Peter Day's radio 4 programme on corporate governance

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

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?

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

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

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

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

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.