FinchesBlog

Olympus: you really couldn't make it up

2012-01-10T05:28:00.000-08:00

Readers may feel I go on too much about the scandal at Japanese camera and medical equipment firm Olympus but, although everything about it seems so extreme that it has become a parody of a corporate scandal, still it holds important lessons for corporate governance everywhere.

This story illustrates how good corporate governance demands that three key groups of stakeholders must act to preserve it; directors must live up to their responsibilities; investors must apply proper stewardship and regulators must act to protect the public interest. If directors fail in their duties then external directors must act, if they fail then investors or regulators must act. In contrast, the case of Olympus seems seems to illustrate more of a national conspiracy amongst all parties to preserve the corrupt status quo.

The two latest acts in the comedy are; firstly that sacked CEO, Michael Woodford, has given up his attempt to be reinstated because the major Japanese investor groups refuse to act swiftly against the disgraced management; and secondly - you really couldn't make this up - that the firm is suing most of its own directors, who had a hand either in falsifying the company's accounts or in protecting colleagues who did, yet they remain in office until March and seem to have a hand in choosing their successors. Meanwhile the police, stock exchange and government regulators are 'investigating'. This has been going on for months - since October 2010. All of which clearly suggests that it is unsafe for foreigners, who are outside the coterie of Japanese conspiracists, to invest in Japanese companies. Who knows what else is going on elsewhere? Regulation and the rule of law patently mean nothing in Japan.

There are also other stakeholders who should have acted and could have influenced events. The auditors are clearly culpable. How on earth is it possible for successive auditors to miss a hole in the accounts that was over $1bn? And what are the Japanese authorities, whether accountancy bodies or police, doing about this and why is it taking so long? The other guilty party comprises the company's banks, who have extended credit in this situation. You can argue that it is not the role of banks to change management, their role is to lend at profit. That, however, is a simplification. In Japan the banks seem to be part of the conspiracy of the business elite. They have continued to lend, without apparent conditions, to a company that has been teetering on the verge of collapse. They have provided critical support that has enabled a corrupt management to stay in place: in a western context, banks would have demanded both good security and immediate management changes to protect their investment.

Governance on Olympus

2011-12-19T05:13:00.000-08:00

Sorry for the dreadful pun of a title. Its poor quality gives some indication of the struggle I have had, and continue to have, with this important case study in appalling governance. The big question I have been thinking about is what lessons there are for corporate governance outside Japan where this company is based. Is it just too specific to the curious business environment of that one country to have wider significance?

I must start with a brief summary of the salient facts. In April 2011 an Englishman, Michael Woodford, was elevated to the position of president and chief operating officer of Olympus Corporation where he had worked for 30 years. The man he replaced, Kikukawa, was elevated to chairman. Woodford was appointed CEO in October but then removed after just two weeks. He claims this was because he queried transactions that had been brought to his attention by an article in Japanese financial magazine Facta in July.

This reported that Olympus had bought a series of small businesses that were peripheral to its main activities but apparently for very high prices. One of these, Welsh medical equipment maker Gyrus was acquired for $2.2bn, which included a $687m success fee to a middleman through a Cayman Islands registered company. A 31% fee is extraordinarily high and totally out of proportion to the size of the company acquired. Further acquisitions were queried in the days that followed and Woodford fled Japan, claiming his life was threatened. Japanese newspaper reports alleged that huge payments had been made to criminal underworld figures. After repeated denials of any wrongdoing by the company, a halving of its share price, and the opening of investigations by police forces and regulators around the world, it eventually admitted that these payments were actually an attempt to hide investment losses from the 1990's. Three board members resigned but the rest, who had all voted for the sacking of Woodford, remain. They have indicated there will be further resignations but not until after they have appointed new directors.

One of the many curious facts about this most curious scandal is that Japanese investors have been relatively subdued. Calls for resignations of all the board have mainly come from overseas investors which has led to a polarisation. Indeed the board of Olympus has spoken of issuing new shares, presumably to a 'friendly' party, which would have the effect of diluting the overseas shareholders who are vociferous in their criticism.

It would take too long to rehearse further facts of the case (for latest developments see here), I must turn to the issues;

How have internal and external auditors missed such huge losses (around $1.5bn) over so many years and what sanctions do they face?
Were they in collusion with management?
What are the Japanese regulators and police doing, since such a huge falsification of accounts is surely criminal?
Why are Japanese investors still so quiescent when they have lost over half their investment and they too have been seriously misled?
The board of Olympus comprised almost exclusively company 'insiders'. Will this be an impetus to corporate Japan to start appointing genuinely independent directors who will challenge management?
How on earth can the board that presided over this debacle still be in office and in charge of appointing their own successors?

The biggest question of all is why there seems a (possibly unspoken) conspiracy of collusion and closing of ranks between company executives, shareholders, regulators, police and government. Clearly Japan is a curious place where identity and loyalty are more important than cleaning the stables and punishing wrongdoers. The disgrace in this case does not just lie with Olympus but with corporate and government Japan.

Although a case like this occurring in the UK or USA would have resulted in arrests by now and a removal of the entire board I think there are still lessons on corporate governance for all of us outside Japan. The most important is that good corporate governance is not just about publishing codes of conduct: people may flout them. It demands that all stakeholders in the company live up to their responsibilities;

Auditors must do their job properly
Shareholders must not collude with the people who betray them
Lenders must not support disgraced management
Regulators must act swiftly and decisively to maintain trust
Directors must be willing to challenge their colleagues

And let us not be too compacent because we are not Japanese. I will write separately about the results of the investigation into the collapse of Royal Bank of Scotland, one of the biggest banks in the world. Despite having a board packed with big names from the world of business, we are told that nobody really ever effectively challenged a domineering chief executive in Fred Goodwin, neither fellow directors nor the regulator.

The Boardroom Conversation

2011-10-14T08:03:00.000-07:00

Unless key figures in an organisation live company values and are prepared to speak up, corporate governance policies are pretty much meaningless.....see my piece on the Boardroom Conversation in Financial Director

Update for "women in the boardroom"

2011-10-14T07:44:00.000-07:00

Politicians love easy wins: they love good news; so UK government ministers are positively ecstatic that their calls for greater representation of women in corporate boardrooms has borne fruit after just a few months. Figures published by Cranfield Business School show that FTSE 100 companies have moved from 12.5% representation to 14.2%. Whoopee!

But look more closely. Out of 21 female appointments to FTSE 100 companies in the past six months, 18 are non-executives. So there is no evidence that promotion of women within companies is improving. Also the number appointed to a wider spread of FTSE 250 companies was only 28 - so just 7 for companies ranked 100 to 250.

Now it is movement and it may be a good thing but it still misses a large part of the point - diversity in the boardroom is good but equality of opportunity is better and demands changes to recruitment, development and promotion practices below board level. How many of those 28 had kids?

Psychopaths in the boardroom

2011-09-09T08:05:00.000-07:00

A recent Horizon television programme for the BBC discussed the physical differences of psychopaths, whether noticeably different brain functions or differences in key genes. One of the principal researchers in this field, who appeared on the programme, reported that he found no less than sixteen murders committed by members of one branch of his family, over several generations. He also found that he himself had the gene that predisposes its carrier to this condition, attributing his lack of symptoms to a happy childhood and proposing that the gene on its own does not cause the condition but needs to be triggered by stressful influences such as childhood abuse.

Towards the end of the programme a New York psychologist, Paul Babiak, recounted his research that shows psychopathic characteristics are found disproportionately amongst top executives. Why should this be found amongst the most successful? Because the characteristics of the psychopath revolve around a lack of empathy for others and a need to take big risk. So the psychopath can be ambitious, manipulative and ruthless, without qualms and they will be attracted to jobs that give high adrenaline surges. Of particular note is another aspect of Babiak's research that shows these people may get to the top but that , once there, they perform noticeably less well than their peers. This should not be surprising - business is a collective activity that calls for social skills far beyond a mere ability to manipulate others.

Perhaps none of this should be too much a of a surprise. Many of us will have come across such people; manipulative, bullying charmers who, you feel, would sacrifice anyone to their ambition, whether friend or foe. And yes, I have felt they talked the talk but actually lacked the substance to perform in that top job.

What implications for corporate governance? I think this raises serious questions for those people who believe that rules and codes, or even laws, will control corporate governance on their own. If one or more senior people in a corporation is driven to take risks and seek thrills whilst having no moral scruples about harming others then will they not simply ignore those rules if they can? And the more precise you make the rules, to strengthen them, the more chinks appear, through which the determined can wriggle. You have to have the rules, but more important, you have to have the collective ethos that, like a net, holds the errant individual tightly in its strands. To continue the analogy, if the individual can cut one of the strands of the net then the net is weakened but it will still hold him unless he can cut many strands. So the real constraint comes from shared values across the organisation, where people will not be bullied into doing things that are patently contrary to those well-communicated values and the constraint comes from individual ethical behaviour - which is shared values at a society level.

Financial Times Briefings: Corporate Governance

2011-08-24T07:35:00.000-07:00

My book on UK corporate governance is finally published.
ISBN-10: 0273745972

"Corporate governance describes the systems, procedures and behaviours by which an organisation is directed and controlled."

The book is designed as a quick, practical and accessible guide to what you need to know about UK corporate governance. It describes the basis of law and how voluntary codes, backed by a "comply or explain regime", were encouraged as government took fright over the effect of corporate scandals on capital markets. Inevitable accretions of bureaucracy have led to the voluntary approach being partly subsumed into law and describes how this trend is likely to continue under the influence of EU pressures to unify national practices.

The book covers the responsibilities of directors and boards and how the latter should be organised and managed. It also addresses the practicalities of how to measure, manage, discuss and justify corporate governance.

However, rules are not enough – both corporate scandals and anecdotal evidence suggest that behaviours are critical to good governance. Indeed too much legislation is counterproductive, turning into a box ticking exercise rather than something people really engage with. For the ill intentioned those laws and regulations merely provide neat targets for side-stepping and proving that their behaviour did not quite fit the definitions givem. Rules and codes, together with the prevailing climate of opinion can encourage appropriate behaviours and ensure the quality of the ‘Boardroom Conversation.’ But if people think they can get away with sliding around the definitions while ticking the boxes then many of them will.do so; that climate of opinion is critical because it can discourage behaviour that falls just outside the definitions but that business partners believe is beyond the pale.

Furthermore, governance extends beyond the boardroom door. The blowout at BP’s Deepwater oil rig and GSK’s product quality failings at its Costa Rica drug manufacturing plant occurred despite compliance processes and safety officers and reams of risk assessments and governance procedures in annual reports. The behaviour of subordinates is also the responsibility of the board and an integral part of their governance duties – how do they make their policies stick?

The book emphasises that corporate governance applies as much to private as to listed companies as well as to a range of public bodies and not-for profit organisations. Good corporate governance contributes to business success, to successful fundraising and to dealing with business partners. It balances the needs and rights of different interest groups. It constrains the overmighty chief executive, chairman or shareholder to consider other stakeholders, appropriate levels of risk and to follow fair and transparent processes. It should reduce the incidence of corporate disaster as much as corporate fraud – better board structures and approach would surely have increased the chances of GEC avoiding policies that led inexorably to the company’s implosion?

Key chapter headings include;

PART 1 – In Brief

1 The executive précis:

2 What is it? What do I need to know? Key terms/ concepts

The Background, Corporate Culture, Creative Accounting, Individual Behaviour, The legal structure, Current UK developments, Voluntary Codes or Legislation? The International Picture – EU, The Sarbanes Oxley Act etc

2.1 What is it for?

2.2 Who is it for?

2.3 Objectives

3. Why do it? Risks/ Rewards

Compliance, Stakeholder demands, Corporate effectiveness, Public and Employee Relations, The costs, risks and rewards of good governance, Roes it work? Reasons for Corporate Social Responsibility

4. Who’s doing it? Who has done it?

What do success and failure look like?

PART 2 In Practice

5. How to do it

Role and Duties of Directors, The role of the Board, Integrity and Values, Shareholder rights, The Role of Markets

6. How to manage it

7. How to measure it

8. The business case for corporate governance

9. How to talk about corporate governance

PART 3 - Intervention

Executive intervention, Internal communication, Delegated Authority, Risk Management, Whistleblowing, When is my intervention needed? What questions should I ask, and who should I ask? What are the decisions I need to make? What levers should I pull? How do we know when we’ve succeeded or failed?

PART 4 – Other Resources

websites, books, courses, consultants

Do directors of private companies have a duty to declare insider knowledge when puchasing shares?

2011-08-23T12:07:00.000-07:00

Yesterday The Times reported on the settlement of a court case involving former shareholders in Uswitch who alleged that the Marquess of Milford Haven induced them to sell their shares, at an undervalue, to a company that they did not know was connected to him. Shortly afterwards the business was sold in its entirety for over £200m to a US company at a price per share some ten times what they had received.

The outline of the allegations points to an anomally in UK company law. For a company whose shares are publicly traded on an exchange, the directors are obliged by the Financial Services and Markets Act to disclose information about their share dealing and to make full disclosure of relevant information to shareholders through the regulatory news services. But this legislation does not apply to private companies. Shareholders in these businesses can only sue for deception or misrepresentation if they feel they have been wronged.

In another example, a friend of mine is a shareholder in a private company. After some years the shareholders as a whole appointed an outsider as chairman who, over a period, bought shares from individuals and became the largest individual shareholder. During this period there were expressions of interest from a foreign company in buying the business, though this has not yet come to anything. My friend thinks the chairman is very capable and has done a good job. There is no implication that he has done anything morally wrong. But UK company law offers very little protection if he had used inside information to buy shares at an undervalue. In this case, at least, the sellers would have known they were selling to an insider but would they have imagined that protections against insider dealing applied to them? Insider dealing is an offence defined in relation only to quoted companies not to private ones.

It seems to me that larger private companies which allow their shares to be traded should produce, at least, a code of behaviour for directors and other executive shareholders. If it were possible to put something stronger in place through a binding shareholder agreement that would be better. If a satisfactory way could be found to extend the law to private companies then that would be better still.

Transparency International calls on FIFA to improve governance

2011-08-18T09:37:00.000-07:00

Article by Aarti Maharaj in Corporate Secretary reports that Transparency International, the corruption campaigning and monitoring group, has produced a report that suggests, among other things, that a group of independent outsiders should oversee the current review.

