London Evening Standard: Mission impossible for directors
23 March 2004
RICHARD Lapthorne, chairman of Cable & Wireless, delivered an impressive speech last week to the National Association of Pension Funds conference in Edinburgh, one part of which was devoted to a crystal clear warning of the dangers to companies and capitalism of class action lawsuits by shareholders.
Next day came news of a veritable rash of exactly such actions against Shell and its executives. And today we learn that C&W itself has just defeated two such actions against it in the United States, though a third is still pending.
Shell's rivals, watching with growing alarm as they are caught in the backwash, believe the crisis at the oil major is being blown out of all proportion by the media, disgruntled analysts and investors.
That sounds about right, coupled with a lack of appreciation outside the industry that the methodology used to estimate oil reserves has developed a lot faster in the last decade than the methods of accounting used by the American regulatory authorities.
Now there is a further complication in that American lawyers see the opportunity to feed. As Lapthorne said: 'There is probably no more destructive force in a relationship than adding a lawyer, let alone a US one. Once this element is introduced, the managers of companies and boards of directors stop focusing on running the business and start focusing on protecting their backs.'
From here on, Shell executives will find it hard to know if shareholders are asking questions as interested owners or potential litigants. Every approach will have the potential to turn into a cross-examination - or be used as evidence against them. Shell and its shareholders will be the obvious losers. But all business ultimately will pay the price.
One can understand why lawyers like class actions - they take half the money - but it is difficult to see what shareholders hope to get out of it. The best they can hope for in this case is to be compensated for some of the loss in value their shares have suffered recently.
But to get that they risk undermining the whole business and doing far more damage to their holdings, assuming they still have them. There can be few things more likely to destroy shareholder value than the suing of the company and its officers in the courts.
Yet more institutions are thinking about joining in, for the reason only a lawyer could invent - that they might be neglecting their fiduciary duty if they fail to pursue every possible avenue for redress.
The same argument has prompted the Equitable Life board to destroy the lives of its predecessor directors with litigation. It is also an argument that threatens to make the directors' job un-doable and leadership impossible.
As Lapthorne succinctly put it: 'There is something wrong emerging here in the owner-steward relationship which risks harming our future prosperity.' That means we shall all be the poorer for it.