone mad'.

However, there are some other consequences of a Health and Safety approach that are not quite so desirable. Search for 'shop accidents' on the web and see how many firms of lawyers are touting for business from customers injured whilst shopping. This is a case, almost literally, of 'ambulance chasing', yet the sheer number of adverts raises the suspicion that the promise of compensation may itself give rise to some of those injuries in supermarkets. Search also for H&S consultants and see how many people make a good living from giving advice in this area. The legislation does not demand the use of external consultants - you can write your own risk assessment and your own policies - yet it has become the default position for most organisations. It is now generally assumed that you need to employ an external consultant or you are pushed into it by your insurers (who may also provide the consultancy). This amounts to a huge extra 'tax' on employers. A relatively small retail organisation I know of is spending around 7% of annual profits on a consultant, in addition to the sums charged by their insurers for a consultancy programme.

The Bribery Act already seems destined to travel down a similar path. The lawyers and consultancy firms are running courses and offering their services in conducting risk assessments, devising policies, installing computerised systems, sending questionnaire's to staff and suppliers. As pointed out in my previous posting, we don't yet know how the law will be interpreted and enforced: the government has promised a commonsense approach to prosecutions. So, much of the panic and much of the consultancy is premature. Yet, as with Health and Safety, we are likely to find ourselves encumbered with superfluous costs and bureaucracy even though the basic objectives of the legislation are worthwhile.