27 August 2018 by Anthony Hilton
The contrasting US and UK systems call into question the value of governance
When he was chief executive of Unilever, Niall FitzGerald also became a non-executive director of a major US pharmaceuticals firm – however, he left after barely a year.
Recalling what had happened, he said that the other non-executives were very friendly, the executives were as they should be, but he had no real sense of engagement with the business. At the meetings there was no visibility from the CEO about what he was doing or what his plans were.
There was no feeling that the business had to grow, stay the same or contract, as drugs went off-patent. The chief executive published the quarterly numbers and that was more or less it. Whatever else went on, it took place somewhere else, without any non-executives present.
Nor was this executive any different from the others. In the US, the boards of large companies usually have just one executive present – and they are usually both chairman and chief executive, although the titles are sometimes different from in UK practice. If they have another person present it is often the financial director and they are unlikely to the rock the boat. The boards suck up the world view as presented by the chief executive.
“More and more companies, when they first go public, do not enfranchise shareholders, preferring to keep control of the business in their own hands”
In short, management disposes and non-executives in America do not get involved. So FitzGerald, having seen the UK way, where non-executives are much more involved, was less than comfortable with the lack of exposure.
Interestingly, it is the same for US shareholders. More and more companies, when they first go public, do not enfranchise shareholders, preferring to keep control of the business in their own hands.
Shareholders do not have much power either. They occasionally complain about profits, or dividends or buybacks and they may occasionally protest against a director, and even vote against them, but the company does to have to take any notice and goes on its own way regardless. Indeed, it is only shareholder activists, with the might of American attorneys alongside, who have any real influence.
Governance in the UK is altogether different. A recent book on Barclays – 'The Bank that Lived a Little' by Philip Augar – recalls how non-executives turned against the chief executive not once, but twice in 10 years, and then a third time it was the regulators who had him ousted. Other executives have similarly been dismissed and chairmen approved or disapproved of. Shareholders regularly get cross with executives who do not perform – and sometimes even when they do.
Sometimes when the board gets rid of the chief executive – as for example at the London Stock Exchange at Christmas – shareholders can be up in arms about that too. The chair Donald Brydon had to curb his tenure in office as recompense.
And the latest iteration of the UK Corporate Governance Code has given non-executives even more power. They may still not have all they seek, but it is a lot more than the Americans.
“Governance has made little difference to productivity and this is perhaps the greatest issue affecting boards”
What is interesting, however, is if any of this makes a difference. British governance experts say their code is world-beating and copied all over. That may even be true. But do companies perform better with or without governance? People say that the share prices of companies in Asia do better if governance reforms are enacted, though Anthony Bolton, once of Fidelity in Hong Kong, came unstuck when he relied on this measure. Does the comparative absence of governance in the United States make a difference to the bottom line? Do UK company boards – and their consultants – do a lot of things that do not really add up to much? Is it possible that we cannot do the stuff that matters so we do the other instead, as a kind of displacement activity?
It is certainly the case that governance has made little difference to productivity and this is perhaps the greatest issue affecting boards. It has similarly been of no help so far in curbing executive pay, although this is the issue that fires up non-shareholders.
The Americans seem unfazed by having the chairman and chief executive as one person but make sure there is a candidate in place if the incumbent stumbles. In contrast, succession planning in Britain appears to be honoured in the breach rather than the observance – see WPP.
The majority of US companies do not appear to be better or worse than the British, other than in productivity. However, they have a home market and all sorts of other behaviours that make them behave differently from Europeans. They also comply with very strict rules and regulations and it is perhaps these rather than governance codes that make a difference.
Does that make governance a dead issue? No. But it is definitely a work in progress.