Monday, 25 July 2011

SFO uses civil recovery under Proceeds of Crime Act in corruption case

There have been reports over the weekend of Macmillan publishers agreeing an £11m settlement with the Serious Fraud Office in relation to corrupt practices in Africa to win contracts and the SFO has released a statement.

Two interesting points emerge from this;
  • Firstly, that we focus too much on the new Bribery Act when there is other existing legislation that is used to address problems of corporate bribery. Civil action using section 5 of the Proceeds of Crime Act provides wide powers for restitution and can be much quicker, cheaper, easier route for the authorities to pursue. The standard of proof is also lower - civil actions requiring a 'balance of probabilities'. As I discussed in a post just a few days ago, Willis have been prosecuted under the Financial Services and Markets Act.
  • Secondly that the SFO and FSA seem to be very active in steps to prosecute bribery and corruption overseas. This case is only one of several to have been dealt with recently.
While I have blogged about the feeding frenzy of corporate advisers preceeding the introduction of the Bribery Act this month, nonetheless companies should be reviewing their procedures for preventing corrupt practices. My caveat was that it is unnecessary to spend large sums with advisers who, along with the rest of us, can have no idea what the courts will deem to be adequate precautions. Following the Ministry of Justice guidance would seem to be sufficient and excessive bureaucracy would seem...excessive...and may not be effective. This is a case for intelligent design.

The first step is risk assessment; the second clear statements (commitment and training) from company boards on acceptable behaviour; the third due diligence on business partners, the fourth accounting control of the flow of money - so you know who receives payment and for what - even when routed through third parties - this also includes monitoring of procedures.

Thursday, 21 July 2011

FSA fines Willis Ltd nearly £7m for failings in anti-bribery controls

We may have focused so much attention on the UK Bribery Act that we forget there are other regimes and legislation that cover this area.

The FSA has announced its action in respect of system failures that raised the risk of corruption and bribery. In particular...

The FSA investigation found that, up until August 2008, Willis Limited failed to:
  • ensure that it established and recorded an adequate commercial rationale to support its payments to overseas third parties;
  • ensure that adequate due diligence was carried out on overseas third parties to evaluate the risk involved in doing business with them; and
  • adequately review its relationships on a regular basis to confirm whether it was still necessary and appropriate for Willis Limited to continue with the relationship.
These failures contributed to a weak control environment surrounding payments to overseas third parties and gave rise to an unacceptable risk that these payments could be used for corrupt purposes, including paying bribes.

So although Willis found £227k of suspicious payments to Egypt and Russia no actual bribery was proven - this was a punishment for failing to take measures to control the use of payments through third parties.

This action was taken under provisions of the Financial Services and Markets Act.

An interesting sentence at the end of a report in the Washington Post extends the likely scope of such FSA action..

The agency said last month it is opening a review into whether investment banks have systems and controls in place to prevent their employees from paying bribes to win business.

That should prove interesting

Tuesday, 19 July 2011

Rupert Murdoch, News Corporation head testifies to British MP's

An interesting facet of Murdoch's testimony was his insistence that the News of the World is a very small part of News Corporation's interests: less than 1%. Given this, he would not have expected to be directly involved in the issues MP's were grilling him about. Actually the word 'grilling' is a little misplaced - it reminds me of Denis Healey's riposte, that it is "like being savaged by a dead sheep". The one line of questioning that was interesting regarded who, in management, asked what and when about the dossier of emails sent to lawyers - which constituted the central beam of News International's investigation to see whether the hacking went wider than the Royal Correspondent convicted in 2007. But more of that later.

Actually, it does not seem unreasonable that the chairman of the ultimate holding company should not have been hands on. The person at the top of a very big business cannot deal with the minutiae of every subsidiary - it has to be delegated - that is proper corporate governance. What is a little more surprising is to be unaware of the detail once the potential damage to the overall business becomes apparent. Surely, then good corporate governance demands that not just the chairman but also the main board should be aware of the detail. The local management should normally be left in charge, unless it appears they are taking bad decisions or cannot cope, but there should be written as well as verbal reports to the main board. And I would have thought that once this member of staff had been convicted then there existed the risk that the scandal could spread: that there could be contagion to other parts of the business.

What seems to me curious corporate governance is that an investigation was instituted - the main focus of which was communications by email from selected journalists at News of the World - and nobody from senior management seemed able to tell MPs who had chosen which journalists' emails should be looked at, how they were selected or what was the brief to the lawyers who reviewed them; not the regional head (James Murdoch), nor the chief executive of News International (Rebekah Brooks) nor the editor of the News of the World (Colin Myler). And nobody other than the external lawyers seems to have read them until the past few weeks.

