SBHD: When it comes to running British business, the players in the boardrooms should be accountable to the public, not layers of regulatory bureaucrats.
The gutters of British management ran red last week and, in the wake of the Saatchi show, it was interesting to see how real business behaves when the gloves come off.
True, it looks unlikely that key executives will follow deposed Kingfisher chief executive Alan Smith and finance director James Kerr-Muir to found The New Kingfisher Company, but we should still be aware that their departures from the Ãº2.7bn retail combine were accompanied by far less playing to the gallery than that performed by the Saatchi refuseniks.
Similarly, you wouldn’t expect the resignation of the chief executive of the mighty Prudential Corporation to have been conducted with anything other than decorum. Mick Newmarch could teach the shrill voices of renegade public company directors a thing or two.
Those public company directors who had no choice but to play to the gallery last week were the ones facing the parliamentary Employment Select Committee – British Gas chief executive Cedric Brown and Eastern Group chairman Dr James Smith (the fearless MPs couldn’t find time for Sir Desmond Pitcher, chairman of North West Water, who must wait for his day in court later this month).
Meanwhile, we have Sir Richard Greenbury and Tim Melville-Ross of the Confederation of British Industry and the Institute of Directors, respectively, shooting their mouths off on the subject of executive pay before the CBI/IoD committee convened for purposes of examining the subject has heard a word of evidence. Anyone would think they were MPs.
All in all, it was an extraordinary week for British boardrooms, and one that raises important questions of what is pompously known as corporate governance, but, more prosaically, could be described as how we are going to run British business in the post-modernist climate.
By post-modernist, I mean the school of British commercial life that has emerged in industry post-privatisation and in the City post-self-regulation. I suggest that a dangerous cake-and-ha’penny attitude has developed in the wake of Thatcherism. In an indolent political climate, we demand an invigorated private sector (even the new Labour Party wants that), plus accountability through overweening regulatory structures and strictures.
Take parliament as a sort of regulatory structure of the last resort. We have a Government that propounds free-market principles, challengeable only by shareholders and the law, while select committees have the sort of powers to subpoena witnesses from industry in the style of a Star Chamber.
Through this latter parliamentary structure came the circumstance of last week, whereby Employment Select Committee chairman Greville Janner waves a sheaf of papers at Eastern’s Smith and demands to be told why they have been given to the Committee marked “confidential” when any shareholder may have access to them. Janner declared that this was one of the “most ridiculous” things he had ever heard.
For this to be one of the most ridiculous things that an MP has heard stretches the imagination – Janner cannot have been listening in the chamber of the House. What Smith had rehearsed was the whole point of shareholder democracy. You enfranchise yourself with a public company by buying its shares – that is why you can vote on its resolutions. You disfranchise yourself by selling the company’s shares. Even if some members of the Employment Select Committee are Eastern shareholders, they were not being supplied with company information in that capacity. Hence the information was confidential. Simple.
A select committee is about as interventionist as it is possible to be. But not in the Michael Heseltine sense. The role of committee members is as scrutineers, not suppliers of aid and controls for industry.
However, there can be no doubt that the Employment Select Committee sought to intervene in the running of the companies before it.
Janner and his colleagues will come up with a report, based on many of the misconceptions that it perpetuated during its open session and ensured were repeated and reinforced in some of the lazier media overnight. And its very existence is supposed to have some interventionary effect on top executives’ pay. We can expect a slap of the wrists at one end of the scale, the prospect of an incomes board at the other, if Labour warms to its executive pay controls theme under the direction of Gordon Brown.
Such an appetite to control the free market when it suits is far from confined to Planet Westminster. The City has, of late, demonstrated considerable aptitude for burdening the reputable, while signally failing to convict the villains (most of you, I imagine, can list three).
The recent experience of the Prudential is a case in point. Newmarch found his position untenable because he favoured a statutory regulator – in the image of an American Securities & Exchange Commission – over the system of self-regulation, embodied of late by the PIA, which patently doesn’t work.
Note that this was not, in the end, an issue for shareholders – or only in so far as Newmarch endeavoured to serve the interests of his shareholders and was frustrated by bureaucrats in Whitehall and the City. His resignation also coincided with continued questions regarding his dealings in Pru share options last autumn. There is no suggestion that anything illegal occurred, but this was apparently the final straw in Newmarch’s back-breaking burden of regulation.
Legality, of course, is central to any type of regulation we want for British boardrooms. No one should suggest that directors ought not to be subject to limited legal requirements, the breach of which should bring rapid and effective response. But what we don’t need, and shouldn’t want, are layers of regulatory bureaucrats, whose role is to intervene on behalf of some ill-defined public piousness.
Which brings me back to Kingfisher. As I understand it, Smith proved less effective as chief executive at Kingfisher than he did as a director at Marks & Spencer and, along with the finance director, was ousted in a nettle-grasping exercise which saw Sir Geoffrey Mulcahy step back into the role.
In other words, Smith didn’t last because non-executive directors – on behalf of the shareholders – believed he wasn’t up to it. That is real self-regulation, because it is regulation on behalf of shareholders rather than self-righteous regulatory bureaucrats.
It’s an important distinction, because it prescribes how we choose to govern companies. I favour shareholder power for anything not covered by company law. And that, incidentally, should go for Saatchi too.
George Pitcher is joint managing director of media consultancy Luther Pendragon.