“FIFA says it wants to reform, but successive bribery scandals have left public trust in it at an all-time low. Working with an oversight group – taking its advice, giving it access, letting it participate in investigations – will show whether there is going to be real change. The process has to start now,” said Sylvia Schenk, senior advisor on sport to TI.

That certainly suggests a pretty low degree of trust in Fifa and its internal processes...probably well deserved.

Peter Day's radio 4 programme on corporate governance

2011-08-16T07:12:00.000-07:00

If you missed it then it is worth listening to this programme on corporate governance. It covers too many issues too superficially and seeks too many easy soundbites but it assembled a group of mostly impressive and interesting people to provide those soundbites. And, Peter Day actually asks some very good questions. And, by the way, most of those issues are really important.

FTSE 100 CEO pay unrelated to performance

2011-08-16T06:03:00.000-07:00

I have written before, quoting Chris Bones and Sir Paul Judge, about how directors have, over a number of years, captured increasingly huge pay packages that bear no relation to their own or their companies' performance. Further evidence is provided by the Manifest and MM&K Total Remuneration Survey 2011, quoted in Tricker and Mallin's blog.

They report that "median FTSE100 CEO remuneration increased by 32% to £3.5million in 2010 compared to 2009, whilst the FTSE100 index only rose 9% over the same period." I am prepared to bet that the falling stock market and falling corporate profits in 2011 will not show up in reduced remuneration!

How does the board ensure its policies are carried out?

2011-08-09T08:37:00.000-07:00

I started an online discussion on this topic on a forum for governance professionals and was startled by the responses. They read as if they resulted from quoting a particularly unimaginative textbook, referring to committees, escalation procedures, frameworks, second and third lines of defence, a performance management dashboard; oh, and before I forget, reminding each board member of their duties.

Now the forum members are meant to be people who work in the area of governance, probably many are company secretaries or internal auditors - and not a clue. Not just no clue about the answers - which are difficult - but actually no clue about the questions either: they just did not understand the problem. There are two distinct sets of issues connected with making sure that board policies are actually being implemented. The first is where the board policies are communicated but at some point in the process, by the time they get to the operational front-line they are changed or blocked or just not carried out. The executive directors probably believe the policies are being observed but there is a disconnection in the line of command and they are not. The second issue is where the problem starts at board level. Different executive directors may be in conflict and battling for resources and influence or there may be disagreement about the policy - in the latter case it is communicated and implemented with a lack of enthusiasm, which prevents it from working - in the former case there is deliberate obstruction. In any event the problem is not rules, procedures, mechanisms, frameworks etcetera: it is behaviours.

Even in traditional command-and-control organisations it was a myth that the leader would give an instruction and that it would be passed accurately down the chain of command and carried out diligently and immediately at the operational level. There were endless opportunities to obstruct or reinterpret direct instructions. In more modern, more flexible organisations there are infinitely more ways to delay or ignore and, perhaps counter-intuitively it is the network of frameworks and procedures that helps those who want to obstruct. Whenever there is a precise regulation there is an opportunity to misinterpret it. I believe that the answer to the problem I set lies in working to change behaviours. One respondent to the governance forum did come up with a solution that showed understanding of the problem. He proposed making executive board members accountable for particular board policies and having this tied to their remuneration. So if X is tasked with carrying out a policy and it can be shown that has not been done effectively then X is paid less. This could apply not just to one person but to a management team.

Unfortunately this is only half of the solution because it may influence those at the top but does not address the disconnection that can exist between policy makers and operational management. Merely punishing those at the top for not making something happen does not actually do anything directly to make it happen. It may sound a little vague, but the key to good management and effective governance is shared vision, shared values and shared understanding across the organisation. When the board makes sure that their vision and values are clearly communicated and that their goals and strategies are too, then that is a critical first step to ensuring that all policies are carried out. The next step is to make sure they are shared as well - so that you don't need to bombard people with detailed instructions because they will use their initiative within prescribed boundaries and it is clear to them what they should do and they are committed to doing it. You do this through excellent communication and through the reward system and through development of line managers to do what line managers are meant to do: to direct and develop their staff and to communicate effectively with them and to feed information back up the line. So the result is that good governance is not a system that is bolted on to an organisation like an external skeleton - if it is to work it must be part of the DNA of the organisation.

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

2011-07-25T04:42:00.000-07:00

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.

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

2011-07-21T06:19:00.000-07:00

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

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

2011-07-19T14:35:00.000-07:00

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.

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

2011-07-18T07:28:00.000-07:00

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

2011-07-18T03:57:00.000-07:00

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.

Corporate governance at News International

2011-07-12T08:34:00.000-07:00

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.

The regulator's role in the ENRC Fiasco

2011-07-10T16:47:00.000-07:00

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.

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

2011-06-15T04:21:00.000-07:00

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.

Some complexities of Corporate Social Responsibility

2011-06-12T03:02:00.000-07:00

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.

Eurasian Natural Resources Corporation ejects independent directors

2011-06-09T07:32:00.000-07:00

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.

Directors personal responsibility

2011-06-08T02:43:00.000-07:00

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.

The FIFA bribery scandal: and Sepp Blatter

2011-06-02T04:46:00.000-07:00

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

2011-06-02T01:16:00.000-07:00

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.

Bribery Act Panic

2011-05-27T08:16:00.000-07:00

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.

Paying Executives for failure

2011-05-25T04:05:00.000-07:00

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.

The Board Challenge of the Dominique Strauss-Kahn Affair

2011-05-24T01:17:00.000-07:00

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.

Burson Marstellar contributes to corporate governance thinking

2011-05-15T16:22:00.000-07:00

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?

David Sokol, Berkshire Hathaway and Integrity in Corporate Governance

2011-05-03T09:33:00.000-07:00

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.

Conflict of duties between nominee directors and company law

2011-04-26T07:57:00.000-07:00

City AM reported on 20 April on a call to shareholders by Pensions Industry Research Consultancy (PIRC) to vote against the re-election of directors of Anglo-Swiss miner, Xstrata plc who are nominees of (soon to be floated) Glencore. They argue that these directors are not independent enough. This simply exemplifies a long-standing incongruity in company law and governance. The Companies Act 2006 makes clear that a director's duty is to the company they serve - so how can the nominee of another company and likely shareholder possibly be carrying out their duty? They are nominated in order to represent that other company, otherwise why would they be nominated? But this is blatantly incompatible with the legal position.

Appointment of Non-Executive Directors - how little has changed

2011-04-20T08:56:00.000-07:00

Non-executive directors are in the front-line of corporate governance. A critical part of their role is to probe and challenge the executive directors - to hold them to account and to apply common sense and specialist expertise to test the appropriateness of their strategies.

The Higgs Report into the role and effectiveness of non-executive directors and the Tyson Report on their recruitment and development, both published in 2003, addressed issues of board composition. The latter, in particular, talked about the importance of board diversity to better decision making. In this it echoed the views of others, such as Tomorrow's Company. It talked about things such as defining skills or perspectives that are lacking in the board and going out and recruiting against that brief, It talked about being prepared to recruit from people who possess the right skills and qualities but who may have worked below board-level in their careers or have worked as consultants or advisers to businesses.

So have things changed with the passage of eight years and in light of the increased focus on corporate governance? Not a bit of it. British boards still have very few women but they also have very few of anything other than British, white, middle class, heterosexual men who share a very limited background and have all pursued very similar career paths. I know someone who is exploring the possibility of taking on one or more NED positions and she has been told by headhunters that, in reality, very few appointments result from search assignments. Companies don't want to pay. Just as Tyson reported in 2003, over half of appointments result from a tap on the shoulder by someone you know. Another person I know, who is looking for an NED role finds that his lack of previous main board experience is a huge impediment; this despite having served as a divisional MD for a large quoted company.

If non-executive directors really are important - and I believe they are - then this lack of diversity and lack of change is a real problem. I don't have a solution. I don't think legislation or regulation is appropriate but cannot think how we combat this damaging rigidity in our economic and social fabric. Tyson suggested measuring and reporting board background and composition on the basis that people manage what is measured. I am not sure that would work either but it is surely worth a go - however nothing has happened in this respect in eight years. Any ideas?

Shareholder rebels over executive pay

2011-04-18T03:53:00.000-07:00

I would link this post to the headline in the Sunday Times, but it is hidden behind a paywall. The article about Standard Life, the biggest sharteholder in Rio Tinto, criticising "the mining giant for handing bosses generous rewards for hitting 'unchallenging' targets. It follows 41% of votes going against last year's remuneration report. The issue raises some interesting questions;

Should shareholder votes on the remuneration committee's report be binding instead of just advisory?
Should public companies treat these expressions of shareholder dismay rather more seriously?
Does the lack of board responsiveness itself point to serious governance issues? For example are the non-executive directors actually doing their job or are they merely cheerleaders for the board?

As time passes and we see more of this, I suspect there will be a growing consensus for reform. The big problem is that shareholders will rarely vote against the reappointment of directors. By the time a company is performing badly enough to warrant that, the shareholders simply sell and leave a takeover to institute reform. However that discipline does not help when a company is performing reasonably well, yet shareholders are unhappy about outrageous remuneration packages. What is needed is a mechanism that produces more active non-executive directors who are not all part of the club who vote each other outrageous remuneration. It is not even always that directors sit on each other's boards or are personal friends. They just have similar backgrounds and similar interests and believe that high remuneration for pedestrian performance is ok because that is the deal they have themselves received in their day jobs.

This is an argument for boardroom diversity

Financial Advisers in the Corporate Governance Process

2011-04-15T11:51:00.000-07:00

The role of financial advisers in the corporate governance of listed companies ought to be a pivotal one. I am not so old but still remember a time when investment banks (or merchant banks, as they were known then) were often paragons of rectitude and the more reputable ones would not deal with a company if they felt it was acting improperly: not illegally, just improperly. Really, it is true. Of course, there were some that sailed close to the wind even then. I remember the time when I was involved in negotiating to buy Hard Rock Cafe and, at the very end of the deal - when everything was agreed - the advisers acting for the vendor raised the issue of their fees. Apparently they were not being paid by the vendor, having set up the deal speculatively, and wanted to land us with the extra cost. We were shocked. There was nothing illegal in this, just not quite cricket to leave it so late to tell us. Still, it was Drexel Burnham and Lambert and when you dealt with them you knew you were in the wild west.

Since then everyone has become inured to revelations about financial advisory firms. A recent Harvard Law blog examines the recent court case arising from Barclays behaviour in the del Monte takeover - where they advised and also misled the del Monte board. I would not have imagined that of Barclays in the past. And of course there is the opprobrium heaped on Goldman Sachs for selling investments to clients at the same time as other parts of their organisation described the securities in unflattering terms. Still, a City connection recently offered the opinion that people prefer not to deal with advisers they don't trust; and that over the next few years one may see the deal flow to some of these major institutions dwindling in quality and quantity as boards of directors go back to seeking advisers they can trust.

An interesting thought.

Do the UK's regulators need regulating?

2011-03-31T05:22:00.000-07:00

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

2011-03-31T04:57:00.000-07:00

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.

Financial Reporting Council guidance on board effectiveness

2011-03-22T10:04:00.000-07:00

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.

Obama, Crowley, Manning and Corporate Governance

2011-03-14T08:32:00.000-07:00

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

2011-03-14T04:08:00.000-07:00

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?

The politics of corporate social responsibility

2011-03-08T10:22:00.000-08:00

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

2011-03-08T06:32:00.000-08:00

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.

See Professor Bainbridge on the evils of over-regulation

2011-03-02T15:39:00.000-08:00

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.

Social Networking

2011-02-27T15:24:00.000-08:00

I saw a post on social networking that raised important governance issues. Unfortunately it was a weak article, which is why I am not referencing it. But this subject goes beyond social media such as Facebook and Twitter. It also relates to use of discussion boads and forums. These are important platforms on which company employees can get advice and ideas that may be useful, even important to the company. The board must have policies in place. Access must not be denied because these media are important and because employees will disobey strict denial that seems to make no sense. Employees in modern businesses cannot be given orders without reasons: they expect to be persuaded not dictated to; but boundaries have to be set. The employees who may get inspiration that feeds into future products also have to know what they must not discuss. What company processes and developments are so confidential that they must not be disclosed even if discussion with outsiders might lead to their improvement? And who can they go to within the company to put forward a case for discussion with outsiders and under what terms can this be regulated? If people are given boundaries but also trust then valuable resources can be used effectively.

There are always risks from hackers, from trojans and viruses whenever company employees use the world wide web. Companies need sensible policies, clearly communicated to say what can be used and in what way and with what precautions and what cannot be done under any circumstances.

We live in a world where ideas are freely exchanged and where businesses customarily develop products in partnerships. These issues have to be considered.

What are the boundaries also on personal postings? When can a frivolous interchange become bullying and what are the sanctions? Are these policies in place and have they been clearly communicated?

These too are issues that need to be considered at board level.

The film "Inside Job" and corporate governance

2011-02-26T05:05:00.000-08:00

Ostensibly this documentary film is just about the ongoing financial crisis that started in 2007. It charts the immediate causes through a lending bubble, although it does not address the causes of that bubble in international trade imbalances and the choices made by governments. That, as they say, is another story. But the real strengths of this particular story is its success in getting interviews with some of the big names in government, regulation and business as well as using public archive sequences to demonstrate the corruption of politics, regulation and academia that allowed this particular crisis to happen.

Of course the film-maker has selected material to present a case but, nonetheless, you hear from the protagonists own mouths their sense of entitlement, their vested interests and their lack of contrition or self-awareness. This is very much a governance issue. The lessons do not just apply to financial services in the USA but hold up a mirror to corporate dysfunction worldwide. We see alpha males (and they are virtually all males), at the top of the tree, who obtain influence over their supposed regulators (in the USA, even becoming the regulators) and, of course, don't see the need for regulation. Their world view of how things work is guided by their own vested interests so, of course, they believe in efficient markets and light regulation and, having captured top roles in academia they shut down debate and marginalise ideas that contradict their own.