Latterly those emails have been reviewed, as part of a renewed internal investigation and the results thought serious enough for the dossier to be handed to police.

Even a small part of a sprawling business empire can cause serious problems that are disproportionate to its profit earning share. When that risk becomes apparent then good corporate governance demands that the main board asks for and is given more than mere reassurance but is given the detail upon which to base an assessment of whether the risks are being managed appropriately. According to Rupert Murdoch that has not happened and he is still personally unaware of some of the detail. Even James Murdoch and Rebekah Brooks seem to have a wide range of unawareness of detail.

Monday, 18 July 2011

Association of British Insurers warns over poor governance at Cable and Wireless

Cable and Wireless share price has dropped 44% in the year since demerging into two companies - 'to release shareholder value'.

However the Association of British Insurers, representing investors holding some 20% of the share value of the London Stock Exchange, is not amused. Although possibly welcoming the ejection of the chief executive who has presided over this decline, they are outraged to find that his replacement is to be John Pluthero, the chairman, who may combine the two roles. This has earned the company one of their 'amber top' warnings.

They are also outraged by the decision to award shares to senior executives based on a four times multiple of salary (apparently, since reduced to three times), and to alter the performance targets in the light of 'turbulent markets'. Issuing executive share deals just after a sudden share price drop risks giving them a huge payout for pedestrian performance. Indeed, The Guardian reports that Pluthero has collected almost £15m since joining the company in 2005 - although shareholder value has declined 11%! Nice work if you can get it.

Sir Paul Stephenson resigns as Metropolitan Police Commissioner

What does this have to do with corporate governance? My answer is that it has plenty of lessons for us.

Newspapers have reported that Sir Paul Stephenson employed Neil Wallis, formerly deputy editor the News of the World, as a PR consultant. Unfortunately this man has subsequently been arrested in connection with the News of the World phone hacking scandal. The implication is that there was an improper relationship that could have affected judgements in relation to the investigation or that it was a reward for past favours. Just an hour ago I wrote, "It seems unlikely that either of these is true. After all, the most skilled advisers on dealing with the press are likely to be former senior members of the press." However, I have since read the New York Times article that says that Wallis was hired specifically to advise on phone hacking matters. If that is true then it changes everything and provides evidence for an improper relationship between police and the press.

A second report revealed that Sir Paul had stayed free of charge at an expensive 'health farm' following surgery last year and that this same Wallis was PR adviser to that business. However, it is also said that Stephenson was a personal friend of the owner. The Wallis connection is therefore a red herring. The more significant question is whether a senior police officer should be accepting large gifts from anyone, even a close friend? I think the answer is a clear negative and I was surprised to read that there is a register for police officers to report such gifts - gifts that should not be accepted in the first place.

It must be good practice for directors and senior executives also to report gifts and for their companies to publish a clear policy on what is acceptable and what is not. This is particularly important since the UK's Bribery Act came into force this month. Gifts, including hospitality, are generally given to business acquaintances in order to influence their decisions: why else would they be given? Since an invitation to a night out at the opera and dinner - or to a major sporting occasion - is likely to cost more than £1,000 the sums involved are not trivial. It is a difficult argument but I can accept that some level of hospitality oils the cogs of business without creating an improper influence. The recipient of 'low level' hospitality still feels able to cancel a contract or negotiate hard for lower prices. But it is wise practice for companies to maintain a register of all hospitality and gifts received and given.

But it can never be appropriate for a police commissioner who earns £276,000 per annum to accept a favour worth some £12,000 from anyone, even a close friend. On the one hand he could afford to pay for himself whilst on the other hand it is significant favour.

It is important to remember that we are not the judge in our own case; and for Sir Paul to claim his integrity is untarnished is mistaken because that judgement is for others to make.

Tuesday, 12 July 2011

Corporate governance at News International

The news media and blogosphere is full of the goings on at the News of the World, where there is evidence of journalists writing stories based on unlawful hacking into the telephone messages of private individuals. Subsequently there has been evidence emerging of money being paid to police officers for information that subsequently has formed the basis of articles.

I will focus on just a very small area of this wide ranging scandal, an area that has clear corporate governance lessons. That is the response of News International to developments. In January 2007 the royal reporter of News of the World, Clive Goodman, was sentenced to four months in prison for procuring phone hacking by a private investigator, who was also jailed. The Sunday Times (also part of the News International empire) reported last Sunday that "The case triggered a thorough review at News International" But what follows is interesting, the article reports that "Colin Myler, who replaced Coulson as editor at News of the World was tasked with the enquiry".

