Investors Asking Questions = Better #CorpGov ?

 
We are delighted to welcome a guest blog post from Dina Medland . We hope you enjoy this investor-oriented perspective.  

We shall be adding more investor perspectives.

 




As one might expect, any institutional investor is capable of asking questions that will concentrate the mind of a publicly listed company. Would that more would do so - in a non-specific manner if preferred, but publicly. It's all about having an ongoing, relevant and timely debate around corporate governance, and better run businesses.


The innovative UK consultancy Board Intelligence  (@boardintel) held one of its regular think-tank events in London this week. This one involved a select group. Attendees in senior positions from public and private sectors agreed that there seems to be a 'bubble', a 'disconnect ' between our boardrooms and the reality out there - the way business is viewed by the society within it sits. The only way to break that 'bubble' is to have genuine, and transparent wherever possible, debate - and come up with potential new ways of doing things.

The question is what to do next. There are many potentially troubling issues around the UK's boardrooms.

This week institutional investor  Legal & General Investment  Management (LGIM) came out strongly on two of them - cybersecurity and board evaluation and review. The link will take you to some thoughts on the first issue.

Board evaluation is one of those issues that evokes comment from regulators from time to time, but is very slow to change, beyond lip service. It has taken years for anyone even to pay serious attention to the fact that executive search firms responsible for placing non-executive directors in the boardroom have also been earning fat fees 'evaluating' the same individuals. Enough said.

This blog has expressed views on evaluation from the start - the search engine does work, take a look. At the start of 2014, it got excited about the possibility of  a new code around the evaluation of boards. I got even more excited about being approached directly by Anthony Fry, a Chairman, with his thoughts.

Mr Fry has not been in the best of health, or I would have gone back to him. Would that more people in leadership positions at the top in boardrooms would reach out so naturally with their ideas, as he did.

But, despite my best efforts - with his help- to create a little kerfuffle around this issue, nothing seems to have progressed since the start of the year. Is it because there are too many vested interests at stake ?

Enter LGIM. First, the diplomacy: "Behind every successful company is an effective board. It's a message we've been spreading for many years which is why we welcomed the Financial Reporting Council's decision to officially require FTSE 350 boards to be externally reviewed every three years. However, four years after these reviews were brought in, there are still big variances in the process - namely, wide variation in the ways that reviewers work and how companies share the results with shareholders" says Sacha Sadan, its Corporate Governance Director.

Sacha Sadan, Director Corporate Governance LGIM

LGIM goes on to say that it "expects all board reviews to be rigorous and a value-adding exercise", not a 'tick-box' one. "A set code of practice should provide the necessary frameork to ensure minimum standards are upheld and that potential conflicts of interest are managed appropriately" says a press statement.

As far as I am concerned, it gets better. "LGIM has suggestions on what should be included in such a code. At the very least, minimum standards should help to ensure that the purpose of these reviews are more balanced between investors and companies, rather than tilted towards management."

What was that about 'stewardship'? And - as I take a quick peek at Twitter tonight what do I see ?
@manifestproxy: No quotas, no regulations, just S/H action: LGIM may vote down director elections on diversity from 2015 http://uk.news.yahoo.com/legal-general-im-may-vote-down-director-elections-143744321--sector.html#NnEpML8

Ah yes, diversity too - Perhaps this is one way to get quicker change when it comes to corporate governance.

Dina Medland
http://www.dinamedland.com
Original article posted October 2014 

Managers are Chief Bribe-Givers

The OECD has published a new report analysing 427 concluded bribery cases over the last 15 years.  The results are striking.

• In 12% of cases, the CEO was aware of and endorsed the bribe;
• In 41% of cases, other members of management were aware of and endorsed the bribe;
• External intermediaries such as sales agents and distributors were involved in 41% of cases;
• 57% of bribes were paid in relation to public procurement and
• 41% of cases related to bribes paid in well-developed countries.

It is a surprise that bribery is a phenomenon of well-developed countries, but it is a shock that most bribery efforts are approved by mangers or the CEO.

The root causes of bribery have to do with behavioural and organisational risks such as leadership on ethos and values, actual leadership ethos and behaviour and incentives at all levels.  Organisational complexity may leave the board in a rose-tinted bubble, unaware of the extent to which operational units - which may share a language and a country or be in far-flung places - are very different from themselves. Failures in all these areas have their origins in the board, and we suspect that it will not be long before boards themselves are pursued by prosecutors.

All large firms concentrate on bribery as a risk issue.  But how many focus systematically on the root causes?

In our experience, even after the Financial Reporting Council  has made behavioural and organisational risks a board issue, too many Chairmen and Company Secretaries are reluctant to investigate the extent to which their risk management systems have a hole where behavioural and organisational risk should be.

Until they fill that gap, boards will continue to find themselves regularly surprised by the latest crisis to hit their firms.

We won't be surprised: one of the striking findings of 'Deconstructing failure' was that boards' 'inability to engage with important risks to the business' was a root cause of 85% of the crises studied. 


Anthony Fitzsimmons
Reputability LLP
London

Anthony Fitzsimmons is Chairman of Reputability LLP and, with the late Derek Atkins, author of “Rethinking Reputational Risk: How to Manage the Risks that can Ruin YourBusiness, Your Reputation and You”