One of the best sequences in the film is the interview with Glenn Hubbard, economist and Dean of Columbia University Business School. He was an adviser to George W Bush on deregulation and is member or adviser on many committees, including the Federal Reserve Bank of New York. It asks him about his substantial business consultancies and the conflicts of interests this raises with his academic and government advisory roles. Instead of addressing this legitimate issue of public interest he becomes aggressive and defensive. Asked why an important advisory paper he penned, supporting the strength of Icelandic banks and written just before the implosion of the economy of that country, failed to mention that he had been paid for it, he failed to show any embarrassment. When it was pointed out to him that his on-line cv on the Columbia website wrongly stated the title of this paper as addressing the "Instability" of Icelandic banks instead of the "Stability" he lamely blames a typo and, again, shows neither concern nor embarrassment at the impression this gives of dishonesty.

All this is relevant to corporate governance. The unconstrained alpha male will not always seek self-interest at the expense of the multitude, but it only takes a few to wreak untold damage. We need balances, transparency and accountability to protect the common good.

See the film. Read "23 Things They Don't Tell You About Capitalism" by Ha-Joon Chang. Keep an open and critical mind on both but realise how important good governance is and how easily corruption takes hold of a poorly protected system.

PS This is a blog about governance not about cinema...however...with the Oscars just announced I feel driven to observe that while Inside Job is a very good film it is nowhere near as original as its rival Exit Through The Giftshop. I guess it won the award because the voters wanted to comment on the message rather than on the film-making.

Wall Street Journal and Independent Directors

2011-02-21T11:00:00.000-08:00

I picked up a sceptical piece on independent directors via Professor Bainbridge that originated at the Wall Street Journal.

We're still waiting for evidence that independent directors yield better financial results. Merrill Lynch's 2006 annual report proudly noted that 11 out of the 12 members of its corporate board were independent—people who had never worked at the firm and had little connection to it. Merrill was a model of trendy corporate governance, with a board of esteemed Americans who could offer an unbiased perspective.

As it turned out, what Merrill really needed was a board that knew how to manage financial risk. And it would have helped immensely if directors had understood the mortgage-backed securities on which they had unwittingly bet the firm. The report was released in early 2007, and by that October the company was searching for a new CEO after an $8.4 billion quarterly loss.
In 2008, the firm again boasted of independent captains manning the board deck as Merrill sailed into the financial crisis. The company had 11 directors by then, and 10 of them were untainted by intimate knowledge of the business. Several months later, the securities that the board never did comprehend forced Merrill to sell itself to Bank of America.

Today the regulators are pushing aggressively for independent directors at both public and private companies, but there is even less of an argument for such changes than there was at Merrill.

This raises a good point that applies to all companies and not just financial services. It is important that non-executive directors understand the business they are in if they are to contribute anything. However, it may push the balance too far. Having an outsider who can ask apparently simple questions and challenge the company orthodoxy is probably helpful but you don't need everyone to be like that. It also points to a weakness of the American model where most boards predominantly comprise non-executive directors. That leads to power residing elsewhere and protects the real decision makers from scrutiny.

Bainbridge questions whether the evidence from financial returns supports the effectiveness of a majority of non-executives on a board. He suggests the benefit may arise from having any such independent element, though highlighting a study that argues that the reason for the weak evidence by company is that the whole market has improved governance and performance as a result of this independent scrutiny.

Unilever, sustainability and maths

2011-02-03T01:21:00.000-08:00

Unilever - the world's third largest maker of branded goods - has just published its 4th quarter results. They show a significant rise in sales and profits.

I admire Unilever. I admire its commitment to sustainability. The company's public communications say some very sensible things. For example, they try not only to reduce their direct environmental footprint (the energy and the materials they use and the waste that results) but to use research to reduce the footprint of their customers when using Unilever products.

But I have difficulty with the term 'sustainability'. It misleads people. Growth is not sustainable - I don't advocate stopping growth but is does not carry on forever. Imagine that Unilever continued growing at 5% per annum in real terms. In 100 years they would be 131 times the size they are today, with sales of some £5,200,000,000,000. That is 4 times the size of the UK economy today. In 200 years...well the number is unimaginably huge and probably much bigger than the world economy will be then.

Companies do not grow forever. They stop growing or fail completely or they are eventually split up and disappear into the background economy. What Uniler mean by 'sustainability' is not sustainable it is just reducing their impact on the environment. It is more sustainable. I know that is not such a snappy catchphrase but it says what it means.

The paradox is highlighted by the report of the UN's Brundtland Commission in 1983 that defined

"Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs."

Which is admirable but must surely preclude any mining activity whatever? Sacrificing today's civilisation for tomorrow's is a paradox because you don't get civilisation tomorrow without it building on civilisation today. And today's civilisation does not exist without the extraction of raw materials to feed it. Much of our high tech communications depends upon Rare Earth metals that seem to be in limited supply in the earth's crust. Do we stop mining in order to preserve stocks for future generations? Why do those generations deserve more than we do? Maybe the best solution is to carry on mining and to hope that new technologies emerge before we exhaust supplies. This is a rational strategy but it may not work. There may be no alternative technologies.

My conclusion? I have no answers but let us not delude ourselves that 'sustainability' means any more than minimising our impact on the environment.

Our financial services regulation is bonkers

2011-01-31T10:27:00.000-08:00

A business associate pointed out that much of banks' proprietary dealing has decamped to Singapore, which made me think about how inept so much financial services regulation has proved to be. It is regulation by huffing and puffing. Instead of thinking and taking measured steps that are designed to have particular effects the politicians constantly play to the gallery and think about the next day's news headlines rather than careful policy-making. The outcome is virtually guaranteed to have unintended consequences.

So EU politicians rail at hedge funds although they were not actually the cause of recent financial instability; but ok, they could be connected with the next crisis. But financial institutions are flexible. They move abroad to avoid new regulations and new taxes. What good have the regulations and the taxes done? The hedge funds are still funded by EU banks but now they are outside the reach of EU regulators so, instead of having improved the risks we all face, the politicians have pushed them beyond our control.

Similarly with the proprietary trading. It may be carried out by non-bank institutions or outside EU jurisdiction but, if you follow the money trail, it is still, effectively, the same EU banks that are taking the risks and the profits(losses). So the effect has been the precise opposite of what was intended. Madness.

Business Leaders see little profit in Corporate Social Responsibility (CSR)

2011-01-27T03:38:00.000-08:00

A survey of 700 UK business leaders by the government funded Carbon Trust shows that 77% state that the main benefit of going green is to enhance their reputation. Which is not surprising because less than a third think it will improve their profits.

It is worth examining that result. A whopping 92% said that there were growth opportunities for their companies in the green economy, 40% think it will outstrip growth in the ‘conventional economy’ (so 60% think it won't) and 75% think it will account for more jobs. But…less than a third is investing in R&D despite these growth prospects and despite a belief that new technology will drive it. And why is that? Because less than a third think it will improve their profits. The obvious conclusion from the data is that they believe it is largely a public relations exercise and a response to legislation and not a serious profit opportunity.

Of course the Carbon Trust has not drawn these conclusions from their data but they wouldn’t would they?

Diversity and discrimination in and around the boardroom

2011-01-25T03:01:00.000-08:00

The Corporate Governance Code addresses the importance of diversity in companies and research from Tomorrows Company indicates that diversity imroves corporate performance. But progress is painfully slow, with women and ethnic minorities poorly represented on quoted company boards.

Then, this weekend yet another newspaper article put this into perspective for me. It was a perspective the writer did not intend – these are often the articles that provide the deepest insights for the reader – those whose authors actually have the least insight themselves. It reported directors of consultancies complaining about having to turn down work because they could not recruit the right people into key positions. The specific detail was given that they wanted people ‘typically those with MBA’s and about 15 years’ experience’; and I thought how precise that is. The issues that arise, though, are as relevant to industry, finance and commerce as to consultancy.

The first insight this provides is how limited and narrow-minded the recruiters are. And the second insight is a realisation of who is excluded: women who have taken a career break to start a family are excluded, older people are excluded, those who have not followed a conventional career path or come from poor backgrounds are excluded. This last category is also important because it indirectly affects ethnic minorities. Since black people are under-represented at top universities it is harder, on average, for them to demonstrate their abilities as quickly as competitors in the jobs market. There is clear evidence that a better school improves the chance of attending a top university which, in turn, helps to get that first job which goes on to provide the experiences that enhance career prospects. So individuals from poorer areas find themselves first disadvantaged, then discriminated against for their education, then for their speed of progress and finally for their age.

The issues of discrimination are complex and inter-related but so many of the impediments are quite unnecessary. Why, for example, is it necessary for the professions to limit entry to graduates? This discriminates against late developers who seek qualifications through adult education and is likely to affect those who performed less well at school, who often come from poorer and from ethnic backgrounds. In the past, people from humble backgrounds could join professional firms at a junior level and work their way up, obtaining qualifications at night school or through correspondence courses. Nowadays adult education is becoming more expensive and harder to find – yet more discrimination against those who are badly served by the education system. Does a degree, say in history, mean you are a better surveyor, lawyer or accountant? An excellent degree may display qualities of thought and an ability to write well, but often it is simple discrimination based on a type of snobbery and it damages social mobility. If you can get a good grade in the professional exams there is every chance that you will be just as competent as someone who has a degree in a non-relevant subject.

Consider the number of jobs whose advertising is clearly aimed at the young. An older applicant will not be considered yet may be better suited and more competent. Does it matter that they may be less ambitious because they are closer to retirement? In fact most companies shed workers as they get more senior because there are far fewer senior vacancies than junior ones. Therefore it is quite unnecessary to seek only ‘ambitious, dynamic young accountants with ten years post qualification experience’ because someone with thirty years experience might well do that job better, will be around for ten years before retirement and will not need a redundancy package when they can progress no further up the career pyramid.

And where does this argument lead eventually? It leads to an explanation of why company boards under-represent women, older workers, ethnic minorities and those from poorer backgrounds. Of course exceptional individuals will claw their way to the top regardless of any disadvantages they may suffer – but the statistics show quite clearly that these are exceptions. And this is no argument for quotas or for positive discrimination. There is no satisfactory way to ensure perfect equality of outcomes as well as of opportunity. But the point is to ask ourselves whether those ‘people specifications’ need to be as tightly drawn as they are? If we were more adventurous and less discriminatory in recruitment at all levels we would end up with more diverse, more dynamic and more innovative boards and more successful companies.

Philip Hampton, RBS Bank chairman, declares many bankers are overpaid

2011-01-19T05:47:00.000-08:00

Seen this really important post on Robert Peston’s BBC blog? It is not just another piece about overpaid bankers. He quotes Philip Hampton, RBS Bank chairman, who he interviewed for a BBC 2 documentary.

“The star quality, as it were, seems to filter down to people who don't seem so star quality. There is, if I can use the expression, a sort of gangmaster cultural phenomenon in this, that you recruit top people who really do make a difference, who really do move markets and get business and are really high achievers.

But they do tend to associate themselves with people who aren't such stars, but they want them around and they trust them, sometimes they move with them and there is a team associated with it. And the disparities between the top stars in the team and some of the journeymen players, if you like, is probably not as marked as it should be."

Inevitably some will see similarities with Premier League football teams, in which even quite mediocre players earn tens of thousands of pounds per week, because that's the going rate for the Premier League.

Hampton says that when the real stars leave, "they take their clients and their business with them, and we see this routinely". That's why RBS feels obliged to pay huge bonuses to these top performers. But it is "one of the major challenges" to reduce the pay of the more average bankers in the teams assembled by these stars.

Hampton also implies that investors have been irrational in allowing banks to pay huge bonuses. He says:

"This explosive growth in financial services meant that thousands of people, arguably tens of thousands of people, are extraordinarily highly paid. The most peculiar thing about it all, actually, if you look at the last ten years of massive increases in pay is that the performance for shareholders has been pretty disastrous really across most banks.”

So the upshot is that top bankers recognise they are paying out far too much to their staff at the same time as the performance of most banks “has been pretty disastrous”. The problem is that either they like the resulting upward pressure on their own pay...or they really don’t know what to do about it. Maybe Vince Cable is right, after all, and they need a hand?

Companies not complying with Companies Act reporting requirements

2011-01-13T02:52:00.000-08:00

I blogged recently about the FRC’s recent report “Effective Company Stewardship: enhancing corporate reporting and audit”. The FRC also gives data showing admittedly lowish levels of outright non-compliance with Companies Act 2006 reporting requirements; although a hefty 32% of accounts examined failed over non-financial KPI’s (Key Performance Indicators). A raw average of 42% of company reports may have complied but were judged to ‘fall short’ on the list below. In view of my previous criticisms, it is noteworthy that whilst 100% of reports complied with requirements in relation to principal risks, a whopping 66% fell short of being adequate. So they supplied the legal boilerplate without giving shareholders adequate information upon which to make judgements.

	% non-compliant	% falling short
Business description	6	52
Strategy	8	44
Principal risks	0	66
Performance and position	4	20
Trends and factors	6	56
Corporate social responsibility	12	34
Contractual arrangements	12	52
Financial KPI’s	6	34
Non-financial KPI’s	32	20

FRC urges companies to cut the flannel in annual reports

2011-01-11T10:29:00.000-08:00

Well the latest publication of the FRC, Effective Company Stewardship, doesn’t use those precise words but it does urge directors to reduce the length of annual reports whilst making them more useful. The FRC also specifically urges the reduction in legal boilerplate, particularly in relation to reporting principal risks and uncertainties.

I have blogged about this before, citing the example of GlaxoSmithKline that agreed in 2010 a $750m financial settlement of a US lawsuit that alleged appalling misconduct in relation to the supply of drugs there. Their annual report did refer to the lawsuit - boilerplate - but reported nothing about how it had occurred or actions taken to improve governance or to prevent a recurrence. That is a pretty remarkable lack of reporting (despite pages and pages devoted to risk committee structures and broad, uninformative statements of principal risks) when the total costs of the governance fiasco must have been around $1bn.

But although there is much sense in the FRC report there is also much to make you weep. Despite paying lip service to proportionality and avoiding excessive compliance costs they find it impossible, in practice, to restrain their urge to impose increasingly prescriptive (and costly) demands on business. They never seem to wonder whether any of it does any good – serves any purpose. Do they commission any academic studies, I suspect not?

Companies take risks in order to earn financial returns. That is what business does. Sometimes they fail and the result may be business failure. Expanded reporting of risks and uncertainties will not stop that. Wider responsibilities for audit committees and enhanced reporting will not stop that. There is also no undisputed, published evidence that shareholder value is enhanced by all this reporting detail.