The board, in such circumstances, will want to make sure that they incur no personal legal liabilities through inaction: for example, The Regulation of Investigatory Powers Act 2000 covers the interception of mail or telephone conversations and provides for directors of offending companies to be, themselves, liable to criminal prosecution in the event of consent, connivance or neglect. The board will also want to protect the value of their company from reputational damage or the consequences of further prosecution. However, if you are a director, you may face a dilemma; suppose you know or suspect that such practices are widespread industry practice? In such circumstances you can be pretty confident that a proper investigation will damage the business by its revelations but if you do not investigate properly then you face possible personal liability and the risk that the damage will be worse if it is revealed by someone else or by legal processes. If you suspect that all outcomes will be bad, how do you determine which is least bad?

Now, as a director of News of the World, if you were serious about investigating this matter, would you appoint your new editor as the man in charge of the enquiry? Colin Myler is a very experienced newspaper editor. Of all people he would know about industry practice in the tabloid press.

At this point we can jump to the outcomes, of which there are two;
  • Firstly, in 2009, Myler and Crone (head of legal affairs at NoW) assured the culture, media and sport parliamentary sub committee that the investigation had not revealed any wrongdoing by other reporters.
  • Secondly there is the report itself, which has apparently now been handed to police.

The Sunday Times quotes a source about this report
"It is a reasonably decent investigation and either they were idiots for not having acted on it or they deliberately didn't"..."They got very strong indications of all sorts of dodgy behaviour. It revealed [possible] police payments and indicated enough about phone hacking to be of serious concern."
Myler and Crone now claim they had not read the final report they had commissioned and, apparently, overseen or the data attached but relied upon an audit carried out by external lawyers. That beggars belief. There is this really serious matter you have been tasked with looking into and you don't want to know the detailed findings? You have no conversations with the people you had delegated to carry out the work and nor would you stay up all night poring over the pages?

But over and above that, what about the board and their governance responsibilities: was this report an agenda item at board meetings; did the board rely upon a brief audit letter from outside lawyers that reported on the report and if so, why? What about individual directors, did none of them want to see the report itself? If these matters of board responsibility are ever pursued in court I find it hard to imagine that a court would conclude the board had been other than negligent if they really did not see the original report of their internal investigation into this serious matter.

Sunday, 10 July 2011

The regulator's role in the ENRC Fiasco

Back from holiday and catching up. One of the first things I saw was an excellent article in the FT by John Plender. Unfortunately, it is behind their paywall, but the FT allows you to sign up at no cost to access a limited number of articles.

To recap, ENRC, a Kazakhstan mining company  listed just over 18% of its shares in 2007 and promptly joined the FTSE 100 index. This means that UK index funds have to hold its shares.  Plender points out that when it was allowed derogation from normal listing rules demanding 25% of shares be floated this was
"Far from being unique this was symptomatic of the pre-crisis “light touch” regulatory approach that was designed to enhance London’s position as an international financial centre." 
A number of similar mining companies listed at that time, all with a small number of wealthy controlling shareholders and with a history of related party transactions. How did the London Stock Exchange and the Financial Services Authority deal with these additional risks? Plender writes...
"To address these risks the LSE and the FSA, which acts as the listing authority in the UK, have put their faith in relationship agreements with controlling shareholders and in independent non-executives. These directors have often been highly experienced business people, but most have had little knowledge of mining. Their fees tend to be well above average, which does little to reinforce their independence. Against that background the ENRC fiasco demonstrates, among other things, that the UK approach to governance is not designed for a system in which controlling shareholders call the shots. It is structured to address the problems of dispersed ownership."
Whilst well expressed, this is too kind. The LSE was desperate for the business and bent its rules while the FSA was just asleep on the job, unless they were a lapdog for the LSE, which is scarcely less demeaning.

One of the key points of good corporate governance is that the rules and regulations need to be policed by regulators. I would go further and say that the regulators need also to apply judgement. The FSA surely has a duty to protect investors and that should have included wondering about the level of governance risk attached to these mining companies. Old City practices were opaque and decisions were often made by unaccountable individuals in smoke filled rooms. Nonetheless, I think that in the past these companies would not have been allowed to list in London without stronger safeguards for investors.

Plender finishes by saying

"The low standard of governance among foreign owned mining companies is not just a potential threat to investors. If valuations in the wider stock market become tainted by a governance discount as a result, the cost of capital to UK companies will rise. ENRC should never have been allowed in and nor, in my view, should the others. But since they are here, pension fund trustees who run indexed portfolios should consider asking their managers to exclude these companies from the index."
 Which is true but insufficient. The government really needs to get a grip on the FSA.