This hot weather, combined with my
post-holiday indolence, has meant that all I’ve managed to do for the last week
is keep on top of email and catch up with some admin tasks. Today is cooler
though, and I was up early reading two big new documents.
First, the 514 pages of the third report
from the House of Commons Business Innovation and Skills Committee on the Kay
Review of Equity Markets and Long-term Decision Making.
Following the web streams of the
Committee’s hearings can be as fascinating as a soap opera but this document
contains transcripts of the hearings as well as copies of all the written
evidence submissions – a wonderful resource for anyone wanting to analyse in
detail the responses to the Kay Review and the progress made in implementing
its recommendations.
The Kay Review was a clearly written and penetrating
analysis on which a series of recommendations were based. The Government
response, while appreciative and supportive, has not led to any positive action
so far and the BIS committee is critical of this. This report contains comments
from Lord Myners who conducted a similar review more than a decade ago and is
rightly disappointed that no action followed his recommendations either. The
committee states that:
It is a huge
disappointment that previous Governments have not implemented the
recommendations of previous works nor have they kept regulation in line with
the rapidly changing nature of equity investment. There is no point in
commissioning a Review of the industry unless the Government is challenged to
move forward and make radical changes to align the incentives facing every link
in the investment chain. The Government has to deliver on the recommendations
made by Professor Kay and the issues raised by his analysis. It must bring
forward proposals to enhance the culture of long-termism, transparency and
accountability.
Fine words but it remains to be seen
whether there will be any government action. I wouldn’t bet on it….
I was interested to see that there is only
one mention of the role of non-executive directors, arising in the discussion
of whether major investors should be consulted in the appointment of
executives. On p 21:
We asked Harlan
Zimmerman, Senior Partner at Cevian Capital, how the
current
appointment system could be improved and how external forces should influence
the decision. He told us that it was not necessary for shareholders to be
represented on the boards of companies because the non-executive directors were
supposed to be fulfilling that role.
However, he went
on to explain that the role of non-executive directors had been ignored and described
the fact that this was overlooked by Professor Kay as being “the single biggest
problem” with the Review: “Fidelity, even with the best will in the world,
cannot look after the day-to-day operations of thousands of companies, so we
have nonexecutive directors who are there, who are supposed to be doing that
job for us. Now, the companies will say they do consult with their major
shareholders on nonexecs, and the asset managers will say that they do consult
as well, but the reality is that when that happens it is a very superficial
consultation in most cases. It very often takes the form of a Sunday night call
before an announcement on Monday. If you look at one single damning fact,
director elections here in the UK for nonexecutives are a rubber-stamping
exercise.
I found that all a bit confusing, even when
I read the detailed transcript. But it does suggest that major investors have
expectations of NEDs that may not be satisfied, possibly can never be
satisfied, even if investors have a specific involvement in NED appointments.
Makes me wonder if the corporate governance focus needs to shift away from
shareholders and back to directors, not in the sense that boards are not
performing properly, which was a driver of Cadbury, but to re-examine the legal
duties of directors to see if they need to be rethought in the context of the
development of the investment intermediary chain.
The discussion about narrative reporting on
p 74 reminded me of the BDO Terrapinium exercise, which I haven’t yet had a chance
to study but looks very interesting:
The second report was shorter: Good
Governance in the Public Sector—Consultation Draft for an International
Framework, published by CIPFA and IFAC.
This proposes a framework of seven
principles to underpin “good” public sector governance. Its scope is
international which is ambitious and the report recognises that the public
sector and the size and structure of the organisations it encompasses will
differ widely across the world. The principles are simple enough:
2.1. The
function of good governance in the public sector is to ensure that entities act
in the public interest at all times.
2.2. Acting in
the public interest requires:
A. Strong
commitment to integrity, ethical values, and the rule of law; and
B. Openness and
comprehensive stakeholder engagement.
2.3. In addition
to the requirements for acting in the public interest, achieving good
governance in the public sector also requires:
C. Defining
outcomes in terms of sustainable economic, social, and environmental benefits;
D. Determining
the interventions necessary to optimize the achievement of intended outcomes;
E. Developing
the capacity of the entity, including the capability of its leadership and the
individuals within it;
F. Managing
risks and performance through robust internal control and strong public
financial management; and
G. Implementing
good practices in transparency and reporting to deliver effective
accountability
Having set these out, the paper continues
with more detailed guidance on organisations might follow the principles with
some checklists and some examples under each one. I don’t think anyone would argue with the principles
but I think it’s quite difficult to distinguish between governance and
management in some areas. More food for thought on whether this matters, as I
discussed in my MARG presentation. I hope I manage to get all these ideas into
a paper eventually.
And now I need to write some comments on
this:
More principles! One problem that the
Cadbury Committee encountered was the demand for detailed practical guidance on
how to apply principles, which rather undermines the whole idea of a
principles-based approach which is intended to allow report preparers to use
their initiative and tailor their reports to specific company situations.
Perhaps the answer lies in some sort of Socratic dialogue…