But there is sense here too

Not quite demanding an audit of the directors’ report but requiring auditors to disclose incompatibilities between the directors report and financial statements or information gathered during the audit.
Encouraging greater auditor scepticism
Enhancement of auditor reporting to audit committees
Enhanced audit committee reports to shareholders

But then they go and spoil it by suggesting the auditors report on the ‘completeness and reasonableness of the audit committee report’ – that is two sets of cost and the auditors are effectively writing the committee’s report anyway; why not get the auditors to report in the first place?

And worse…they propose investor involvement in auditor appointment. On the one hand, many will not want to be involved and on the other hand, which investors? Do you involve an activist hedge fund or a foreign, sovereign wealth fund or a union? Who gets excluded and why exclude individual private investors? No, it is a silly idea and profoundly discriminatory.

But then back to some sense again

In return for requiring directors, executives and auditors to make ‘forward looking statements of belief or judgement’ the FRC proposes a ‘safe harbour defence’ as long as they were not made ‘recklessly, dishonestly or fraudulently’

CEO Education

2011-01-09T04:41:00.000-08:00

This is interesting because of its implications for diversity. If CEO appointments are highly influenced by educational attainment then this must affect the prospects of groups such as those from poorer or ethnic backgrounds who are less likely to be able to get to the top universities. That the authors of the study found no long-term correlation between education and performance suggests unfair discrimination. The short-term effect they found could result from the MBA's tuition in cost-cutting, which achieves short-term benefits but at a risk to long-term performance.

I conclude that to increase diversity in the boardroom demands that recruiters show greater flexibility in their approaches. If they stick to old-fashioned techniques then there will be no improvement. Recruitment of more women to senior levels demands a more open approach to flexible career patterns whilst recruitment of more minorities and those from poorer backgrounds means placing less emphasis on those factors that are unlikely to be able to meet. The evidence of this study suggests that the old fashioned ways do not produce better results.

CEO Education (from professorbainbridge.com)

"A paper by Sanjai Bhagat, Brian Bolton, and Ajay Subramanian finds that CEO education has no statistically significant effect on CEO tenure or turnover:

We use six main measures of CEO education: whether or not the CEO attended a Top-20 undergraduate school, whether or not the CEO has an MBA, law or masters‟ degree, and whether or not the MBA or law degree is from a Top-20 program. Our study includes more than 14,500 CEO-years and more than 2,600 cases of CEO turnover from 1993-2007.
Our results show that CEO education does not play a significant role in the decision by a firm to replace its current CEO; poorly performing CEOs are replaced, regardless of their education. Education, however, does play a significant role in the selection of the replacement CEO. There is a significantly positive correlation between the education levels of new CEOs and those of the CEOs they replace. Further, hiring new CEOs with MBA degrees leads to short-term improvements in operating performance. However, we do not find a significant systematic relationship between CEO education and long-term firm performance. CEO education does not seem to be an appropriate proxy for CEO ability. Our results lead to the puzzling implication that, while CEO education appears to play an important role in the hiring of CEOs, it does not affect the long-term performance of firms.

To my mind, these findings make perfect sense. I suspect that the effect of one's education on one's job performance, if any, is short lived. I wasn't a lawyer for very long before I was relying on what I had learned on the job rather than in school, for example. What a CEO learned 30 years ago in b-school thus probably has zero impact on his job performance today.

At the same time, however, the correlation between education and hiring is equally unsurprising. There is an inherent problem in corporate governance of structural bias. Indeed, it's not just a problem of corporate governance; rather it is a pervasive failure among institutions of all types. Institutional decision makers tend to replicate themselves when they hire new people. They tend to lean towards people with the same background and socialization. If we plausibly assume most corporate directors have a top 20 education and a professional degree, we'd expect CEOs they hire to have the same.

Whether shareholders would be better served by more diverse boards that presumably would pick more diverse CEOs is a question for another day."

E63WYFRMXFUM

Bribery and Corporate Governance

2011-01-03T09:31:00.000-08:00

Although I have written before about the new Bribery Act and corporate governance, I was struck by a newspaper headline, “US war on terror is tangled up in web of bribery, corruption and fraud”. The report stated that the US investigators are working on 110 cases of suspected fraud with at least a dozen US army procurement officers already convicted of taking kickbacks. A major, was jailed for 17 years for taking nearly $10m in bribes and the Special Investigator General for Iraq Reconstruction (SIGIR) has obtained over 40 other convictions..

The lessons that leap out are that corruption depends upon three things;

Controls and procedures

To prevent corruption there must be a network of controls so that deals and contracts are independently reviewed. Clearly the US was in a hurry to get things moving in Iraq and decided to sacrifice normal controls. I remember reports about huge sums of money being disbursed in the early days of the occupation without even proper records being kept. That also brings us on to the second point…

The cultural climate

Even with controls in place, if there is a culture that accepts and promotes bribery it is very hard for them to work effectively, not least because record keepers, investigators and judges can be bribed. So the potentially dishonest individual is assailed with numerous temptations whilst seeing a culture of impunity around them. Once again, the US compromised for political reasons – the agencies of a generally uncorrupt US chose to dispense money through local political bigwigs, fuelling an explosion in corruption.

Let us not use only US institutions to illustrate this. Consider Mrs Andreasen, chief accountant at the European Union Commission who, according to the Daily Telegraph was

“shocked to discover that the EU did not have double-entry book-keeping when she joined the Commission in January, fearing that funds could be diverted without leaving an electronic fingerprint. Her claims, which were originally dismissed by Mr Kinnock's office [Kinnock was a British commissioner whose role was meant to be to control fraud], were later substantiated by a secret internal report from the Court of Auditors.

She claims that her superiors ignored warnings, so she eventually contacted the Court of Auditors and then MEPs. Mr Kinnock first moved her to another job, then subjected her to disciplinary proceedings, and finally suspended her...

He denied that Mrs Andreasen had been mistreated, saying that she violated staff rules by defaming her superiors, bringing disrepute on the Commission, and violating hierarchy lines.” This is the classic response of the company whose misdeeds are shown up by a whistleblower. In response many countries, including the UK, have introduced legislation to protect whistleblowers. It is hard to think how she could have defamed Kinnock who has lost any reputation that might have been capable of defamation.

Individual integrity

Only last is individual integrity an issue and, as implied above, once corruption takes hold it is hard to root out because the honest know they will not be protected. Indeed they fear they will be attacked by the corrupt and hauled before corrupt justice if they speak out.

Parallels with the corporate situation are clear. Controls are necessary but not sufficient without a culture of integrity because behaviours matter as much as rules. The Enron case is often cited as an example; there were rules and procedures that should have prevented at least some of the misbehaviour there but individuals did not act appropriately to enforce them and the Board itself connived at a conflict of interest which had only one possible purpose – to mislead users of published accounts. This permitted an inappropriate cultural climate to overwhelm the controls.

And back to the individual. The corrupt individual will still occasionally find ways to bypass controls or a cultural climate that is unfriendly to malfeasance - whilst the incorruptible individual will occasionally defeat corruption.

Since most companies have controls in place and there exists a mix of honest and dishonest people everywhere, the lesson is that the cultural climate at the top that is most important and provides the action point. Whether the US reconstruction in Iraq, The European Commission Budget or Enron, we find that it is political decisions at the top that provide cover for corruption.

Why do CFO’s manipulate accounts - 2

2010-12-28T03:17:00.000-08:00

Reasons for manipulation of accounts are more complex than the Harvard research (see last blog) acknowledges.

A dominant CEO was on the telephone to the finance director of a subsidiary company. The business was both manufacturer and retailer of a product so they booked a profit in the accounts whenever they transferred a batch from the factory to a shop and another profit whenever the shop sold an item. The year-end was approaching and the group as a whole was performing poorly so the CEO wanted the subsidiary to consign a large quantity of stock from the factory to a temporary warehouse – because there was not enough storage space in the shops - and take the profit. The finance director was using a speaker phone and the CEO did not realise he was talking to a room full of people – which is how I know the story. This case conforms to the Harvard model – the finance director got to keep his job while any benefit went to the CEO.

More recently I was finance director of a medium sized business and kept the monthly profit forecast conservative despite the optimism of my CEO. I did not want to forecast high and deliver low. However, I was less keen for the cash forecast to illustrate our problems because our chairman had a habit of giving grief rather than support. So, my cash forecast showed how I expected to manage the cash – which gave an accurate figure of the outcome, and showed that it was under control. And I reported separately, in the narrative, that cash was tight.

My accountant chairman was able not to ask the critical questions and I avoided getting a regular earful, which always came without any help to improve the situation. The only way out was to improve trading which we were trying to do – having cut costs as far as possible. I was confident that technically we were solvent.

This second case illustrates two things. Firstly that there is a line between an optimistic presentation and impropriety. I believe I kept the right side and when the situation changed I did not hesitate to act appropriately. Secondly a CFO - or any executive - has motives other than personal financial benefit. Having less hassle is a legitimate motive. You believe (or gamble that) things will get better and not worse, so you won’t be caught out. The test of character comes if things do get worse…what then? If you continue to show an optimistic case then you fail the test. If you cross over into active manipulation to hide the truth then you fail big-time.

CFO’s who cover-up bad news have bought time but they don’t use it to get another job. It seems they are sucked in to the deception and feel bound to use the time to solve the problem – even when that is impossible. Maybe, they suddenly realise it is too late and that the shame of the deception will follow them when it inevitably unwinds. I can understand that. You know that things are going to get very bad - you can’t see a way out - so you enjoy the weeks or months before the pain begins by blocking the situation out of your mind and doing whatever it takes to extend the period of calm before the storm.

The lesson - management is a team game. The whole team needs to enagage with and support everyone else. Don't just blame the CFO - it is a dysfunctional team that causes it and stops it coming to light.

Why do CFO’s manipulate accounts?

2010-12-23T03:04:00.000-08:00

A research paper described on the Harvard Law School Forum on Corporate Governance suggests that pressure from their CEO’s is the prime motivation for Chief Financial Officers of listed companies to manipulate their accounts. The pay and rewards of these executives does not seem to be enhanced by the manipulation but that of their CEO’s is enhanced. Also, prior to the manipulation there is an above average turnover of CFO’s in those companies where it has been detected, compared with a control group. The data all comes from the USA, but evidence from major financial scandals in other countries would suggest that the lessons are universal.

Of course we know little of manipulation that has avoided detection and the authors seem not to have tested for other motivations, such as deperate attempts to stave off corporate failure. Nonetheless, this is an important piece of work that reinforces the view that the majority of financial scandals result from over-dominant Chief Executives, without sufficient checks and balances on their behaviour, who treat company assets as their own.

Can good corporate governance coexist with venality in government?

2010-12-21T05:08:00.000-08:00

The Institute of Directors in South Africa published its King Code of Governance Principles in 2009, to widespread praise. The code seems to have been heavily influenced by ideas discussed by Tomorrow’s Company and seems to combine common sense, liberalism and social responsibility. However, I was struck by the contrast with an article in the Sunday Times, which reported (28 Nov 2010) a study of South Africa’s 535 MP’s that showed; 7 have been arrested for fraud and 3 served jail sentences, 19 have been accused of bouncing cheques, 71 can’t obtain a credit card, and 117 have been directly or indirectly involved in at least two businesses that have gone bankrupt.

The report refers to “political feelings of entitlement” and a “culture of impunity”. The paper gives an example of one MP who served only five months of a four year sentence for fraud in 2003 and has been found to hold six directorships despite being banned from being a company director. He is quoted as saying “What has the High Court got to do with my life?...I don’t have to ask permission from them”

We have here an impressive voluntary code of governance in a society whose leaders present an appalling example of venality. There is a similar disparity in Kenya too, where impressive governance ideas coexist with the country’s MP’s being accused of ‘plundering state coffers’ as a result of paying themselves 50% more than MP’s in (much richer) western Europe and on top of generous expenses.

Now I am not picking on African countries. Transparency International’s ‘Corruption Perception Index’ shows South Africa at a significantly better level than the likes of Russia which, in turn, is at a similar level to Kenya. So Kenya and South Africa are also very different. But what is interesting is that in these African countries such venality in some of their institutions seems to coexist with the highest principles in others. I have no idea whether that can and does work or whether the contagion will inevitably seep into the realm of major corporations too. Comments and ideas would be welcome.

FSA forces rise in probes by experts

2010-12-16T03:48:00.000-08:00

The Financial Times reports that the FSA is forcing a record number of financial services companies to hire outside experts to investigate their inner workings, prompting complaints over the rising costs of regulation.

Since April it has ordered 90 reports (compared with 88 for the whole of 2009-10) under S166 of the Financial Services and Markets Act for “skilled persons reports” into areas such as capital adequacy, governance and complaint handling. The average cost of a report is now £128,000, while the most expensive was £4.4m.

“The most common issues are systems and controls, but governance-related reports are increasing rapidly” the FT reports. They quote Jon Pain, FSA managing director of supervision, “It is a direct reflection of our desire to be more intrusive. I don’t want to tie up huge swaths of supervisors doing detailed work on one firm….It’s effective because the firm pays for it rather than the costs being spread across all firms.”

Some experts point out that the Bank of England used to ask routinely for reports before the FSA’s creation, but bankers but others argue that it amounts to an abdication of responsibilities in favour of the “Big Four” accountants and the costs can be prohibitive for smaller firms. A ‘senior executive at a global bank’ is quoted as saying the intrusiveness was making London less attractive.

On the one hand, they would say that, on the other hand there is a delicate balance between ‘prudence’ and ‘over-regulation’ shifting banking business abroad. There certainly does seem to be an awful lot of bank bashing going on, not just in the UK but throughout the EU. See my post on CEBS, and Lord Turner's recent musings for example.

