Shareholders are getting more information but do they feel they are being served?
This article first appeared in Aimzine, www.aimzine.co.uk
I’m not sure why but I look back on the 1970’s with a degree of nostalgia. It could be the three day week resulting from the miners’ strike, or the country declining to the brink of bankruptcy or the ever present threat of nuclear annihilation. I suspect though that, as a child at the time, part of the nostalgia is down to having shared experiences such as most of the country simultaneously watching programmes like “Are You Being Served?”. So it was with some momentary sadness that I read of the death last month of Trevor Bannister who played Mr Lucas in the series. Another 70’s great passes away even though most of us probably never realised he was still alive.
Roll forward to the late 1980’s and the miners had been defeated in the return leg of the strike fixture, the economy had been brutally beaten into shape and as the USSR disintegrated, nuclear annihilation suddenly became further into the future than just four minutes. It was around that time that I was approaching graduation and wondering what I could do with my life to avoid practising my degree subject of pharmacy. I started to consider accountancy amongst other things, and one of the ladies I worked with in Boots during my pre-registration training suggested I have a chat with her son, Chris Lucas, who had joined Price Waterhouse a few years earlier. I met with Chris and his enthusiasm for accountancy was a key factor in my subsequently joining the profession, albeit with the slightly cuddlier firm of KPMG.
I haven’t seen Chris Lucas since but to be fair to him he hasn’t really been free. He’s been busy firstly rising to partner at what is now PricewaterhouseCoopers, then to Head of PwC’s Banking Practice, being the lead partner on the Barclays Bank audit, and then more recently becoming Group Finance Director of Barclays.
Close monitoring
With an audit partner becoming the Finance Director of a client, there is always, quite rightly, a closer monitoring of the individual’s role and whether the gamekeeper turned poacher has any implications for corporate governance and financial reporting. In this case, to their credit, Barclay’s dealt with the potential issue by appointing Sir Michael Rake as a non-executive director not long after. Sir Michael was previously Chairman of KPMG International and is one of the biggest hitters in accountancy circles.
We don’t know what impact Sir Michael has had on the governance of Barclays. In fact, shareholders seldom know what is happening behind the scenes in a company. Annual Reports and trading updates often refer to business activities in a rather perfunctory way. Although, regulators have tried to change this by requiring companies to discuss business operations and risks in more detail there has seldom been any discussion about why the numbers reported are as they are.
That box-ticking landscape began to change recently because Sir Michael as head of the Audit Committee of Barclays wrote a few paragraphs in his Audit Committee report about certain judgements the Committee discussed with the auditors. Whilst not very long this section highlights five issues which could have been accounted for differently and, if so, would have had a material impact on the numbers that Barclays subsequently reported for 2010.
Although shareholders cannot work out what financial impact there would have been if the issues had been accounted for differently they do provide an invaluable insight into the prudence applied or otherwise in preparing the accounts. This is the type of information which hitherto never went beyond the audit committee, board and auditors.
Methods and judgements
No doubt Sir Michael’s decision to introduce this improved reporting may be connected to a document issued by the Financial Reporting Council on Effective Company Stewardship (1) which is well worth a read and, amongst other things, highlights the reliability of financial statements being increasingly dependent on matters such as “the methods and the judgements made in valuing assets and liabilities”. In Barclays case for example, whether the fall in value of its investment in the fund manager Blackrock (to which it sold Barclays Global Investors) should be charged against reserves or go through the profit and loss account and hit earnings per share. Not surprisingly, Barclays chose to take it through reserves and not through the P&L, but at least it was highlighted and there was a rationale given for that decision.
Unfortunately, the significance of this improved reporting and of Barclays leading the way has been drowned out by the continuing public and shareholder anger at banker’s bonuses; the 2010 bonus pool at Barclays was £2.6 billion compared to dividends to shareholders of just £645 million.
So, whilst Sir Michael deserves a knighthood if he didn’t already have one, important improvements such as this one will be overlooked if more pressing business issues aren’t addressed by management teams, and if shareholders continue to feel that they aren’t being served by the people their company employs. In the case of Barclays, if Mr Lucas is free he might want to consider whether the cost of bonuses at this level makes business sense or whether a rebalancing with the dividend might prove to create more shareholder value.
