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Chairmen do protest too much

We can learn from the summer we have been enjoying this year. Areas of high pressure suck in wind and bluster, and the same, it seems, applies to the Higgs Report on non-executive directors. Now that the report has been finalised, we can look back and wonder in amazement at some of the daft things that were said.

The Combined Code now exists in its final form and we can move on. The whole ethos of ‘comply or explain’ will settle down. But it is important to look back at the sort of turbulence we had over the first six months of the year and analyse what brought it about, because it was the sort of episode that discredits the business world.

To outsiders, much of what was being suggested would, had they read it, have seemed like common sense. But the spectacle they would have viewed would not. Every successive wave of corporate governance reform comes with two predictable consequences. First the majority of companies in the FTSE-100 will announce they welcome the reforms because they are, in effect, a codification of best practice and so each particular company commenting is already high up there on the best practice charts. The second thing that happens is that a number of chairmen – the most pompous and self-important ones – announce that the new reforms are an absolute disaster, that they will lead people to concentrate on these nonsensical reforms rather than remaining focused on the business and that an outbreak of box-ticking will ensue.

The latter is one of those self-fulfilling prophecies. If this is really what they think, then they are bound to bluster about it so much that a significant number of people in the organisation will fulfil their wishes and reduce the reforms to useless bureaucracy. It doesn’t do to fall out with this type of chairman. If he expects useless bureaucracy to be the result, then that’s what he will get.

All this is just knee-jerk reaction, honed to perfection over the years since Sir Adrian Cadbury first embarked on the reforms that followed the great corporate scandals involving Robert Maxwell, Polly Peck and a host of companies and people which, if they still existed, would be providing the sort of nonsense we heard post-Higgs.

This comes about partly because a fairly consistent percentage of chairmen love the limelight and know that a smattering of well-polished cliches will create headlines. What they never understand is quite how much damage this does when viewed by everyone else, from the DTI to the sceptical investor. They love to portray themselves as spokesmen for business in general. It all harks back to the culture of the 1960s, which was prevalent when they all started out in business. Those were the days of tycoons.

These people covered up the ethical failings of their businesses with a swathe of cigar smoke and promulgated bullying rhetoric, while portraying it as business wisdom. The result was our emphasis now on institutional shareholders and investor relations.

What the short history of corporate governance reform also shows us is that the chairmen who bluster and produce most of the hot air are also the ones who preside over a slumping long-term share price. But then we should expect that as a given. We all learned from our early days at school onwards that the bully who shouted the loudest was invariably the most unreliable in the group and the least likely to provide solid achievements.

There is valid criticism of the long-term effect of the reforms – that risk is being squeezed out of the largest companies. The bigger they are the more the pressures are now loaded toward being safe rather than sorry.

But somewhere on that spectrum lies the point where a risk could be taken that would propel the company and, for its investors, the share price forward. Frequently, that step may not now be taken. This is simply a reflection of the current trends within society generally. From the railways to the supermarket sell-by dates, there is an inexorable squeeze toward a safety that goes beyond rationality. It should not be surprising that the public expectations of companies are not immune to this process. This is why there has been such a boom across the last decade in investments at a local level in small companies that can – by the nature of their size, ownership structures and types of markets served – take much more in the way of risk.

The lessons that all the hot air over Higgs should provide are those advocated by Derek Higgs himself: “This is not about science, it’s about people,” and that is why the simple ‘comply or explain’ principle is so powerful.

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