Grant Thornton FTSE 350 Corporate Governance Review

2010-12-14T08:47:00.000-08:00

Grant Thornton has published its FTSE 350 Corporate Governance Review for 2010, entitled “Evolving with the Code”. It provides research data for the corporate governance record of the FTSE 350 companies, giving comparisons going back 5 years. There are a number of interesting points that emerge;

There does seem to be something of a ‘boilerplate’ approach to narrative reporting, with the average length of the annual reports reaching 128 pages – the biggest was apparently 500 pages. The review suggests that companies set themselves a target of cutting back 10%. One of the wisest points made in the field! Cut the ‘boilerplate’ and the ‘box ticking’ and engage with the values.
Boards are not very diverse. 46% of companies have exclusively male boards and only 9% of directors are female. I would guess the ethnic diversity is even worse. As I have written elsewhere, companies need to be more receptive to flexible career paths before they will become diverse in any meaningful way. As long as they stick to the old ways and very traditional thinking, failure will follow.
Although nearly half the FTSE 350 (153 companies) claims full compliance with the UK Corporate Governance Code, only 48 provide detail to verify this (schedule c of the code)
The 2010 Code brought in annual elections for directors. I am not alone in thinking this a daft idea but so do the FTSE 350: only 17 companies have annual elections of directors and only 50 have triennial effectiveness reviews, of which only 5% provided more than the bare minimum of detail. Actually I think the idea of facilitated board effectiveness reviews is quite a good idea as long as the board engages with the process and tries to gain something.Both these points emphasise, for me, that it is not just a matter of imposing rules but of winning the argument.
Compliance with the Corporate Governance Code has improved steadily over five years as has the number who explain non-compliance. In 2005 7% did neither but this dismal record had virtually disappeared by 2010
The estimated cost per meeting for a non-executive director is £2,800 for the mid 250 companies. Of course this is not the whole time they give to their companies, since reading and informal meetings are likely to double the average of 17 per annum. Nonetheless, it illustrates the level cost that smaller companies might struggle to find.
Only 41% of mid-250 companies gave detail of how their board operates
There is something of a trend amongst larger companies to outsource internal audit: in 2010 there were 64 companies out of the 350 who did this.
Turnover amongst external auditors was very low. If this continued their average tenure would be 31 years
Companies have proven reluctant to disclose their strategy and direction in their annual reports: fewer than 50% comply with this requirement. Grant Thornton feel this odd because many companies do disclose such information on websites and in presentations, so it is scarcely secret.
There is little evidence of companies providing verification of performance against non-financial Key Performance Indicators (KPI’s)

Lord Davies considers forcing FTSE firms to appoint more female directors

2010-12-13T01:52:00.000-08:00

The Sunday Times reported 0n 12 December 2010 that Lord Davies, who is preparing a report for the UK government on how to remove obstacles to women making it to the board, is considering recommending the imposition of a gender quota for listed companies. This follows the annual report and index in the FTSE Female Board Report from the International Centre for Women Leaders at Cranfield Business School. They claim their data shows a plateauing of a previous gradual improvement in female representation on big company boards. Actually, looking at their data, it seems to be continuing very slow improvement but very slow and at a very low level. Worse, if anything, most of the female FTSE 100 directors are non-executive – a mere handful are executive directors. They recommend a quota to redress the balance.

The UK Corporate Governance Code recommends diversity in the boardroom.

But all this misses the point. Until companies feel able to accept flexible career paths very few female directors will be appointed to boards on merit. The women that do make it will generally be those who have chosen, or been forced by the constraints of their career, not to have children. Companies expect their senior executives to be there the whole time – it is a rite of passage – they can’t cope with career breaks nor with flexible hours. In this way they waste the talent of half of the population. Redressing this narrow mindedness is the way forward, not imposing quotas.

UK Serious Fraud Office to fight bribery by foreign companies

2010-12-10T14:51:00.000-08:00

riberyIn recent years the USA has started extraditing individuals from around the world to face courts in America for alleged crimes committed elsewhere. This report appeared in The Times last week

“Jeffrey Tesler, 62, a dual British-Israeli national, is accused by US authorities of conspiring to funnel more than $130 million (£85 million) in corrupt payments to Nigerian officials to secure engineering contracts.

It is one of several cases in recent years in which British nationals have fought to avoid being sent for trial on American soil.

In 2006 a group of bankers known as the “NatWest Three” were extradited on Enron-related fraud charges. In March Ian Norris, the ailing former chief of the applications engineering company Morgan Crucible, was sent to the US where he was convicted for conspiring to obstruct justice.Gary McKinnon, who is accused of illegally accessing Pentagon computers, continues a lengthy legal fight against extradition.”

Tesler’s lawyer said “In essence this case is concerned with an allegation that a non-US national and non-US resident conspired to bribe officials in a third party state: Nigeria. The conduct and alleged criminality, at its heart, is extraterritorial and does not concern bribery in America, nor in the UK.”

The unattractive word for this is extraterritoriality – though, just to confuse things, as well as countries reaching beyond their borders to impose their laws it also refers to the opposite: individuals (such as diplomats) being exempt from the laws in their host country. And it is a side effect of globalisation. If a country outlaws a practice, such as bribery, then it cannot permit people (or companies) to evade the law by using intermediaries hiding overseas. The UK has also gone down this road; recently the Times reported…

“the former chief executive of PWS, a London based insurance broker….was prosecuted by the fraud office after the case was referred by the Foreign and Commonwealth Office in October 2005. He was accused of presiding over a network of corrupt payments during his time as head of the company’s American division before he became chief executive.” He “oversaw 41 illicit payments to senior officials at Instituto Nacional de Seguros (INS), the Cost Rican state insurance company…” He was imprisoned for 21 months

But this is not just about principle…it is about commerce. The Times (6 December 2010) quoted Richard Alderman, director of the Serious Fraud Office (SFO)

“I’m determined that British companies that pursue good corporate governance and ethical business practice shouldn’t be placed at a competitive disadvantage by foreign companies, wherever they are based, using bribery and corruption to win contracts.”

In a global market, if you take a principled stance then you have to try to stop your competitors from taking advantage. I don’t disagree with the approach, but it raises difficult issues. Since the SFO could prosecute companies with any presence in the UK, will it drive business from the UK? Will the UK start prosecuting corrupt politicians from other countries who accept bribes?

Interesting times.

Punishments for failed bank bosses

2010-12-08T07:46:00.000-08:00

Robert Peston writes in his BBC blog after a conversation with Lord Turner, chairman of the FSA.

“Directors of banks responsible for catastrophically bad decisions, which put their respective banks in jeopardy, could face a new punishment of having two years' pay clawed back from them.

[Turner] was attracted to imposing such a sanction - which is part of the so-called Dodd-Frank financial reforms in the US - as a way of discouraging banks from taking excessive risks. The clawback of bank bosses' pay would be punishment for misguided or stupid behaviour, rather than for illegal behaviour.”

Wow! Lots of issues here. First of all Robert, the Dodd-Frank Act that was passed into law this summer does not do that, you should have checked. It provides for a clawback following a restatement of published accounts and applies only to ‘incentive pay’ that would not have been awarded under the restated numbers.

There are also lots of potential problems with this legislation that may become clearer when cases reach the courts. It refers, for example, to clawback if companies are ‘required’ to restate their accounts. Well who certifies that it was unavoidable? Suppose new management takes over and decides to restate the accounting numbers, perhaps to make life easier for the new regime, is that required or optional? See Lane & Worcester for more.

Now Turner is not completely barking, he does explain in an article in the FT that banks are different…

“But banking is not like other sectors. The fact that many banks made decisions in the same way as other companies was itself a key driver of the crisis, a big problem, but not one that regulators had adequately identified. In some other sectors we want bold risk-taking, which might sometimes result in failure, shareholder loss or even the danger of bankruptcy. But banking is different.”

I accept that, but they are also businesses and businesses take risks, that is what they do. If you stop them taking risks then they will decline. It is more to the point to try to understand why checks and balances in the boardroom did not constrain the rush at RBS to acquire ABN Amro. What went on there, if it was so obviously a big risk (as Turner claims with hindsight). Also…Turner admits to errors in FSA supervision being part of the picture for RBS and Northern Rock et al. So will the bosses of the FSA also face collective punishment for failures…perhaps a future case like Equitable Life, say….I just wondered….

The Institute of Directors new Governance Guidance

2010-12-08T00:46:00.000-08:00

The IOD published its Corporate Governance Guidance and Principles for Unlisted Companies in late November, skilfully adapted by Roger Barker (IOD Head of Corporate Governance) from a pan-European edition published by ecoDa earlier in the year. It deserves publicity. Although it does not seek to break new ground and can read, at times, as if trying to cajole some grumpy company founder into wiser ways, it is pretty good on the whole – addresses the issues that need to be addressed and any company director would benefit from reading it.

But its most important attribute of all is that it takes governance to the unlisted company. For too long the governance industry has directed attention to the listed sector because there is a sense that their shareholders need protection. By addressing the unlisted sector the message inevitably becomes nuanced to become ‘this is the best way to run a business’. That is a message that can be directed to all businesses, listed or unlisted.

There are other important issues too but for those you will have to wait to read my book, due out in May or June 2011.

Government interference in bankers bonuses

2010-12-07T03:05:00.000-08:00

I may be a bit early on this item, since the Committee of European Bank Supervisors (CEBS) is not due to publish its rules on bonuses until Friday 10 December. But the Times reports that they are due to set a 20% cash limit on bonuses, 20% in shares that cannot be sold for some time and 60% deferred for several years.

Now, I understand that governments and regulators are eager to discourage bank staff from taking huge risks in order to achieve huge bonuses. But…put aside the anecdotes and the outrage against people earning lots of money…does the evidence show that large short-term bonuses were a causal factor in the banking crisis? And are these proposed rules limited to those who could possibly take actions that cause economic harm in pursuit of bonuses?

Don’t misunderstand me, I am as outraged as the next man at people earning vast sums that seem unrelated to their contribution to society. But if the motivation is jealousy then what about footballers and lawyers and film stars and lottery winners? And is it the job of government to interfere in freely negotiated wages? I am worried that governments that should lead are reacting to the news agenda and not taking rational decisions. The economic stupidity of raising UK marginal tax rates to 50% still irritates me. And will the regulations work anyway or will ways be found around them or, worse, will these banking activities migrate overseas? Banks have been slanting remuneration more towards basic salary and less towards bonuses for two years now anyway. Beware populist measures that have unintended consequences.

Film: The American

2010-12-06T13:50:00.000-08:00

I saw Kat Muir’s review of this film in The Times on Saturday. It is an odd review. She makes a mistake in placing the action in Tuscany, which seems slight enough, except that it is set in the Abruzzo region of Italy (south and east of Tuscany) for the very specific reason that it is more mountainous, more isolated and less developed than Tuscany. It sets a scene where the visiting American protagonist, and the other foreigners who pop up in the story, stand out. But the second surprise is that she gives it four out of a possible five stars – pretty good then? Well, the scenery is pretty and it is a compelling watch. But a failing for a thriller is that the story really doesn’t hang together. At a key point, for example, when it is clear that he has been betrayed, George Clooney, the anti-hero does…nothing. Curious police inactivity in the face of a double murder in a very small town is also pretty hard to believe. But Clooney is not bad in it…not great but not bad. A little wooden. He gives little indication of what volcanic emotions are bubbling inside to make him behave as he does – you just have to accept it. Oh, and you have guessed how it will all end some way out, which is not so good in a thriller.

Government interfering with governance over Goodwin?

2010-12-06T04:58:00.000-08:00

I was disturbed by the FSA investigation into the collapse of the Royal Bank of Scotland because it seemed to owe more to government feeling a need to respond to public hysteria than to any sensible reason.

The Financial Services Authority asked a narrow question: were fraud, dishonesty or failure of governance processes responsible for the bank over-extending itself so badly before the financial crisis that it cost taxpayers £45bn to keep it from collapsing?

Did anyone sensible ever harbour suspicions of fraud etc? Dominic O'Connell in the Sunday Times on 5 December neatly summarised the answer.

"If you aim high, you won’t shoot yourself in the foot. That’s true, unless you are the Financial Services Authority, where a foot-maiming moment is always just round the corner.

Officials at the FSA aimed high when deciding to investigate whether Sir Fred “the shred” Goodwin had done anything wrong in taking Royal Bank of Scotland down a ruinous road of over-expansion. Anyone who had followed RBS could have told you the answer immediately. Fred was guilty of an autocratic management style, was carried away by the idea of ever-expanding credit markets, and made a serious error with a top-of-the market purchase of ABN Amro. His failings had serious repercussions for the country, but not even his harshest critics seriously thought he had done anything criminal or fraudulent. He made bad decisions, but he made them in good faith.

Little surprise then that the FSA’s investigation, which has dragged on for more than a year, finally concluded last week that Goodwin had no case to answer.…Goodwin …probably suspects — as do most in the City — that the investigators took a long time to come to a conclusion that could have been arrived at after 45 minutes"

But the FT, in its report, included a quotation that summarised the hysterical demand for a head to be cut off 'pour encourager les autres'.

Rob MacGregor, Unite’s national officer, said: “The report’s conclusions are an outrage. It is unacceptable to suggest that the behaviour of the management in this iconic UK bank did not ‘lack integrity’ when they brought RBS to its knees.”

Well, sorry mate, but businesses (even big businesses - even well run businesses) make mistakes - it happens - get over it. But governments and their agencies should not join the hysteria. They are meant to lead and to show calm judgement. Even announcing an FSA investigation to buy time while things cool down, sends the wrong messages to those who pursue their own agendas by shouting loudly and wildly.

Executive Remuneration

2010-12-05T05:12:00.000-08:00

November boasted two articles related to executive remuneration that showed immense insight. Firstly, Chris Bones, stepping down as head of Henley Business School, delivered a speech in which he skewered the ‘Cult of the Leader’. He discussed the reward disparity of the leader

"There is a plethora of statistics to show the unequal rate of growth of CEO and leadership rewards versus that of the average wage-earner.

In 2006 the chief executives of America's 500 biggest companies got a collective 38% pay raise to $7.5 billion. That was an average $15.2 million apiece.

In the UK in 2007 chief executives earned on average 98 times more than the average for all UK full-time workers. Ten years ago the pay differential was 39 times that of the average worker."

Then he addressed the weakness of the justification

"And, with some notable exceptions … performance doesn’t seem to come into it. Sixty companies at the bottom of the Russell 3000 Index in the US lost $769bn in market value in the five years ending 2004 while their boards paid their top five executives at each firm more than $12bn.

