Even More Problems With The Law.. Plus Ca Change?

Millions of words have been written, for example, about the rigging of the unregulated Libor market; the various debacles at Barclays UBS and HSBC, to name three and, most recently, the collapse of the Spanish bank, Bankia, which will leave about 350,000 investors almost wiped out. Add to that the technology meltdown at Bank of Ulster, a subsidiary of RBS, and the failure of the Facebook IPO unless you happened to be a seller, and there is no doubt the year could have been a lot better for most people.

Far from anything having changed very much over the last few years, we appear still to be in the midst of a continuing cycle of failures of governance, as well as a lack of accountability and of responsibility; themes that remain a constant and major concern as noted below.

So as a starter, here is part of my wish list (and I should mention that I also believe in the tooth fairy!):

• Those who lead companies, whether they are individuals or boards, to take more responsibility and stop blaming others for the errors of and in their own organisations.
• Regulators to regulate more effectively.
• Tougher sanctions for individuals, who are shown to have screwed up, screwed the public and screwed the system. This, for example, should not apply just to the junior trader who goes to jail, but as far up the line of corporate responsibility as necessary.
• Legislators to ensure the laws they pass are (at least vaguely) intelligible and open to (reasonably) clear interpretation. I am often told, the Victorian draftsmen managed to do so, why can’t ours?
• I know this final wish is like trying to grab a cloud but I would like to see an acceptance that (i) most core rules of whatever description will only work effectively if they are based on a genuine moral and ethical code, and as a corollary (ii) box ticking, in its widest sense, should be sent by every regulator back from where it originally came. I wonder why this second point appears to be such a difficult issue to resolve.

Perhaps the one piece of positive news for many investors in UK quoted companies, though hardly “payback time” as dubbed by one newspaper, was the so-called shareholders’ spring, which seemed to peak during “AGM season” in the first part of last year. I suggested in a note I wrote at the end of the summer that the real test will come later this year when we discover whether it was just a one–off season of investors venting their genuine anger, or the start of a process under which more of them take an interest and indeed responsibility in the companies in which they own shares. If so, it might represent a real change in the dynamic between stakeholders and in particular Chairmen and CEOs. A key “tussle” looks as if it will again be the one between WPP’s long-time CEO, Sir Martin Sorrell, and his institutional shareholders. Last year shareholders voted against that company’s executive pay report; let’s see who wins out in 2013.

In 2012 nothing much was pretty about the business world. This belied the majority of comments in a recent publication from the UK Financial Reporting Council which appeared to extol the practice of corporate governance as a rather magnificent British invention brought into existence 20 years ago and now copied by much of the rest of the world. As an aside it is more than 20 years since Asil Nadir stole a very large amount from the Polly Peck group and has finally been sent to jail for 10 years.

While about writing about some of these topics I have wondered whether I am perhaps being too critical and should give people and organisations the benefit of the doubt. However, on canvassing opinions from numerous clients, academics and other contacts, I am generally told to get on with the article in question (currently this one) and stop being so wet!

Further examples of the less than pretty business world in 2012 are numerous. Consider George Osborne’s “amazing” idea of asking employees to give up certain basic employment protection in exchange for shares in their employing company. Did he really think it through and is anyone, anywhere, in favour? Not from what I have read or heard. The proposal to split the so-called “casino” part from the retail part of commercial banks may, perhaps, be a good idea, but can it be helpful to wait for at least seven years to do it? The apparent “deal” struck between a well-known coffee retailer and HMRC by which it agreed to contribute some money to the UK economy in tax baffled many people. On the basis of that “gift”, the taxpayer seems to have decided, on a unilateral basis, it has fulfilled its obligations. I didn’t realise that choosing to pay a particular amount of tax was an option. Equally, how many people who had the choice would opt to pay more tax than the absolute minimum required—which could be zero? One crucial issue in this debate is the difference between obligations which might be termed legal and those termed ethical. However that needs a whole book to itself and also, I believe, requires many more of those who teach law to engage more fully in such discussions.

Not long after Hewlett Packard bought Autonomy for over US $10 billion (and presumably having first carried out , or paid for experts to carry out, its due diligence) it was apparently forced to write down more than US $8 billion dollars, citing “accounting improprieties” among other things—consider responsibility and (no pun intended) accountability in this case. Finally, because various regulators need to be put into the frame as well, the shambles at the Serious Fraud Office under its previous boss is something to be noted. To have its accounts qualified by the National Audit Office because of improper payments to its departing chief executive, to my mind sums up much of what went badly wrong during 2012.

So, another depressing year for those of us who believed that some of the key comments made in the major report of Sir David Walker following the banking crises in 2008, might have led to some real changes in the morality and ethics in the business world , as well as a genuine improvement in corporate governance. It seems to me there are several threads that run through much of what has happened in 2012 which of course cannot and should not be taken in isolation and are part of a continuing process. For example , a short paper I wrote about five years ago, connected many of the issues raised in this note as follows; too much law; too much bad / complex law; laws that are unenforceable; and laws that are unenforced. These issues continue to ring true for many aspects of the business world. They also apply to many other areas of society including health and welfare, education and the justice system generally, but I need to stick to the task at hand. These four points are not in any way intended to be trite; they reflect my concerns, and those of many people who have been involved in this on-going discussion over several years.

