32 years after the Cadbury Report defined modern corporate governance rules, corporate scandals continue to happen. Another version of the Corporate Governance Code came out in January with yet more minor changes. Why isn’t corporate governance working and why do corporate failures keep happening? Growing frustration is leading to demands for ever more regulation, but we’ve actually already got the benefits from good governance. Added pressure...
Risk simply means that we are not sure about what will happen in the future. If you know everything about the future, you haven’t got any risk. However, if you are mortal like the rest of us you are constantly wrestling with what might, or might not happen, in the future. That’s risk. Then you think about what you might do to influence or respond to the future event. That’s risk management. Risk management isn’t about having a risk committee or...
At the very last minute the Insolvency Service, acting for the UK Government, has just abandoned disqualification proceedings against five former non-executive directors of Carillion, which collapsed in 2018. This is a massive relief, not just to those individuals, but to the whole non-exec community as it would have put full responsibility on all non-execs and audit committees to detect and stop hidden executive misconduct. Three ex-Carillion...
A new academic study (1) is challenging one of the central policies of gender diversity -boardroom quotas for women. They have been the central plank of the push for diversity in business, not just to promote more diversity in the boardroom, but also to encourage it below the board. This study challenges this. It argues(2) that mandating more females on boards actually reduces diversity, because men don’t like them and take revenge on other...
A company with just £24m annual revenue goes bankrupt with £1.9 bn of debts and a further £0.6m financing commitments. It made two appallingly large and risky investments that, not surprisingly, went disastrously wrong. It should have made national headlines amid demands for prosecutions and disbarments, as well as calls to tighten company law and the Corporate Governance Code. Except that it isn’t a company. It’s a local authority, Woking...
Business is plagued these days with academic studies that come up with sensational conclusions, usually based on statistical regression. Many seek - and often get - wide media coverage if their claims are wild enough. To experienced business people, these reports usually draw a wry smile. If having greener policies or more diversity or better governance really were such sure drivers of financial success, life would indeed be easy. However, I...
In case any of us forget the importance of good corporate governance, have a look at the administrator John Jay III’s declaration* on the collapse of FTX, a company once valued at $32 billion. The governance was so bad, you might smile at some of this, but remember that a vast number of people have lost a lot of money. I’ve added a few signposts for each quotation from the report, and a few conclusions at the end: A damming summary; “Nearly...
Making better decisions is the holy grail of the boardroom. Corporate governance is full of rules and procedures, but very little on actual decision-making. There is however considerable academic discussion of good decision-making. A really interesting example of this was published by Stanford Graduate School of Business in their ‘All Else Equal’ series: ‘The Path to Good Decisions Starts with Data’. Their basic tenet is pretty unarguable: Good...
Lucy Tobin’s article in the Evening Standard drew my eye. Share buy-backs have always seemed to be controversial amongst commentators in the UK, and this article is yet another to criticise them. Let’s look at the arguments being used and see if they stand up to scrutiny. Why do buybacks? The Evening standard claims: ‘Buybacks ostensibly come about because a company believes it is a great investment, its shares are cheap and it’s an excellent...
https://www.piworld.co.uk/education-videos/piworld-interview-with-simon-laffin-secrets-of-the-boardroom-what-every-investor-should-know/
I joined the board of Northern Rock a month after it suffered its humiliating run featuring long queues of anxious savers. This was my first non-executive role, despite having been a FTSE 100 Finance Director for ten years. As I sat in the board, surrounded by worried-looking bankers and lawyers, I realised how much I didn’t know about being a rounded board director. Too many directors are appointed with little or no board-specific education....
“Fears over Morrisons estate being sold on cheap…The shops, warehouses and factories owned by Wm Morrisons could be worth almost £9 billion – double the value the supermarket chain believes they are worth, raising concerns that a buyout firm could seize the assets on the cheap.” – Times 7 July 2021 So what is the value of Morrisons property portfolio and should this inflate the price that bidders pay for the company? Morrisons balance sheet...
How do we improve corporate performance and avoid more corporate failures? The government is clear: We need more regulation. ‘Restoring trust in audit and corporate governance’ is the promise of the current white paper, whose consultation period ends on 8 July. It’s an extensive list of some 90 new regulations; ranging from mandating joint audits, new company disclosures, increased director accountability to stretching regulation to many more...
There is a lot of discussion at the moment about the legacy of Sir Ken Morrison and whether would have approved of a private equity bid for his company. I got to know Sir Ken during his protracted takeover of Safeway (where I was CFO), so it is worth revisiting his legacy. Sir Ken's career is sometimes viewed as 50 years of success, until at 73 he led the 2004 Safeway acquisition followed by four difficult years until retirement. He built up a...
Two successes from the pandemic have been the ‘Recovery’ treatment trials and new vaccines. Medical experts suggested possible options, tested each in blind trials, with the most successful treatments (such as dexamethasone) identified and rolled out globally, and changes made with real-life experience. Millions of lives are being saved thanks to evidence-based medicine. Fortunately, the medical profession didn’t commission inquiries to find...
https://youtu.be/oNJetz62YMY
https://www.youtube.com/watch?v=s9SPeJOdQnI
Tesco has proudly announced that it is the first UK retailer to offer sustainability-linked supply chain finance. That sounds great, well done Tesco! But wait a moment. What does this really mean? Supply chain finance is used when a company takes so long to pay its suppliers that they have to borrow money to finance themselves. Suppliers can borrow against the amount of money that Tesco owes them, but of course, the suppliers have to pay the...
https://youtu.be/yEAbWFW7N0A
A fascinating piece of academic business research1 was posted on Linkedin. Not normally an aficionado of academic papers2, I couldn’t resist reading it. The title ‘Role of Old Boys’ Network and Regulatory Approaches in the Selection Process for Female Directors’ lured me in. It promised fascinating research into gender diversity on boards, something I am passionate about. Now I don’t suppose they have a Trade Descriptions Act on academic...
