Conflict of duties between nominee directors and company law

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

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

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

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?

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

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

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.