George Pitcher: Bad practices in industry need action not reports

Just as the Spanish have decried FIFA, so investors knock UK industry. But they are all party to it, so stop pontificating and do something about it, says George Pitcher

I write this before the World Cup semi-final between Germany and South Korea, but it seems to me that we will be facing one of two possibilities ahead of Sunday’s final. Either Germany are through and are under heavy security, drinking only bottled water and eating their own food flown in from non-Asian cooks in Hamburg. Or they will have lost, having had goals disallowed for “kicking the ball too hard into the back of the net” or having been made to use a ball filled with sand for the penalty shoot-out.

Either way, allegations of corruption at the top of FIFA, world football’s governing body, and bias among officials that have favoured one of the host nations will not go away. For one thing, the Spanish are unlikely to let it.

They do seem to have a point. Spain appeared to be flagged during their quarter-final against the Koreans for no better reason than they had red shirts or looked like they might win.

For all we know, FIFA’s policy of using match officials from minor nations may be a poor one. And there could be corruption. But it’s a bit rich for major football nations, such as Spain and Italy, to claim that it’s all a conspiracy within the beastly FIFA.

FIFA has long had a whiff of corruption. But Spain and other countries can’t complain that they are oppressed by it. The nations that comprise FIFA are FIFA. It is a democracy – it has a controversial president, but he was recently returned to power with a large majority.

There is no point in turning to any democratic institution in which you have a vote and saying “something must be done”, as though the institution has a life of its own. It is only the voters and those they put in power who can do that something.

The same principle applies with companies. Institutional investors are fond of chuntering about corporate governance and indicating that something must be done about the ways that UK industry runs itself. But these institutions collectively own UK industry – or, at least, their ownership of shares is significant enough to provide them with a very strong voice in corporate-governance debates.

Many of these investors are reluctant to take a leading role in these debates, for fear that they will be labelled “activists” – the point of investment, they argue, is not to usurp management. They invest in management; they don’t replace it.

That view might be sustainable if institutions were consistent. Not only are there some highly active shareholders in UK industries, who see it as their job to shake up incumbent managements, but there are some institutions that are highly selective about the management issues that they address.

You might think it plausible, or even likely, that investment institutions were most exercised about the gathering crisis in pension provision in flat equities markets. Or you might anticipate that major investors wanted to co-ordinate UK industry’s position on the euro. Or you might hope that investors’ first priority was to root out the kind of management practices that dissipate shareholder value (and that are said to corrupt FIFA).

But what do leading institutional investors get most worked up about? Executive pay. The International Corporate Governance Network (ICGN), whose members control some £6.7bn of corporate assets, has published a report that questions why executives’ remuneration packages are being structured so generously.

Apparently the idea of top executives being poached by US and other foreign companies if they’re not paid enough does not stand up. “That is so much goobey,” said Alastair Ross Hooey of the ICGN committee responsible for new corporate-governance standards (actually it’s Alastair Ross Goobey, but people with names like his should be more careful with their sound-bites).

Somewhat piously, the ICGN’s report states: “We cannot ignore the societal impact of what seems to be unfair or disproportionate rewards.” I think this means anti-capitalist demonstrations in the streets. The report is timely, coming after the collapse of Enron through greed and, more recently, the fuss over the £2.4m salary package for Vodafone chief executive Sir Christopher Gent, after a year in which the company spectacularly lost £13.5bn.

I’m not sure anyone outside Vodafone would claim that Gent’s salary is anything other than a bit silly and insensitive. One can only gasp at the thought of what he’ll take home as and when Vodafone actually makes a profit.

But what we think of Gent’s income isn’t really the point. Institutional members of ICGN, such as Capital Group, Fidelity and Barclays Global Investors, have enormous influence over the companies in which they are invested. They can virtually set rates of pay for top executives and sack them if they don’t perform. But they don’t. Instead they produce worthy reports on corporate governance.

A survey from the Co-operative Insurance Society, which invests some £24bn in UK industry, shows that more than half of FTSE-100 companies don’t have a fully independent remuneration committee to set levels of executive pay.

Institutional investors could insist that they put this right. The City needs to roll its sleeves up and get its hands dirty in UK industry, rather than write reports about it. It’s the only way we’ll do away with what we used to call Spanish – and I guess we had better start calling Korean – practices.

George Pitcher is a partner at communications management consultancy Luther Pendragon


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