Tesco, like Dominic Cummings, has a home in Durham, but not in Barnard Castle. Also, like the No10 guru, Tesco has come in for a lot of criticism about its application of the pandemic rules. It is banking £532m COVID-19 full year rates rebate, despite actually benefiting in many ways from the lockdown. As a result, it is now paying a bumper dividend up 21%. Is Tesco as short-sighted as Cummings? There are not many companies at the moment in the...
The much-awaited Brydon Report was published just before Christmas. It didn’t get much publicity, as the festive season proved more alluring than yet another long report and profusion of recommendations on corporate governance. In a sense, this was a pity as this ambitious report contained over 60 wide-ranging recommendations that would have considerable impact on auditors and boards. It also needs to be seen as part of an avalanche of changes...
I am responding to the request from the Government for views on the recommendations by the Competition and Markets Authority on the market for Statutory Audit Services. This submission is made in a purely personal capacity. Over the last 25 years, I have been chairman or director of ten different companies, from small privately owned to FTSE100, participating in over 200 audit committee meetings. I have never worked for an auditing firm, big or...
What if the government insisted that every time you bought a tin of Heinz baked beans, you had to buy at least half a tin of Crosse & Blackwell ones too? You would have to explain to the grocery regulator why you chose Heinz, and if it thought that your choice was the wrong one it would mandate you to buy differently, publicly shame you and even take control of your grocery shopping as a punishment. You might not feel so great about it, but...
Storm clouds are gathering over the audit market. Government, politicians, media and regulators are all queueing up to condemn companies and auditors over the few, but well-publicised, failures of certain companies. Lack of knowledge about the audit process is no bar to these opinion-formers. Meanwhile industry bodies are supine in defending business and signally failing to provide the missing knowledge as to what actually happens and what went...
The FRC has set out new proposals for more corporate governance regulation (the Wates Report) for large private companies. This is my response to the consultation. Summary High quality regulation should focus on outcomes and provide evidence to support new rules and principles. Both the government and the FRC seem to be impervious to either. The Wates proposals identify neither outcomes nor evidence. They require private companies to disclose...
The collapse of Carillion was a tragedy, especially for its 45,000 employees and 25,000 pensioners. In an earlier article, I looked at its last Annual Report to see if there had been clues that could have tipped readers off to the impending catastrophe. Since then, we have had Select Committee hearings and their January 2018 turnaround Business Plan has been released. This now gives quite a bit more colour to understand better what happened and...
Carillion has entered the pantheon of cursed companies following its recent failure. Politicians and the media have worked themselves in another fit of righteous indignation about greedy management and incompetent boards. The search is out for people to blame, shame and even prosecute. Regulators, sensing the flow of the political wind, are climbing on the bandwagon and looking for blood. Non-executive directors are reasonably enough feeling...
I gave a nervous laugh. The headhunter asked me if I would like my first non-executive director role, joining the board of Northern Rock. It was October 2007, a few weeks since the first run on a UK bank for 150 years. Struck by an uncharacteristic sense of adventure, I did indeed agree to serve on the Northern Rock board for the next year, becoming Chair of the Audit Committee, through the various bids, nationalisation and the rebuilding of...
It won’t be long into your first non-executive job when you start to feel as if the executives resent you. It’s okay. You haven’t become paranoid. They really do resent you. Why? Being an executive director is a tough job. You work all the hours that the Working Time directive allows, then you opt out and work some more. The market is very tough and competitive, and you end up making numerous difficult decisions. You do this for a couple of...
“I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors who are supposed to ask the difficult questions, think about the long-term and defend the interests of shareholders. “In practice, they are drawn from the same, narrow social and professional circles as the executive team and – as we have seen time and time again – the...
Grant Thornton has just published a Report comparing the effect on corporate return on assets (ROA) of having women on an executive board across three countries (UK, US and India). It concludes that such diverse boards cause companies to perform “Materially better”. The report quantifies the economic benefit from having more women executives on boards as “a staggering $655 billion”, boosting GDP by 3%. Now that’s some benefit just from changing...
What drives corporate governance regulation? Is it media focus, political pressure, or a need to ’do something’? Or is it sound analysis leading to thoughtful prescriptions? I suspect that pretty much everyone accepts that the answer is somewhere in the former list. Why does it have to be like this? Evidence-based medicine is a well-established movement in health care. Even the UK Government published a White Paper in 1999 (“Modernising...
Right Reverend Host: “I’m afraid you’ve got a bad Egg, Mr Jones!” The Curate: “Oh no, my Lord, I assure you! Parts of it are excellent!” A ‘curate’s egg’ was originally something that is described as having good parts purely out of politeness, but nowadays, is taken as something that is good in parts. Perhaps this is an apt description of the Brydon Report, set up by the government to be a fast review of auditing and governance in the...
Corporate Governance
Economics
Notes From A NED