Many of today’s leaders of enterprise are rewarded far more like the entrepreneurs than corporate stewards.The point of being an entrepreneur is that you are prepared to risk your own capital and if you fail there is no one to give you a handsome severance payment and a pension pot worth millions of pounds when they fail."

And then he homed in on the problem

"When you get this reinforcement of personal worth within a corporation displaying all the signs of being narcissistic you have the ingredients for a tragedy."

The problem we face is self-reinforcing. Because heroic leaders are the fount of all success they must be paid massive rewards, which they must justify by adopting high risk/high return short-term strategies. If these work, their market value boosted, they will tend to move on to another role. If they don’t work, they will move on, cushioned by a large severance payment. And, of course, they must be heroic…look how much they are paid!

Then Sir Paul Judge, an immensely successful business leader as well as a philanthropist, wrote an article in the Times, with the authority of first hand experience, that explained at least part of the origin of the problem. He lays a large part of the blame at the door of the Greenbury report into directors’ pay in 2003.

"...remuneration practice since has been fatally undermined by the innocent paragraph 4.16: “The (remuneration) committee should have access to reliable, up-to-date information about remuneration in other companies and should judge the implications carefully.” This was coupled with paragraph 5.2: “We attach the highest importance to full disclosure of directors’ remuneration as a means of ensuring accountability to shareholders and reassuring the public.

The law of unintended consequences often bites hardest those who believe most in their good intentions. Those two paragraphs were an invitation to consultants … to provide boards with reams of comparative information. The consultants then scour the annual reports and provide an analysis of pay practices for salary, bonus and long-term incentives. These typically show a spread of about plus or minus 30% around the average figure.

The remuneration committee then decides where its executive should fit. I have never known of a remuneration committee prepared to declare that its chief executive is below average (they would presumably then have to sack the person). Typically, a committee will pitch the salary at around the upper quartile of the comparator companies.

However, when the pay consultants go through the exercise the following year — using the latest information incorporating increases resulting from companies having placed their executives at the upper quartile — pure arithmetic means the average must have increased. Detailed maths shows that if there is a plus or minus 30% spread and all committees separately agree the upper quartile for their executives then the average will rise by about 15% — exactly what it has done since Greenbury was implemented."

Judge believes in restoring the link between top pay and bottom pay through an approach that uses multiples rather than comparability with other overpaid executives.

Shoddy Journalism on Party Pieces in The Times

2010-11-27T03:41:00.000-08:00

I was going to blog on corporate governance and may still get back to that today, but first I need to rant about cheap and shoddy journalism.

Cashing in on the royal family and Will & Kate wedding fever The Times, once a paper of record, chose to publish a nasty article insinuating criticism of the bride's parents probity. What was the ostensible casus belli? Well they wonder how the Middleton's (her parents) earn a very comfortable living from what appears to be a small, party goods mail order business. None of anyone's damn business I would have thought, but there you are. What did they find fault with? Well...breathless shock...they object to the company renting out its mailing list of customers. Now this is perfectly legal and most transactional websites do it. Indeed Google will do it whilst making it very hard to opt out. If you search for partyware on Google you are liable to find you receive targeted ads about...partyware. So then Dominic Kennedy, The Times 'investigations editor' (or sifter of sleaze, muck and non-stories, as the role might be renamed) moves on to complain that it is recommended best practice to allow customers to 'opt in' to receive ads, rather than 'opt out'. Be that as it may, I don't know of many websites that do that. Who is going to tick a box to say they actively want to receive advertisements and promotional emails? Not many saddo's around with nothing better to do than read ads.

But then, hang on a minute, in the very middle of the article they tell us that Party Pieces was achieving around 1,000 sales a week just 13 years after the business was founded. Well, I think there's your answer, staring you in the face. Having had a really good idea, the Middleton's built a really successful business - probably through hard work and intelligence. That sort of sales level probably gave them very substantial profits - and good luck to them. But the journalist is not finished. How did they buy a property in London and a paddock in the country? Well, that's nobody's business but theirs either but here is a thought; maybe they don't live extravagantly but put money aside from a business making healthy profits. It probably speaks well of the sort of people they are but that matters little to the snide insinuators at The Times who desperately seek a story where there really isn't one.

Talent Management

2010-11-15T07:13:00.000-08:00

A new book “The Value of Talent”, by Janice Caplan is about Talent Management but, it seems to me, has clear overlap with corporate governance. I have tried to summarise some of the main ideas of the book, though omitting the detail of how to achieve the goals described.

Talent Management is far more than an approach to recruiting and retaining business leaders but is a new way of managing and leading people and organizations that suits our times.

The rise of new economies as significant markets and competitors, increasing globalisation of trade and the breathtaking speed of new technology changing how we think and how we do things are just three of the factors that are leading to a new global business environment. This ‘new world’ demands new business models, new leadership models and new HR models.

The old order

had businesses;

· developing ad hoc, unconnected solutions to short-term problems,

· burdened with a legacy of command and control

As a result, management systems developed for control result in unintended consequences that block flexibility and slow change. Nonetheless new systems such as competency frameworks and performance appraisals are now widely accepted and most business leaders do believe that people are their greatest asset.

What does the new world need?

In the new world, significant change or inspiration, although shaped by leaders’ strategic vision may emerge from anyone: in a team or an individual at any level.

It needs ‘joined up’ management processes to be integrated to support the business strategy. It demands flexibility to react quickly and to innovate; new ideas to emerge at all levels within organisations, for teams to form, rearrange themselves and disband when projects are complete; sensitivity to what is happening in markets: to new competitors, new technologies, new ideas and new opportunities; because change happens faster than it used to. It demands collaborative working within organisations and with external consultants, suppliers and partners, all working within virtual teams, to achieve common goals. It also demands constant attention to engineering out costs.

What must be done?

These challenges demand new ways of leadership. Talent Management focuses on bringing out everyone’s talents because everyone is essential to the future of the organization. A clear Talent Management strategy identifies current organization and individual capabilities, where they need to be, and focuses on actions to get from here to there. This goes beyond learning and adapting. It engages people with the business strategy: not keeping up with change but keeping ahead of it.

This is a holistic approach. It includes provision for exceptional performers and future leaders and also deals with underperformance and with refreshing existing skills. It is likely to cover also those, such as suppliers and consultants, who are not directly employed but are still part of your team.

The approach uses job experiences as well as conventional means to develop people and emphasises providing stretching work. It challenges those at the top to think through the capabilities needed to deliver their strategies.

Talent Management is not just about systems or people but about integrating them to achieve the organization strategy so that line managers must manage talent just as they are expected to manage other resources.

The overlap with the governance agenda arises from this integrated approach that has to start from the boardroom. It also calls for the sort of communication and leadership that is a critical part of good governance beyond the boardroom.

'Boob Job': manufacturers, Rodial threaten to sue

2010-11-11T07:16:00.000-08:00

I cannot do better than quote sense-about-science on this,

One of Britain's leading consultant plastic surgeons has been threatened with libel action by the manufacturer of a £125 'Boob Job' cream for speaking out about her doubts of its effectiveness. Dr Dalia Nield of The London Clinic was quoted in an article in the Daily Mail on 1st October 2010 saying that it was 'highly unlikely' the 'Boob Job' cream would increase a woman's breast size. The manufacturer, Rodial Limited had claimed that the cream, reported to be a favourite of Scarlett Johansson, can increase breast size by 2.5 cm. Dr Nield said the company had not provided a full analysis of tests on the cream and that if its claims that fat cells moved around the body were true it could be potentially dangerous. Rodial Limited has threatened Dr Nield with libel action. Dr Nield stands by her comments.

Two really important points emerge. Firstly, how can a manufacturer advertise such extraordinary claims for a product without providing evidence? Where is the Advertising Standards Authority in all this and why is there not an equivalent of the EU Food Supplements Directive applying to skin products that appear to claim a medicinal effect? And secondly, why pick on Boob Job? What about 'Bum Lift' or 'Tummy Tuck' for £100 a tube of cream: no really, they do exist, go look at the Rodial website...it's a real hoot. No sign, though of peer reviewed, scientific papers to support a host of revolutionary claims. How come also that a reputable doctor can be threatened with legal process merely for expressing mild doubts and asking for proof?

Glaxo SmithKline and Corporate Governance

2010-10-29T11:13:00.000-07:00

Because I am researching for my forthcoming book "FT Business Briefings: Corporate Governance" I was intrigued by this news story.

In 2002 Glaxo Smithkline, one of the biggest drug companies in the world, sent Cheryl Eckard, one of their global quality assurance managers, to their Puerto Rican plant at Cidra to fix manufacturing violations cited by the US Federal Drug Administration. She found problems that went far beyond these violations. They included defective, misidentified, below strength and over-strength drugs and those not manufactured in accordance with FDA approved processes. Her concerns were so serious that she tried to get the plant shut for two weeks in order to sort out the problems. She tried to raise her concerns with superiors, including making a full report to GSK’s Compliance Department. Court papers show that Eckard made numerous attempts to get her superiors to take action before GSK fired her in May 2003. Even subsequent to this Eckard claims she tried to call the, then, UK chief executive who would not take her call. As a result of her failure to get her reports investigated properly she reported the matter to the FDA and subsequently filed suit against GSK on behalf of the US government under the US False Claims Act, which allows individuals to sue suppliers to the US government on its behalf and to receive a share of any recovery. Amongst other things her suit alleged that there was an attempt at a cover-up.

In 2009 the plant was closed and in 2010, after nearly seven years, GSK settled this claim for $750m. The company “declined to say whether further lawsuits from patients may be expected”.

I am guessing that companies don't agree such huge settlements in cases where allegations are completely without foundation.

My angle on this is to ask where GSK's corporate governance was in all this mess? Its annual report and accounts contains a report on its corporate governance that would seem to be a model of good practice and compliance; and yet what is described above is a gross failure of governance. The answer is that it is not regulations, rules and systems that matter but behaviours. It is not sufficient to have committees and organisation charts if there is a culture of cover-up's going uninvestigated and unpunished and if there are no effective internal processes to investigate and support reports from whistleblowers. It is up to the Board of Directors to supervise such arrangements and make sure they actually work. I think a settlement for $750m represents a significant business risk and therefore ask why the reasons behind it are not included in the, superficially impressive, list of business risks that form part of that report and accounts? The directors report should not be a box ticking exercise but a genuine effort to explain and communicate. Shareholders would like to know what has been done to try to ensure that such a massive failure is unlikely to recur.

Everyman Cinemas

2010-10-21T02:23:00.000-07:00

I am going to keep with my cinema theme a little longer - after all the London Film Festival is still on. But this is a beef about the membership deal at Everyman Cinemas. Don't get me wrong, I think the Everyman Cinema chain in north London, and some surrounding areas is great. They provide comfy armchairs and settees at their plush and quirky venues, which are generally small cinemas showing a mixture of mainstream and slightly more art-house films. They also sell food and drink and, at their Hampstead cinema serve it to your seat - what luxury. No really, it all adds to the 'going out' experience. They also have a membership scheme which, in return for an annual fee, offers discounts, free tickets and undefined special offers. In its first year this was great: lots of free tickets and we went lots. I am pretty sure that extra income from our glasses of wine and bowls of nuts provides compensation for lower direct revenue. The problem arose on renewal. Up went the price and the offers evaporated. A mistake you think, an administrative error? But no response to our emails of protest either. If you live in north London, beware!

Bogus calls from Windows Support

2010-10-20T06:54:00.000-07:00

I have had two calls today from people purporting to be from 'Windows Support' telling me that my computer has been sending 'error messages' and is downloading a lot of 'malicous code' and 'spam'. I have not had the patience to string them along to find out what they are trying to do. My guess is that they would try to get me to open a link, log in to my computer and download some malicous code such as a keylogger to detect passwords or bank detauils!

Microsoft do not make unsolicited calls - see their website. In my case I happen to know that I have not bothered to register with Microsoft and so they could not have my phone number.

Do not cooperate with these people! If you have then disconnect from the internet and seek professional help to clean your computer. Run an anti-virus scan. Alert your bank or credit card companies and change passwords and pin numbers if they have had access to your computer.

The London Film Festival

2010-10-17T12:15:00.000-07:00

The London Film Festival is marvellous. It showcases lots of interesting films, many foreign films that you wouldn't otherwise get a chance to see. But should it be renamed The Insiders Film Festival? Even if you can get on-line to them just after booking opens most of the best films are already sold out - which means that the tickets were pre-sold to insiders. The festival seems to receive a public subsidy, so how about making a fairer share of tickets available to the public?

I've just seen 'Africa United' at the festival, a sweet and well made advernture story about a bunch of African kids journeying through Africa, and their dreams, to get to the World Cup in South Africa. It addresses serious issues like child soldiers, incompetent officialdom, bribery, sex slavery and does do so in a context that is generally uplifting so that the continent is not made to seem like one huge rolling disaster. The film is worth seeing but too many big issues dealt with in passing to make a serious impact. Despite all the hype at the showing, and that I suspect is about to explode upon us, it is primarily a film for kids. Lots of not terribly plausible plot with the children somehow avoiding death and some mawkish sentimentality. Which does not have to be a bad thing if handled well. Comparison was made with Slumdog Millionaire but that, despite negotiating some of the same problems and issues, is a far more assured film.

Whilst on films, saw The Social Network last weekend. Its good reviews really are justified: a brilliant film about the founding of Facebook - amazingly just seven years ago. What distinguishes the film is that it is about people and relationships and it paints those people as complex and not as one dimensional. So whilst the precise way Mark Zuckerberg, for example, founder of Facebook, is portrayed will inevitably colour your judgement, nonetheless the film-makers try to show a person in a situation, leaving that judgement up to the viewer rather than trying to force you to a particular response.

Public Sector Waste

2010-10-14T08:03:00.000-07:00

I just came back from a short trip to Italy's Marche region (food, beautiful and historic cities, beaches) to find I had missed Sir Phillip Green's announcement on public sector waste; so I am catching up. Of course, he's right and he's wrong. He's wrong because much public sector procurement simply can't be aggregated. The specifications of computers or paper or printing quality really are different. So the headline figures of half of expenditure of £191bn being wasted is plain silly. Still it caught your attention. But he's right on two counts; firstly much of the uncoordinated and inadequately overseen expenditure could be coordinated and controlled much better; and secondly, public sector expenditure is often astonishing in its waste and incompetence. Examples...

