The Sunday Telegraph: Corporate governance? Buy British
By Tony Jackson (Filed: 23/05/2004)
Corporate scandal, one might have thought, was a relic of the bubble years: a folly of the late 1990s, now being paid for at leisure. Not a bit of it. Across the Atlantic, at least, it is still going strong. And British companies risk being caught in the fallout.
Consider some of the news from the past week alone. Dayton Power and Light, a US utility, has abruptly lost its chairman, chief executive and finance director over alleged fiddling of bonuses and expenses. And at Nortel, the giant Canadian telecoms manufacturer, 157 managers and directors - count them - have been barred from trading in the company's stock.
Nortel's affairs are in a dreadful tangle, and it has failed to file last year's accounts on time. More to the point, in January the company's senior staff were paid millions in bonuses, in the usual way. But unlike previous years, when bonuses were paid in shares, this time there was an abrupt switch to cash. Six weeks later came a thunderous profits warning, and the share price halved.
It might seem hard to prove the connection. But the lawyers will certainly try. Both those companies face a blizzard of civil suits, and a criminal case was launched against Nortel last week in Texas.
Granted, these little problems are not unique to North America.
Over here, eyebrows have been raised by the case of Sir Clive Thompson, the chairman of Rentokil, who sold £9.25m worth of shares five weeks before a profits warning and his own dismissal. Sir Clive has specifically denied any foreknowledge of the profits warning. But in today's climate, that could be tested in the civil courts.
And that, increasingly, is the point. At a recent conference in London, I heard vociferous complaints from companies about the soaring cost of insuring their directors against legal liability - a fourfold rise in the past couple of years. The European head of AIG, the insurance giant, met the charge bluntly. One main reason, she said, was the equally soaring cost of US class actions.
In the decade to 2000, it seems, US class actions against companies ran at an average of 200 a year, with around 5 per cent being against foreign companies. In 2001 the number rocketed to almost 500, with 9 per cent against foreign companies. The average settlement, meanwhile, went from $8m to $17.5m. So the cost to non-US companies of US class actions rose perhaps tenfold.
In other words, US shareholders are on the warpath, and UK companies are in the way.
The timing, too, is worth noting. The bubble burst in 2000, and the first scandals started coming to light soon after. Hence, presumably, the eruption of class actions in 2001 - and the widening of the field of fire to overseas targets.
All of which makes the continued US scandals peculiarly irritating from a British standpoint. Despite the high-profile criminal cases, civil suits, Sarbanes-Oxley legislation and the rest, quite a few US bosses still seem to regard their companies as personal goldmines. That could perhaps be put down to the maverick, can-do way of American business.
Less charitably, it could be simple stupidity.
Not that UK companies are wholly blameless. Shell, for instance, is facing class actions over its reserves debacle, and serve it right. But it is increasingly clear that UK corporate governance really is superior to the American version. When it comes to scandal, we are not in the same league.
Some of the effects are perverse. At that recent conference, the AIG executive made clear that there is now a sliding scale for companies. Those with US quotes and US operations pay most for their insurance. Then come domestic UK-quoted companies, then private companies.
As one big investor remarked to me, from his perspective this is precisely the wrong way round. He wants to invest in big, liquid, global companies. The last thing he wants is a further shift to private equity, which leaves the big institutions largely shut out. But that is what the system tends to produce.
Another perversity occurs to me.
If I were a UK company director, I might be tempted to view all this with a cynical eye. Because of the behaviour of my North American cousins, I risk getting jumped on for the slightest misdemeanour. The more tempting, then, to go the whole hog.
Running a public company is an increasingly risky business these days; all the more reason, some might conclude, to make out like a bandit while you can.