That is not to say the last year didn’t see some extremely powerful and I am sure heartfelt speeches on these topics. I have been impressed, several times, with a number of high–profile City grandees telling it like it should be told, often with no holds barred. However, many people to whom I have spoken believe that nothing has really changed despite the rhetoric. For example when they read that Mr CEO or Ms FD have “paid with their jobs” perhaps for some of the major “errors” mentioned above (and often they don’t “pay” as most of us understand the word), they are not convinced that takes us very far. “Paid with their job after admitting responsibility and in the circumstances decided not to take their bonus or enhanced pension payment” would perhaps be an improvement. Responsibility and accountability again.

Pressure from a wide range of organisations is a positive sign, but is it a big enough stick to force (indeed how do we / can we force) change. Can we really wait for a natural evolution in the way these core concepts need to be explained and then pushed up and down in an organisation? I am still amazed by the fact (also mentioned in my “shareholders’ spring” paper) that several Chairmen and CEOs of very large quoted companies had to apologise for the lack of / breakdown in communication with key stakeholders. Have they read the Corporate Governance Code? If something as basic as this seems to be such a problem, how will they deal with the really difficult issues? Equally, how far can rules replace common sense in this type of discussion?

Looking further at the question of sticks (rather than carrots), one of the groups which so far seems to have escaped sanction—at least publicly—are the regulatory departments of many financial institutions. In the largest banks these can be made up not of a few dozen people, but many hundreds or more. Will the appointment of the recently knighted ex-head of the FSA, as a sort of super-internal regulator for Barclays, make any different to the culture there? It is too early to know, we can but hope. It seems fairly clear that until recently too many people in these organisations (from the top down) reckoned they could still play the system, beat it and then get away with it. I am sure some still do, Even if they were forced to step down, so what? Having looked at some of the major board room crises this year, do too many people remain where they were 12 months ago? If we think that poor PR and loss of face are good enough reasons to force change, I am not sure anyone involved in the Facebook IPO debacle has really suffered and I have already mentioned the SFO.

Laws which are unenforceable and laws that are unenforced… back to sticks and carrots. I was struck by a recent comment in a newspaper about the relevance of the ring fencing of banks.

“Would an electric ring fence such as that proposed by the Parliamentary Commission on Banking Standards have stopped this alleged ring of dodgy dealers”, [was the question concerning Libor] and the writer failed to see the relevance. He suggested that when it comes to investigating bankers’ morals, “bringing the accused rate riggers to trial will do more than any parliamentary commission could to shed light on the issue.” If the law is too poorly drafted or too complex to bring these cases to trial, or if the prosecuting authorities get distracted, (one example – the SFOs humiliation last year, its dropping of the investigation into the activities of the Tchenguiz brothers and in response their very large claim against it for damages) then let’s be brave and look at the system itself. Maybe we need to go back to basic building blocks, such as the language of regulation.

I know many people still say that “on the whole things are sort of ok and it is worse in most other countries” (to paraphrase), but many others think it is this sort of lazy complacency across much of the system which was instrumental in what went wrong and in so much of # what remains wrong. If we don’t want it to happen again, and I heard yet another commentator recently saying there would almost certainly be another banking crisis in the time it will take to ring fence the banks, then principles as well as procedures ( not the same as box ticking) need to change very soon. I wonder what the 350,000 Spanish investors, whose holdings in Bankia have been virtually wiped out, think about this brave new world of investor protection? A bank which went public less than two years ago, should not, on any basis, now be worthless.

I have mentioned laws that are unenforceable and laws that are unenforced. I have also mentioned big sticks rather than measly carrots. Perhaps, if the massive fines levied on the banks last year are anything to go by, a lot of directors will have woken up and looked around. Whether in the UK these fines are as a result of the FSA flexing its muscles one final time before it disappears, or something else, it has certainly done something positive at last, and perhaps the size of the fines will indeed have an effect.

As I also said at the start, lack of responsibility and lack of accountability are two big issues for me. Playing the blame game, as so often happens, gets us precisely nowhere, but making those who ought to be, more accountable and responsible, might. I hope at least that the “shareholder spring” was not a one-off as I have mentioned. What I am sure about is that the inability of too many people in senior positions in business and elsewhere, to accept responsibility for their actions and /or inaction flies in the face of both formal and informal systems. For company directors these systems range from the FRC Governance Code, to the duties of directors codified and supposedly clarified by the Companies Act 2006. For others, different codes and rules will apply. However rules that are too complex and convoluted, just don’t work. Too many laws can often lead to an ostrich-like approach by owners, managers, directors, regulators and indeed other stakeholders. In addition the preservation of a cosy status quo, supposedly demolished years ago, still seems to be the way in which much of corporate Britain operates. The wish list I set out above makes a lot of sense to me and my team of feedback providers—at least to start a debate. If we get it, Chairmen, CEOs, Ministers, MPs and Regulators ought to start getting it as well. I am pleased to say that Stephen Bloomfield’s excellent new book on corporate governance looks at many of these issues in detail and pulls no punches. It is about time. It constantly amazes me that no-one has really analysed many of the key questions raised by so many people, but which have remained unanswered for too long.

Written By Nick Gould

For more information contact:

Nick Gould

E: nick.gould@collyerbristow.com