The government's Building Bridges to Work initiatives are designed to help the long-term unemployed get back to work. After two years of unemployment, people are required to attend a centre full time for 13 weeks, where they receive help and advice or must take up work placement opportunities (unpaid). It is laudable to try to break people out of the cycle of dependency and despondency. But does this particular scheme work? The private sector firms who administer these schemes think so. It works for them. A highly qualified HR professional of my acquaintance volunteered (unpaid) to help out at one of these centres. He found himself chatting to these people but actually unable to offer specific help. The participants are mostly obliged to sit around doing little they could not do at home - just a bit more like a daily version of the workhouse. But those private sector firms get paid and the government claims it is doing something. But who collects the data to show it works and what data do they compare it with? My understanding is that the firms themselves provide the data to demonstrate what good value they provide. Hmmm.

Or someone who worked at an outer-London local authority who told me they paid/pay a firm to provide and maintain computers- £1,000 per machine per year, which they don't do very well. Blimey, I'll do it for half that...less if necessary. Does the authority have any idea how little computers cost nowadays? Good business if you can get it.

Or experience of computers provided by Barnet council to assist the educational needs of dyslexic young people at university. Another great scheme... except that the computers often did not work properly and (literally) years of continual complaints got nowhere in persuading the external provider to sort the problem. The local authority, councillors, central government were all chased, only to find that it appeared to be nobody's job to check that the provider was actually carrying out the service they were paid for. And no, they were not doing what they were paid to do. To be fair, a different scheme is now available centrally through universities rather than local authorities and does work much better; but how many millions of pounds were wasted in the old scheme that was nobody's responsibility to check on?

So yes, Sir Phillip is right, there is lots and lots of waste in the public sector...and that it is all before we even consider overmanning (try comparing numbers employed in human resource departments with private sector norms) and unecessary jobs.

The Kindle and the electronic age

2010-09-28T05:17:00.000-07:00

The new version of Amazon's Kindle, electronic book reader, has been released and we were debating its virtues and demerits around the dinner table at a friend's house. Well, I can't help it, I am probably a member of the chattering classes.

One of us argued that electronic book readers lead to the death of libraries that, in turn, provide social spaces as well as books, expert advice and inspiration. She further argued that such devices kill imagination and creativity. Finally she argued that they exclude the poor from the information age. Others countered that libraries are already glorified computer centres and that ebooks lead to different types of creativity but creativity nonetheless. I said that we should consider paper books for what they deliver, which is information, entertainment etcetera and that electronic books simply provide the same benefits in a different way, as well as being more compact, cheaper in the long-run and offering extra benefits such as instant gratification via immediate downloads.

But I did not express a niggling reservation. What happens if the electricity is turned off? Now, I know that if that happens we are all stuffed because, just 62 years after the transistor was developed, we depend utterly on computers. I mean utterly. Our food supply chain, our payment systems, our public services (think water, sewage, heat, light, hospitals, transport, fuel etc) would all just stop if all our computers turned off. We would, literally, starve and freeze even before the world economy collapsed if they did not come back on pretty damn quick. So, in those circumstances, it would scarcely matter if the learning of our entire civilization was lost.

Of course none of this will happen. Cyberwarfare by enemy states or terrorists will be kept at bay. But what about a Carrington event? In 1859, Carrington, a British astronomer recorded a solar flare that, if repeated today, would cause at least $2 trillion of damage in the USA alone and leave 130m people without electricity. A 2009 report by the US National Academy of Sciences (which has been taken down from their website since I read it) explains how the extreme electrical activivty would be captured by our electrical grids as if by a huge antenna. The damage could take ten years to repair. The frequency of these events is unknown, possibly only once in a thousand years, possibly less; who knows?

What Price Crime Prevention

2010-09-28T03:10:00.000-07:00

The London Borough of Harrow claims, on its website, that street lights are inspected every two weeks in winter and every four weeks in summer. So a friend of mine who lives in the borough was surprised that one such street light in particular was out for 18 months. This means it was, apparently, inspected at least 30 times with absolutely no effect whatever. The failure of the particular light, at the end of an alleyway used by many pedestrians, was reported to the borough on many occasions because it was perceived as a threat to personal security. Still nothing. It was reported to councillors. Still nothing. It was reported to the councillor who takes responsibility for street lighting, who was told by council officials that it had been fixed. No it hadn't. It was reported to the police as a crime threat. Apparently that particular policeman has better things to do than deal with street lighting. Well, now that someone has been stabbed at the end of that particular alleyway and beneath that non-functioning streetlight I wonder if the police or the council see street lighting as part of their remit?

Sustainable Business

2010-09-06T06:55:00.000-07:00

I am writing a book on corporate governance, due for publication in spring 2011 (thanks for asking), and my research is bringing me across references to 'sustainability' everywhere.... and it drives me up the wall. I have no idea what the term means; which is mostly because the people who write it have no idea what they mean. Whilst it is fun to look up on the internet the handful of businesses that have been around for a thousand years or more, few businesses last more than a few decades, even the most successful. That is inherent in the whole capitalist model of the corporation. They merge, change their activities, change their names, change their ownership, go bust. Businesses themselves are not sustainable.

Of course most of these references mean conducting business in a manner that is more environmentally friendly. This is a relative idea - not environmentally friendly just more so than the alternatives. And, because that is a bit of a mouthful, the phrase is shortened to 'sustainable business'; which is ok. I recycle at home. I put food waste and cardboard on the compost heap; cans and bottles in the blue bin for the council to collect: I suspect they just put these in landfill but I still go to the trouble of separating out those bottles and cans.

And let us be clear, the second law of thermodynamics tells us that the universe is not sustainable. It is gradually winding down. But ok, I accept that is happening over billions of years and life is short. But oil and mining companies are fundamentally in businesses that are not sustainable, whatever it may say in their annual reports about sustainability. They are using up scarce resources that cannot be replaced and will eventually run out. When they are gone we will have to think of a plan B. And it is not obvious or simple to decide whether this is wrong. Many rare earth metals, for example, are used in high tech products today but are running out too. There is no certainty that new deposits will be found. It is not just a matter of digging deeper into the planet: they only exist near the surface. Should we conserve them for future generations or should we use them now and leave it to our descendents to invent new technologies that make use of materials that are available then? Why not just have as much fun as we can now? If a benefit can be had now or in two hundred years it is not obvious that we should leave it for that future generation. With the spread of nuclear weapons, those future generations may not even exist. Bear in mind that few species have lasted on this planet for more than a couple of million years - that seems about par for the course - so we are unlikely to be here forever. Also bear in mind that the extraordinary technological advances of the nineteenth and twentieth centuries have been powered, literally, by the completely unsustainable use of fossil fuels. Without using these up at a prodigious rate, our standard of living and quality of living would be very different, we would still live in a limited and largely agrarian society. It would still take months to cross continents and few people would do it; the electronic revolution would probably not have happened.

What about other businesses, perhaps ones that claim to be carbon neutral because they plant trees. Well, it is all just so much nonsense. It is whistling in the wind. If the UK saved carbon dioxide, for example, by stopping all motor transport then the benefit to the world would be less than the offsetting detriment of a single year's growth in China. So a sense of perspective is good. None of which argues against sensible conservation policies, energy efficiency, reductions in pollution but, however good these things are they also have a price - a world that is 'sustainable' for a bit longer is a trade-off with more poverty, ignorance and disease.

Review of The Pajama Men, London 2010

2010-05-31T03:50:00.000-07:00

These two comedy actors from Chicago have just finished a week of performing at the Soho Theatre. A few years ago they were nomuinated for the Perrier Award whilst performing at the Edinburgh Fringe. They have been widely and, almost universally, proclaimed as brilliant. So I think that it is time for my balancing, counter-view to be published. Maybe it's just me and my family who don't get it, because many other members of the audience on the last night were clearly ready to fall off their seats with uncontrollable merriment. Meanwhile I was consoling myself with the knowledge that it really had to end sometime, and eventually it did. I simply could not see what was funny most of the time. The jokes were laboured, involved a lot of 'funny faces' and 'funny voices' and went on for an interminable time. One, with sound effects, of someone shuffling cards (you get the idea...brrrrrrring noises as the invisible cards were bent and released and flew through the air) must have gone on for five minutes. They do tend to signpost jokes so you knew that when it seemed about to end that it was bound to pause and then start again...which it duly did...and again...and again. Being generous, it ceased to be funny after about thirty seconds, which made the next four and a half minutes a nightmare of tedium. Before anyone goes to a future show I urge you to check them out on Youtube because if this is not your kind of humour then you will learn all about the relativity of time, as in how a minute can feel like a ten year sentence.

Brussels bank levy framework

2010-05-26T06:36:00.000-07:00

I must rename my blog 'Mr Angry' because there is so much out there to make one hopping mad. The latest thing to get my goat is the EU's 'let's get the bankers' tendency. So they announce today details of their plan to introduce a bank levy to ensure that national governments will not have to bail out failed banks in future. What is so wrong with that? Three things;

The UK's bailout cost hundreds of billions of pounds: will the proposed fund really have that much in it? I doubt it - I think this is just political posturing.
If a massive fund is established which has to be parked in government bonds then this will reduce average returns and hit their profits, which will reduce the value of those banks, many of which we now own through direct government stakes and all of which we own through our pension schemes.(so it is a tax on all of us)
The fund will also reduce funds available for lending at a time when governments are demanding increased lending (slightly contradictory policies here?)

So, in summary, it is a proposed policy that will not noticeably protect anyone, is an effective tax on everyone and acts counter to other EU and national government policies. Smart huh?

Dubai Default

2009-11-27T03:42:00.000-08:00

It has been some time since I have posted but the latest fiasco in Dubai, which has effectively defaulted on what is effectively sovereign debt, does demand a comment. You will probably be aware that people in Dubai who fail to honour their debts are sent to prison. Long after imprisonment for debt ended in the effete West you can still go to prison for bouncing a cheque in Dubai.

Which raises a question amongst the cynical here. Does that mean that Dubai's emir, Sheikh Mohammed bin Rashid Al Maktoum, will be presenting himself at the local nick any time soon? No I thought not.

It is hard to be too sympathetic to those caught out by the hypocrisy and illiberalism of these arab states since it has all been well reported over the years. See

Dubai jails woman for adultery - note that husbands are not liable to such penalties
Dubai jails woman for having taken prescription medicine!
Dubai jails people on questionable drug charges
Jailed for debt

China Celebrates Tianenman Square Anniversary

2009-06-04T08:30:00.000-07:00

This BBC video is an unintended but brilliant illustration of how the Chinese government deliberately subverts the rule of law through the unlawful actions of its agents. Actions that are supposedly legal in China are consistently obstructed by extra-legal fiat.

One day the whole edifice will come tumbling down just like the USSR and the Eastern Bloc.

Martin In The Margins: Festival surrenders to boycott blackmail

2009-05-21T06:10:00.000-07:00

Yet again we see the hypocrites shutting down free speech whilst proclaiming themselves its champions. Ken Loach, who has blackmailed a credulous Edinburgh Film Festival, will always defend free speech unless it is the speech of those he opposes.

Martin In The Margins: Festival surrenders to boycott blackmail

Jewel of Medina and Censorship

2009-05-20T01:57:00.000-07:00

I think the Index on Censorship website is a good thing. Censorship, whether open or covert, prevents us from making informed judgements and, in doings so, subverts the democratic process. There are, of course, other means of managing and distorting public opinion but the website provides a small bastion against the encroaching darkness.

However, Sherry Kones, the author of the book Jewel of Medina, who protests there, may not provide the most outrageous case against censorship because there is the other relevant issue that her book is, by all accounts, really bad. Jonathan Moeller's blog offers quite a thoughtful condemnation of the craven publishers in the face of self-appointed Islamists, albeit the author's daughter took exception to his description of the book as trashy. However, even the couple of lines he quotes from it are sufficient to persuade the reader that the book really is trashy, which may have contributed to a lack of any rush to publish it. Nonetheless, she does seem to have got publishers and the more noise she makes the more sales she achieves. Amazon UK and USA both show it ranking just below 50,000th in their sales rankings, which is not bad for a boddice-ripper

Is Chiropractic Bogus?

2009-05-18T11:17:00.000-07:00

So the British Chiropractic Association has sued the science writer Simon Singh for a Guardian piece in which he wrote

The British Chiropractic Association claims that their members can help treat children with colic, sleeping and feeding problems, frequent ear infections, asthma and prolonged crying, even though there is not a jot of evidence. This organisation is the respectable face of the chiropractic profession and yet it happily promotes bogus treatments.

Sadly "According to a report by Jack of Kent, the presiding judge in the English High Court, Sir David Eady, decided last Thursday that Singh's passage was a statement of fact. But more surprisingly, the judge decided that

The word "bogus" meant deliberate and targeted dishonesty. So it did not mean that chiropractic for the six named children's ailments (including asthma) was simply wrong, or that it was contrary to established medical practice or research, or even that it completely lacked evidence.

"Bogus" meant a lot more. The judge held that by the mere use of the word "bogus" Simon Singh was stating that, as a matter of fact, the BCA were being consciously dishonest in promoting chiropractic for those children's ailments."

Read the whole of the article on the language blog. It is worth it.

You do wonder about some elements of the British Legal System. Dr Singh has been hit therefore, with a massive legal bill for the use of a word in a context that most English speakers would not believe to have the meaning ascribed by the judge. I think that the word bogus can be taken to mean complete rubbish without implying conscious deceit. And anyway, it is outrageous that he can be successfully sued when the substance of his article is true!

There seems to be no evidence to support

Speaker Martin

2009-05-18T05:18:00.000-07:00

John Stonborough was PR consultant to the unlovely Speaker of the House of Commons, Michael Martin. He writes in his blog explaining how he warned of the likely embarrassment resulting from publication of the Speaker's expenses. Whilst it has the taste of personal revenge eaten cold, his account also bears the ring of truth.

Apart from his monstrous self regard and record of inept judgements, the man now finds that people he has slurred, hurt and blackened over the years are now taking their revenge. Only an idiot and a truly nasty person builds such an edifice of enemies.

Go Speaker Martin, go.

