Succession planning is one of the crucial responsibilities of a board. It is one that some boards do well, but far too many do not. It is therefore sad to see that the apparently well-ordered succession plan at the London Stock Exchange (LSE) has been derailed.
Intervention from an investor holding 5% of the company’s shares has resulted in Xavier Rolet, the LSE’s former chief executive, bringing forward his planned departure at the end of 2018 bytaking gardening leave and Donald Brydon, the chairman, agreeing to stand down at the annual general meeting in 2019.
The Children’s Investment (TCI) Fund, led by Sir Christopher Hohn, had called for a general meeting to demand the reinstatement of Rolet and the resignation of Brydon on the grounds that the chief executive was forced out against his will.
Sir Christopher had accused the board of gagging Rolet with confidentiality clauses and called for the Bank of England and the Financial Conduct Authority (FCA) to intervene and appoint a new chairman.
Few would dispute that Rolet led a significant revival in the fortunes of LSE, but as Mark Carney, governor of the Bank of England, noted: ’Everything comes to an end. We were appraised of the succession plan before it was announced – the agreed succession plan.’
According to the Financial Times, TCI has indicated that the board is ‘at risk of litigation if its members put personal interests before those of the LSE’. That may be so, but it is surely equally important to examine the motives of TCI in seeking to destabilise a company in which it and its clients have an interest.
It is an important principle of the UK’s corporate governance arrangements that the board is appointed by the shareholders to oversee the management of the company on their behalf. Board meetings are confidential to the company – and they need to be. If the content of board meetings were made public, board discussions would be hampered and the effective decision making process compromised.
The Companies Act 2006 requires that ‘a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole’. Whatever decisions the directors make, based on the information known only to the board, their primary responsibility is to promote the success of the company.
Shareholders cannot possibly know what the board knows – nor should they. The board should be trusted to decide when it is time for the CEO to move on.
There are many examples of companies where a successful CEO has over stayed their sell-by date, to the detriment of the future success of the company. As investors know well: ‘Past performance is not necessarily a guide to future performance.’
Boards are in the unique position of setting the company’s strategy, reviewing performance and regularly scrutinising the company’s management. If the board has decided that the future of the company is best served by a change of CEO, that is a decision only it can take. It is based on information only the board has.
The view of one activist shareholder, looking in from the outside, should not take precedence over the collective decision of the board. And one shareholder should also not presume to speak for the company’s shareholders as a whole, not least because there are no grounds for believing that their interests coincide with those of other shareholders.
The Companies Act 2006 provides a mechanism by which a shareholder with concerns can canvass the views of other shareholders and, if sufficient support is obtained, force change through a resolution put to the company’s shareholders at a general meeting.
That is what TCI has decided to do and, given that Rolet has now stepped down with immediate effect, the resolution before the general meeting on 19 December is simply to remove Brydon as a director of the company.
That is TCI’s right, but for one shareholder to disagree publicly with the board and challenge its role, and then demand the resignation of the chairman simply because the board takes a different view from his or her external perspective, serves no one. It damages the company’s reputation, is unhelpful for the orderly implementation of the board’s succession plans, and is not in the interests of shareholders.
Sir Christopher is correct on one point though. Perhaps the FCA should be taking a look at this dispute and the effect it has had on LSE’s share price and the value of TCI’s investments.
Peter Swabey FCIS is policy and research director at ICSA: The Governance Institute