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LSE spat prompts questions over transparency and succession

07 December 2017 by Jimmy Nicholls

LSE spat prompts questions over transparency and succession - Read more

The departure of the London Stock Exchange’s chief executive tests relations between shareholders and directors

For any board, it is a nightmare scenario to have disputes over the replacement of a chief executive spill into public.

For the London Stock Exchange (LSE), the exit of Xavier Rolet, the CEO credited with boosting the value of the bourse to £13 billion, has prompted double dissent – not only over his early departure for a year’s gardening leave, but on over shareholders’ right to know details of boardroom manoeuvres. 

Under the most pressure was LSE’s chairman Donald Brydon. He was accused by Christopher Hohn – founder of TCI Fund Management, which owns 5% of LSE’s shares – of forcing out Rolet prematurely.

Having already promised not to seek re-election in 2019 after the furore, Brydon could be expelled at an extraordinary general meeting, called for by Hohn.

LSE had hoped to avoid this situation, which could see Brydon removed by a simple majority vote of shareholders. In a circular confirming details of the meeting on 19 December, it alluded to Rolet’s ‘operating style’ in influencing the board’s succession plan. It also said Brydon was ‘the right person to lead the board’ in this period.

For the time being David Warren, chief financial officer at LSE, will act as interim chief executive.

Back in October, it was revealed Rolet would depart by the end of the year. Hohn claimed that no justification for Rolet’s exit has been provided by the LSE board, although the CEO had previously agreed to leave as part of a merger with Deutsche Börse, which fell through in late February.

“For a shareholder to publicly disagree with the board, challenge its role and then demand the resignation of the chairman serves no one”

In a statement about his exit, Rolet said: ‘Since the announcement of my future departure on 19 October, there has been a great deal of unwelcome publicity, which has not been helpful to the company.

‘At the request of the board, I have agreed to step down as CEO with immediate effect. I will not be returning to the office of CEO or director under any circumstances.’

Right to know

The quarrel gets to the heart of what the role of a board member is, as well as the difference in knowledge between directors and shareholders.

In a letter to Brydon, TCI’s Hohn complained that LSE had ‘failed to provide shareholders with any substantive basis for the removal’ of Rolet.

‘Hiding behind confidentiality agreements denies shareholders the ability to review your actions and demonstrates the bad corporate governance over which you are presiding,’ he added.

Prior to Rolet’s exit, a committee of the LSE board considered releasing documents explaining their problems with Rolet’s managerial record. The circular commenting on his ‘operating style’ was less revealing than it could have been, but the move still caused disquiet among observers.

Board members are appointed to represent the interests of shareholders, which necessarily know less about the inner workings of the company. Though companies must disclose information to investors through various reports, it is not expected that shareholders know everything that the board does.

Peter Swabey, policy and research director at ICSA, said: ‘For a shareholder to publicly disagree with the board, 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.’

Julian Birkinshaw, a professor of strategy and entrepreneurship at London Business School, said: ‘It is almost impossible to get across these subjective and intangible aspects of someone’s style of working in a written form, so companies have – wisely – decided not to try.’

He said the idea of the LSE board disclosing Rolet’s interactions with Brydon or other executives ‘seems crazy’. ‘My guess is they will not disclose much more information on this,’ he added.

Tim Jackson-Smith, a partner at Shoosmiths law firm, said: ‘It would be unusual for the circular to go into a lot of detail about the reason for the CEO’s departure. But this is an unusual case – normally the requisition is to remove directors and not to ask for directors to stay on or be reinstated.

‘I would also imagine that the settlement agreement that has been signed with the CEO will contain confidentiality provisions and provisions that prevent disparaging comments being made about him.’

“It would be unusual for the circular to go into a lot of detail about the reason for the CEO’s departure”

Dan Cable, professor of organisational behaviour at London Business School, said the LSE board would be keen to protect its reputation in this dispute. ‘In this case, identity/reputation management and protection is the incentive for firms to reveal more information about a wayward CEO,’ he said.

‘The firm does not want the CEO’s bad decisions, ethical misdeeds, and shame to “spill over” onto the firm’s reputation.’

He added that English law’s defamation laws would be a ‘key’ restraining force, similar to references that any new employee is expected to provide when starting a job.

‘The references cannot really say anything too bad without opening themselves up to charges of libel, slander, or personal defamation,’ Cable said. ‘So the firm should only release information about the CEO to stakeholders when that information is factual, defensible, and objective.’

Divided responsibilities

In addition to the transparency issue, the dispute between TCI as an investor and the board shows that divisions of responsibility between shareholders and directors can be contested.

‘I think the current setup works reasonably well, but the understanding of what it means to be a shareholder and what it means to be a director can get lost,’ said Jackson-Smith. ‘The directors, not the shareholders, are there to run the business and I think that the danger is that this distinction can be blurred.’

Still, he was sympathetic to TCI’s position: ‘It is understandable; I can see why they asked questions given what the original announcement said: a lot about his success but no reasons given for his departure.

‘But no matter how many questions the investor asks it is not going to change the outcome – the CEO has confirmed that he is leaving. Also, the investor has got what it wanted in that the chairmen will also now be stepping down [in 2019].’

External backing

The role of Mark Carney, the governor of the Bank of England, has also caught attention. Responding to questions at a press conference, Carney said: ‘I cannot envision a circumstance where the CEO stays on beyond the agreed period, but it is in the interest of all parties involved that clarity is provided as soon as possible.’

Many saw this as an implicit backing of the board. Historically LSE and the Bank of England have had a close relationship, with the exchange seen as having a quasi-regulatory role, particularly before British financial regulation was moved to a more statutory footing during the 1980s.

In a letter to TCI, the LSE board also cited the Financial Conduct Authority’s (FCA’s) backing of its succession plan. ‘We have discussed with the FCA the board’s strong preference for Donald Brydon to remain as chairman until the 2019 AGM in order to ensure a successful transition to a new CEO,’ it said.

‘The FCA agrees that this is important and an appropriate way to achieve an orderly succession.’

Jackson-Smith said: ‘If your time is up as a CEO there is little point trying to fight it and the best thing for you and the business is to step down. Obviously the way in which that is done and communicated are critical and that is the issue here with the LSE.’

ICSA’s Swabey said: ‘Perhaps the FCA should be taking a look at the effect that this dispute has had on the share price of the LSE and how this has affected the value of TCI’s investments.’

Jimmy Nicholls is deputy editor of Governance and Compliance

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