The Hampel corporate governance report has surprising critics. John Plender detects a backlash.
The subtext of the Hampel committee’s preliminary report on corporate governance was that there was far too much of it about. But if ICI chairman Sir Ronnie Hampel was hoping to roll back the process that began with Sir Adrian Cadbury’s report in 1992, he must now be having second thoughts.
The committee’s assertion that accountability had played too great a role in the governance debate at the expense of business prosperity went down predictably well in quarters such as the Institute of Directors. So, too, did its commitment to substitute principles for detailed rules wherever possible. Yet these same points have run into a surprising degree of flak from respectable bodies.
The Institute of Chartered Accountants, for example, highlighted in its submission the opaque nature of a report that failed to indicate which rules would be abandoned in favour of broader principles. It called on Hampel “to end confusion in the business community about the relationship between its proposed statement of principles and the existing Cadbury and Greenbury codes”.
Corporate practice
The Institute of Chartered Secretaries might have been expected to praise Hampel. Instead it attacked the committee for failing “to bring clarity and authority to the debates on corporate governanceÉ the committee has chosen not to deliver a comprehensive statement of best corporate governance practice against which companies can justify their performance”.
Meanwhile, the National Association of Pension Funds damned the report with faint praise, while calling for increased powers for shareholders to challenge remuneration committees.
What really put the cat among the pigeons, however, was the response of Margaret Beckett, the president of the Board of Trade. With carefully chosen words she declared: “We want forms of corporate governance and company law that encourage companies to invest and grow – to take the long-term strategic view, and a broad view of their obligations.”
That could be interpreted to mean that she entertains a greater sympathy than Hampel for the stakeholder view of the company, in which management acknowledges responsibilities to a wider group than just the shareholders. The reference to a long-term strategic view suggests implicit scepticism about claims that short-termism is an illusory problem.
Equally important, Mrs Beckett clearly sees corporate governance as a potentially helpful spur to investment and growth. We will have to wait for her response to the final report to know what she means by this. But this does not suggest that she shares the presumption that runs through the Hampel document that prosperity and accountability are inimical.
One of the oddities of the report was its cavalier declaration that there was no hard evidence that good governance is conducive to business success. A glance at the property sector of the stock market over the past decade and a half would, at the very least, confirm that there is a correlation between bad governance and corporate underperformance.
Institutional shareholders have been remarkably tolerant of tired managements and have placed excessive reliance on takeovers as the remedy of first and last resort to get rid of the property sector’s duds.
Hampel’s scepticism is doubly strange given that the committee took expert advice on practice in the US, where research carried out by Wiltshire Associates and others for CalPers, the big Californian state pension fund, provides plenty of evidence that good governance pays dividends.
Even more interesting is the experience of Robert Monks, the US shareholder activist who set up the Lens Fund with a view to using corporate governance as both a screening device for investments and an active technique for generating shareholder value. The fund’s compounded annual return in its first five years has been 26% – nicely ahead of the S&P 500 index.
Monks’s style is, where necessary,hands-on. At the US conglomerate Stone & Webster, for example, the fund replaced eight directors and two CEOs, divested non-core businesses, revamped the company’s financial reporting and created a nomination committee. Result: the stock price rose 52% in 12 months.
Power vacuum
Such radical activism serves to highlight the point that an active approach to corporate governance is still rare in the UK. For a start, the National Association of Pension Funds’ own surveys show that a majority of its members still do not cast any votes on AGM resolutions.
So while Hampel complained that corporate governance was too much taken up with “box -ticking”, the boxes are, in reality, largely empty. Small wonder we have so many boardroom pay awards that bear no relation to performance. There is a power vacuum at the heart of the system which leaves management with a high degree of autonomy.
Nor do active value investors exist in the UK with ambitions to rival those of Monks, who has been happy to take on such US giants as Sears, Kodak, American Express and Corning.
Yet this is likely to change – not least because Robert Monks himself is eyeing the UK market with a view to repeating the success of the Lens fund. The property sector would offer him some interesting opportunities. And it would not surprise me if some of the businessmen who sat on the Hampel committee featured as targets on Monks’ hit list before too long.
Plender’s Perspective