(1) http://www.frc.org.uk/images/uploaded/documents/Effective%20Company%20Stewardship%20Final2.pdf
Saturday, 7 May 2011
Wednesday, 16 March 2011
Porridge for business leaders
If prison is a good deterrent to business crime why don't we use it more?
This article first appeared in Aimzine, www.aimzine.co.uk
Although I regard myself as very tech-savvy I’m not an avid Facebook user. Therefore I rely on old-fashioned techniques such as email and the telephone to keep in touch with what friends are up to. Recently though, one of my best friends from school was the subject of an article in the Evening Standard, which at least saved me a phone call. I say school friend but it will become apparent why I now need to refer to him as an acquaintance or even just someone I vaguely knew. “Oh, him. Yes I think I spoke to him once or twice”, I’ll have to respond when people question me about our secondary school friendship.
The reason is that he, let’s calls him PS, was in a crown court recently facing charges of fraud. It seems that his persona of being a successful property developer turned out to be a house of cards. The stunning home he and his wife owned (albeit partly with a fraudulently obtained mortgage) in the Guildford countryside, along with the obligatory Porsche and Land Rover parked outside, were funded mostly by asking parents from his children’s exclusive independent school to invest in his property empire that never was. Many “investors” put in six figure sums and actually those amounts were invested in property but it’s just that they were invested into his Guildford home. So, fair enough that PS is now serving time at Her Majesty’s pleasure and I daresay he’s probably not enjoying it, unless of course he’s discussing plans for a new business with two ex-directors of a Torex Retail subsidiary.
Last month, Edwin Dayan and Christopher Ford previously directors of XN Checkout which supplied software for shop tills to the likes of McDonald’s, Argos and Homebase were sentenced to prison for falsifying invoices to create the impression that XN had made £1.65 million more profit than it really had. Sentencing the two, the judge said 'such sentences may seem harsh on a personal level, but a strong deterrent is needed'. Again, it’s difficult to argue with that conclusion.
These two stories received a fair bit of coverage in the daily press, but of equal interest is the story of someone not going to prison.
Not going to prison
During the month, The Insolvency Service announced that it had applied to the High Court to disqualify all of the former directors of Farepak and its parent company EHR. You may remember that in 2006, just weeks before Christmas, Farepak went into administration. The company collects monthly payments from its customers then distributes vouchers back to those customers for use over the Christmas period. During that time it builds up substantial cash balances and had loaned £35m of those balances to another EHR group company which also went into administration. Savers, many of whom are from the poorest parts of society, lost out entirely that Christmas and only much later did they recover around a third of what they had saved. The Insolvency Service said that the directors’ conduct made them “unfit to be concerned in the management of a company”.
Something that doesn’t seem to have been addressed clearly enough though is the directors’ obligations under the Companies Act 2006. The Act, CA2006, was the largest piece of legislation to ever go through Parliament and codified much of what had previously been case law; you’d think therefore that it would be effective. One obligation it places on directors is that they use reasonable care, skill and diligence in exercising their duties. The extent of their obligation is related to the experience and knowledge they possess. Therefore a director who has more experience, knowledge and skill will have a higher threshold in discharging this duty. You’d think then that Sir Clive Thomson, chairman of EHR at the time, who has served on the boards of six FTSE companies, and ran Rentokil for two decades might have had some expectation on him as to his thinking during the Farepak crisis and a high threshold as to how he discharged his duties.
Independent judgement
Another obligation on directors is to “exercise independent judgement”. It’s not clear whether the directors of Farepak fulfilled that responsibility when they agreed to loan £35m of their customers’ cash to another group company. A degree of independence might have led them to question whether the credit risk was good and whether they would have made a loan to a third party in a similar situation.
However, we will never know as apparently CA2006 doesn’t allow investigations such as the one into the circumstances around Farepak’s collapse to be made public. We therefore have to trust the government and its agencies that their priorities are correct and that there are no other factors for stronger action not to have been taken.
From my layman’s position I find it hard to differentiate between someone who took other people’s money to invest in his own house, and a group of directors who took other people’s money from a savings plan to prop up another company that they were directors of.
The judge in the Torex case had it spot on when he sought to give a sentence which would act as a deterrent but of course for judges to do that the government and its agencies have to ensure that people with a case to answer do actually appear in the dock in the first place. The history of business misdemeanours over the last thirty years seems to indicate that government agencies whether the Serious Fraud Office, or the City of London Police or others have been either too indifferent or too incompetent to address this failing.
