Article in the Sunday Times
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page 2Outgoing tormentor-in-chief of corporate miscreants, John McFall, has warned directors to put their houses in order
In his nine years as chairman of the influential Treasury committee, John McFall has taken few prisoners.
His grilling of bankers has produced a number of memorable moments. Matt Barrett, the former Barclays boss, admitted that he advised his children to steer clear of racking up debts with Barclaycard.
The deputy governor of the Bank of England, Sir John Gieve, was accused over the Northern Rock collapse for being “asleep in the back shop while there was a mugging out front”.
So it was notable that McFall recently used probably his last public address to call for companies — not just banks — to put their houses in order or face the consequences.
“The events of the past two years have shown that companies that are not properly controlled are not simply dangerous to themselves, they are dangers to the whole economy,” said McFall, who will step down as an MP at the general election.
“Unless companies improve their governance, or the institutions that ultimately own companies take steps to control them, pressure to legislate for such control will grow, and pressure for intensive, quite possibly inappropriate, regulation will build.”
Fine words — but what is the worst that could happen? At the moment, boardroom behaviour is governed by the Combined Code on Corporate Governance, with the get-out clause that they can comply with the rules or offer an explanation why they chose not to do so.
If boards flout the code, which is voluntary, then unwanted rules will follow. Just look at how quickly America brought in the SarbanesOxley act after Enron collapsed, to howls of protest from the corporate world.
McFall was speaking at a corporate-governance conference organised by the Institute of Chartered Secretaries and Administrators (ICSA), which has played a role in improving boardroom codes of practice.
As part of the review of the Combined Code, it was commissioned by the Financial Reporting Council to look at updating the guidance set out by Sir Derek Higgs in his recommendations seven years ago.
The institute believes that greater emphasis should be placed on the importance of the chairman. In addition, non-executive directors should provide a more constructive challenge to the chief executive.
“Effective boards are one of the main drivers of good corporate governance,” said Seamus Gillen, the institute’s policy director. “The ICSA’s final guidance will provide the framework for the way boards are run in the future and help directors understand how good governance is a key factor in delivering business sustainability and success.”
In the wake of the financial crisis that brought down several banks, Britain is awash with consultations over how to make sure it doesn’t happen again. Sir David Walker’s report into banking governance recommends a tougher approach to risk, by establishing a separate risk committee and including a risk report in the annual report.
The Financial Reporting Council has set itself at odds with the CBI and Sir Christopher Gent, chairman of Glaxo Smith Kline, the drugs giant, by proposing that directors should face annual re-election by shareholders.
Then there is a new stewardship code for institutional investors, or “absentee landlords” as Lord Myners, the City minister, labelled them. The ICSA’s review is not setting out to reinvent the wheel, merely to look again at what was laid out before the collapse. But its findings will be important too, according to members of the body’s steering group.
“We are looking at the way boards govern themselves and how directors interact with each other,” said John Coombe, chairman of Hogg Robinson, the business travel group. “How do you avoid those catastrophic decisions that we have seen the consequences of recently? I would be willing to bet that Royal Bank of Scotland fulfilled all the recommendations of the code.
“Maybe if you have a dominant chairman and chief executive, the non-executives might have concerns about the way things are being run. We need to remind senior independent directors that they have a place to go.”
Coombe also suggested that divisional directors who sit on the main board should be encouraged to speak up on issues right across the business, rather than only chip in on their own areas.
He is not alone in tackling the review. Sir John Egan, chairman of Severn Trent, the water group, is also on the committee, as is Peter Montagnon, director of investment affairs at the Association of British Insurers. Despite the heavyweight names, some experts are wary of what ICSA may conclude.
“By all means clarify some roles, such as chairman, but it is too easy to think that recent failings were caused by structural failings of boards or that tinkering with the rules will change behaviour,” said Richard Cranfield, chairman of the global corporate practice at Allen & Overy, the City law firm.
“In America we are seeing private equity and hedge funds being pilloried for the financial collapse, which was caused not by them but by an overheated property market. Let’s not make the same mistake here and lay the blame for recent failures at the door of Higgs or the UK Combined Code.”
However, Cranfield concedes that some changes around the margins of the guidance may help. ICSA’s consultation ends on April 16, with another draft due in June before its completed guidance is passed to the Financial Reporting Council in October to wrap into a revamped code. What would life be like if this one really worked?
“Well, I hope boards would become much more uncomfortable places,” said McFall. “I would like there to be a real challenge to management. I would like to see boards exercising much stricter control of remuneration. I don’t just want boards to be uncomfortable — I would like owners to breathe down directors’ necks.”
It all sounds very sensible. But whether or not companies eventually fall into line, they can take solace from one thing. As McFall heads into retirement, there will be one less person breathing down their necks. For some of them, perhaps that is part of the problem.