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.

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