© Ash Mehta
This article first appeared in Aimzine, www.aimzine.co.uk
Although I regard myself as very tech-savvy I’m not an avid Facebook user. Therefore I rely on old-fashioned techniques such as email and the telephone to keep in touch with what friends are up to. Recently though, one of my best friends from school was the subject of an article in the Evening Standard, which at least saved me a phone call. I say school friend but it will become apparent why I now need to refer to him as an acquaintance or even just someone I vaguely knew. “Oh, him. Yes I think I spoke to him once or twice”, I’ll have to respond when people question me about our secondary school friendship.
The reason is that he, let’s calls him PS, was in a crown court recently facing charges of fraud. It seems that his persona of being a successful property developer turned out to be a house of cards. The stunning home he and his wife owned (albeit partly with a fraudulently obtained mortgage) in the Guildford countryside, along with the obligatory Porsche and Land Rover parked outside, were funded mostly by asking parents from his children’s exclusive independent school to invest in his property empire that never was. Many “investors” put in six figure sums and actually those amounts were invested in property but it’s just that they were invested into his Guildford home. So, fair enough that PS is now serving time at Her Majesty’s pleasure and I daresay he’s probably not enjoying it, unless of course he’s discussing plans for a new business with two ex-directors of a Torex Retail subsidiary.
Last month, Edwin Dayan and Christopher Ford previously directors of XN Checkout which supplied software for shop tills to the likes of McDonald’s, Argos and Homebase were sentenced to prison for falsifying invoices to create the impression that XN had made £1.65 million more profit than it really had. Sentencing the two, the judge said 'such sentences may seem harsh on a personal level, but a strong deterrent is needed'. Again, it’s difficult to argue with that conclusion.
These two stories received a fair bit of coverage in the daily press, but of equal interest is the story of someone not going to prison.
Not going to prison
During the month, The Insolvency Service announced that it had applied to the High Court to disqualify all of the former directors of Farepak and its parent company EHR. You may remember that in 2006, just weeks before Christmas, Farepak went into administration. The company collects monthly payments from its customers then distributes vouchers back to those customers for use over the Christmas period. During that time it builds up substantial cash balances and had loaned £35m of those balances to another EHR group company which also went into administration. Savers, many of whom are from the poorest parts of society, lost out entirely that Christmas and only much later did they recover around a third of what they had saved. The Insolvency Service said that the directors’ conduct made them “unfit to be concerned in the management of a company”.
Something that doesn’t seem to have been addressed clearly enough though is the directors’ obligations under the Companies Act 2006. The Act, CA2006, was the largest piece of legislation to ever go through Parliament and codified much of what had previously been case law; you’d think therefore that it would be effective. One obligation it places on directors is that they use reasonable care, skill and diligence in exercising their duties. The extent of their obligation is related to the experience and knowledge they possess. Therefore a director who has more experience, knowledge and skill will have a higher threshold in discharging this duty. You’d think then that Sir Clive Thomson, chairman of EHR at the time, who has served on the boards of six FTSE companies, and ran Rentokil for two decades might have had some expectation on him as to his thinking during the Farepak crisis and a high threshold as to how he discharged his duties.
Independent judgement
Another obligation on directors is to “exercise independent judgement”. It’s not clear whether the directors of Farepak fulfilled that responsibility when they agreed to loan £35m of their customers’ cash to another group company. A degree of independence might have led them to question whether the credit risk was good and whether they would have made a loan to a third party in a similar situation.
However, we will never know as apparently CA2006 doesn’t allow investigations such as the one into the circumstances around Farepak’s collapse to be made public. We therefore have to trust the government and its agencies that their priorities are correct and that there are no other factors for stronger action not to have been taken.
From my layman’s position I find it hard to differentiate between someone who took other people’s money to invest in his own house, and a group of directors who took other people’s money from a savings plan to prop up another company that they were directors of.
The judge in the Torex case had it spot on when he sought to give a sentence which would act as a deterrent but of course for judges to do that the government and its agencies have to ensure that people with a case to answer do actually appear in the dock in the first place. The history of business misdemeanours over the last thirty years seems to indicate that government agencies whether the Serious Fraud Office, or the City of London Police or others have been either too indifferent or too incompetent to address this failing.
© Ash Mehta
Subscribe to:
Posts (Atom)