In our Time: a national treasure

2009-03-20T07:06:00.000-07:00

I wonder whether, anywhere in the world, there exists such a civilised and important radio programme as "In Our Time" on BBC radio 4. In a 45 minute broadcast, also available on the web through BBC iplayer, each week it picks an important intellectual topic from history, science, art, philosophy, literature and gathers three or four academic experts to discuss and expound the subject, guided and kept on track by its 'host' Melvyn Bragg. Occasionally the discussion fails to convey a clear understanding of the key points of a subject to the listeners, perhaps because the subject is too complex for the medium or because the host does not quite understand it himself and so the potential wisdom and knowledge is not controlled and channelled but evaporates in all directions. But these times are rare.

Recent subjects have ranged from "The Measurement Problem in Physics", through "The library of Alexandria" to "The Brothers Grimm". It is a jewel that, on its own, justifies the entire BBC licence fee.

My Rant on Education

2009-03-02T05:54:00.000-08:00

I saw Chris Woodhead's piece in the Sunday Times and it got me going again. By and large he writes well and his arguments are convincing. This time he was reporting on data relating to students getting the grades to get to Oxford and Cambridge. The data shows a disproportionate share of top grades being won by those from independent schools. If, as a nation, we want to give all children of all classes equal opportunities then we clearly have to decide between two choices; make public sector education better so that the children from comprehensives get better results or else make access easier, which is code for making A levels easier, and bully universities to select on the basis of (low) family income.

There is a problem with the latter choice, which is that we are in global competition with other nations and the battlefield is that of skills. If our national skill set is not up to snuff then we will fall back economically too: jobs and industries will migrate. If the better universities are forced to take less well educated students then their standards and outcomes will inevitably drop and we will fall back in the race. In any case, social engineering of this sort seems doomed to fail since even in comprehensives the children of the middle classes will still fare better. Their parents will pay for extra tuition, take them to concerts, buy books and computers, will give them experiences that broaden understanding and will encourage them in intellectual activities. Recently published research shows that disadvantaged children have already suffered significantly by the age of three simply on account of differences in parenting - talking to and playing with babies.

So please let us abandon the class war and focus on improving the public sector schools whilst maintaining educational standards. There is good evidence that it can be done. Tough school heads who impose discipline, exclude troublemakers and dismiss poor teachers do achieve much better results. Yes this still leaves us with the problem of what to do with those difficult children but we would have had that problem anyway.

Darwin and Creationism

2009-02-27T03:26:00.000-08:00

In the beginning God created...chemistry. I don't know about you but I find the extraordinary complexity of life that results from God's chemical processes truly awe inspiring, reminiscent in a way of entering a great cathedral or seeing a great work of art and wondering at the builders and originators of such beauty. Let us think for a moment about the extraordinary end product. When DNA was discovered and explained it seemed as if humanity had a relatively simple key to the processes of life yet with time we have found the story just gets more and more complicated. We have found that our genes are not simple codes for particular results, we have found that each gene can produce several proteins - an average of nearly six not one, that the same gene can perform different functions in different tissues at different times. We have found that the expression of each gene is itself controlled by complex processes, including methylation, from within the genome. We have found that whilst Darwin was mostly right that Lamarck was not completely wrong and that characteristics developed during a single life may, surprisingly, be passed on to our children.

Consider the curious case of human size. At times in history when people have had poor diets for several generations the population becomes smaller in stature. When diet improves, the average size does not spring back immediately but does so over several generations. I have a photograph of my grandfather, great grandfather and his father: each son taller than his father. In turn, my father was taller than his father, I was taller than my father and my son is taller than me. You can understand why this process makes evolutionary sense, reducing the risk of the improved food supply being temporary and ensuring babies in each generation are not too big for their mothers to give birth to. It seems, superficially, to go against our understanding of Darwin's ideas but complex processes of gene expression overlay the genetic code and control how it is manifested.

At every turn the complexity of life and its chemical processes expands. And all this is a natural process that follows from the chemistry of carbon, nitrogen and the other elements: when bundled together in certain circumstances they naturally start reacting and forming chains of molecules that join and break apart - stir, add water and heat gently for several billion years and you get us and everything around us. Amazing.

PS. There was a TV programme on Darwin recently that talked about Lakes Malawi and Tanganyika in Africa and how each had a huge variety of fish in different ecological niches that have evolved from the same single species over many millions of years. And what was wonderful was that very similar fish had evolved in each niche - as if evolution had run the same experiment twice and come up with much the same result. Amazing.

Amnesty International, The Gaza Conflict & Proportion

2009-02-26T03:12:00.000-08:00

On 23 February 2009 Amnesty International issued a report on the recent conflict in Gaza. Its main thrust was to call for an arms embargo on both sides and a cessation of American military aid to Israel. A curious document, on a par with many they have issued on this protracted conflict. As a terrorist organisation, Hamas is clearly unaffected by such a call, so this is really a one sided call for America to stop support for Israel. Amnesty calls for an investigation of war crimes allegations and refers to 'disproportionate' action by Israel and attacks by their forces on civilians and civilian objects.

Now let us talk about proportionality. One death of an innocent is one too many but war is not nice and this was war. It is claimed that Israeli forces killed over 1,300 and wounded over 5,000. These figures come from just one side of the conflict, are they correct? Remember Israel's attack on Jenin in 2004. Palestinian officials spoke of a massacre, of 500 dead, even of 3,000 dead. In the end, when the dust settled, the figure agreed by all sides was between 53 and 56 Palestinians and 23 Israeli soldiers. One death of an innocent is one too many but we are trying to measure proportionality so the figure of suffering matters.

The war was sparked by Hamas deciding not to renew their six-month ceasefire on 19 December 2008, followed by a barrage of missiles into Israel. Hamas officials claimed they were willing to renew the ceasefire if Israel would open the border crossings but Israel was not willing to open border crossings because they feared this would escalate the smuggling of weapons into Gaza and suicide bombers out of Gaza. They did not want to appear to reward the continuing low-level war waged by Hamas through missile attacks and suicide bombing. Israel viewed the threat as being to its existence: what is proportional to the existence of a state? Would proportionality be for Hamas missiles to kill two Israeli civilians and for Israel to respond by picking two random civilians in Gaza and killing them? Is Israel not permitted to try to stop the attacks even if this requires a disproportionate response?

In war both sides use weapons, which are things designed to cause injury and death. Israel was fighting an enemy based amongst civilians: how, therefore, could they avoid civilian casualties? Amnesty complains that Israel used weapons that do not allow pinpoint accuracy amongst civilians but this was war - how many Israeli lives were required to be sacrificed to to achieve pinpoint accuracy? Israeli spokesmen allege that Hamas cynically uses human shields, purposely firing from positions next to hospitals, mosques and schools and that they locate storage and command bunkers beneath these buildings. If this is true then the task of avoiding civilian casualties whilst prosecuting a war becomes very hard. The fog of war makes it certain that errors will occur and that, even with efficiency and goodwill, innocents will die. But let us not assume that the fighters on both sides are always nice. They are people; there are cruel and indifferent people about. In war bad things happen. How do Israeli actions compare with other combatants in other conflicts? I suspect they compare pretty well. They try to avoid civilian casualties as far as this is compatible with attaining crucial military objectives. Hamas does not. Hamas tries to kill and maim civilians - they are the target not 'collateral damage'.

Let us talk about proportionality. Consider America's war in Iraq - we don't know how many civilian casualties there have been where US troops were involved but the number can hardly be less than tens of thousands and the US, perfectly reasonably in the context, has used artillery and aerial bombardment in areas where there were clearly civilians present. We know that the general conflict including civil war has resulted in at least 100,000 dead. Russia's war in Chechnya resulted in the virtual flattening of the capital city Grozny. Chechen officals admitted a death toll of up to 160,000 in 2005. At present Sri Lanka's government is at the point of crushing a long term insurgency. It is hard for us to criticise under the terrible pressures of this war but it is undeniable that tens or even hundreds of thousands of civilians are trapped in the war zone. Many thousands have died and will die.

Let us, in this context, consider the statement from the African Union in January 2009, condemning Israel. They refer to an '...unbearable and worsening humanitarian situation'.... This from the team who brought you the genocide in Rwanda, the war in eastern Congo, the wars in Liberia and Sierra Leone, the government sponsored attacks on civilians in Dharfur, Uganda's war against LRA rebels in the north which observers believe is being kept going on purpose to boost army influence....Where do we stop? This from the people who stand around doing nothing whilst 20% of Zimbabwe's population flees the country and handreds of thousands are starving, where the government uses withholding food supplies as a weapon against suspected political opponents when it does not simply imprison, torture and murder them. The lunatics are in charge of the asylum and who gets waves of criticism...Israel, which is under attack from mortal enemies and which is one of the few countries in the world to make great efforts to limit civilian casualties in conflict. Now why is Israel singled out for special treatment do you think?

William Rees Mogg

2009-02-17T05:46:00.000-08:00

Every once in a while I do read William Rees Mogg's columns in the Sunday Times. I do so because he writes very elegantly and that is a joy in itself. He seems to be a supremely civilised, decent, intelligent, learned and reasonable man. So why do I only 'sometimes' read what he has to say? It is because he is one of those people by whom you can set your watch. When you read his beautifully crafted articles you know that the correct position to take is the opposite of the one he has taken - how, in view of his attributes, he manages to be so consistently wrong I cannot say but there you are.

This week he wrote about the flight to gold in difficult times and the true value associated with that metal. It is one of those rare cases where he is not only wrong but actually ignorant too; he seems not to comprehend that value in a currency or in a commodity lies equally in the confidence of people who will accept the value of either. Gold, indeed, does have some intrinsic value since it is used not just in jewellery but in electronic devices and many industrial applications but as a store of value or a medium of exchange it is no match for intangible 'money' created by banks. Its advantage lies in the place it has in human history as a store of value that is reasonably plentiful, pretty, malleable and does not corrode. Diamonds will not do because they are hard to fashion into coins and can only be valued by an expert, silver ought to work ok, platinum is too scarce, copper too plentiful. But all this is a side issue: the world economy needs to be mended and intangible paper or electronic money is irreplaceable unless we collapse into barbarism, in which case gold or cowrie shells may have to do.

Geert Wilders Denied Entry to Britain

2009-02-13T03:33:00.000-08:00

On 12 February 2009 the Dutch 'Freedom Party' MP Geert Wilders was denied entry to the UK, turned back when he arrived at Heathrow Airport. He had been invited by Lord Pearson of Rannoch (a UK Independence Party peer) to join a group of British peers and MP's at a showing of his film 'Fitna' at the House of Lords. Two days earlier Wilders had received a letter, from the British ambassador to the Netherlands, telling him that he was not welcome in the UK. He decided to confront this ban on his entry through a well publicised arrival at Heathrow.

Should he have been denied entry? The debate is already intense, developing more heat than light, but the key issue to consider is surely that the issue, written about by a host of commentators as if it is a simple matter is actually far from simple. The argument for freedom of speech must start with Voltaire "I disapprove of what you say, but I will defend to the death your right to say it.". The Dutch government said it "regretted" the decision to bar Mr Wilders from the UK, saying it believed all its MPs "should be able to travel freely in the European Union". It should be noted that his party won nine seats in the Dutch House of Representatives in 2006. as the Dutch newspaper NRC Handelsblad argued.“The British ban appears to trample on fundamental rights enshrined by the European Union and the Council of Europe but it also harms the concept that Europe is one open space,” it said in an editorial yesterday.

Meanwhile, Melanie Phillips argues strongly in the Daily Mail that there is apparent hypocrisy here since the UK government has not stopped anti-Israel, and often antisemitic, demonstrators peddling the most virulent hate messages in the UK whilst Wilders does not advocate violence, he merely pursues his constitutional right of freedom of speech to argue that Islamist terrorists derive justification for their ideas from some pretty unpleasant ideas in the Koran and he lays blame there at the book underpinning Islam itself.

The arguments against banning include the allegation that it is a craven response to threats from a Muslim minority and that we must stand up for free speech, see Philip Johnston in the Telegraph. It should be noted that Wilders is under threat of prosecution in the Netherlands for incitement to religious hatred and discrimination. Michael Portillo, the Conservative ex-cabinet minister, adds the point in The Times that banning Wilders has afforded a self-publicist enormous worldwide publicity for his views.

On the other hand...we have decided, as a society, that race hatred is a danger to our society itself and, therefore, that freedom of speech should be limited to prevent such expressions that could lead to serious public disorder and conflict. More recently, such limitations on freedom of speech have been extended to cover religious sensibilities. That extension was hotly debated and critics asked whether is would limit publication of a book such as Rushdie's Satanic Verses. Jews as well as Muslims have benefited from this extra sensitivity as Louis Farrakhan, accused of espousing antisemitic views, and Muslim cleric Dr Yusuf al-Qaradawi, who describes suicide bombers as martyrs and homosexuality as a disease, have been excluded from the country. Do Wilders' views cross the line of acceptable debate; he wrote a 2007 article for Volkskrant, a Dutch paper, read it and judge for yourself. Critics allege that his film 'Fitna' takes verses out of context, omitting parts of verses and other verses before and after quoted text in order to create a misleading impression. Curiously, a video on UTube that makes this point is one of three videos made by the same team, the others using similar editing techniques to attack Israel. This illustrates that we must try to disentangle arguments from hypocrisy - Wilders, who now presents himself as an icon of freedom of speech has also advocated banning the Koran!

The letter given to Wilders, explaining his exclusion from the UK, read The order issued by Jacqui Smith, the Home Secretary, read: "The Secretary of State is of the view that your presence in the UK would pose a genuine, present and sufficiently serious threat to one of the fundamental interests of society. The Secretary of State is satisfied that your statements about Muslims and their beliefs, as expressed in your film Fitna and elsewhere would threaten community harmony and therefore public security in the UK."

But, I worry that Geert Wilders is an elected parliamentarian of an EU country. His views may be unpleasantly expressed but they are non-violent. Are we not allowed to criticise religions or communities now and is it only selected religions and communities that are beyond satire or criticism? I am reminded of the appalling precedent of the UK government's failure 2004 to prevent Sikh thugs from violent demonstrations and threats that forced the closure of the play Behzti - written by a Sikh - and that depicts rape and murder in a Sikh temple. Are Wilders views sufficiently aggressive or extreme to justify curtailing his right to free speech? He was not due to address a public meeting but a private meeting of peers of the realm and British MP's - was this really a threat to the UK?