We were fortunate in having for this meeting a distinguished group of people concerned with aspects of company management that have recently come under public scrutiny, drawn from all the G7 countries.
We started by trying to define the objectives of a company or business. We concluded that while on a narrow view the objective was to increase the wealth of the owners, measured in the case of a joint stock company by the price of its shares, on a wider view a company existed to provide goods or services to the community efficiently, appropriately and legally, and in so doing to contribute to the general prosperity of the nation, or, in the case of multi-nationals, nations. In law the shareholders must be regarded as the owners; but under the wider definition many others were linked to or affected by the operations of the company: its employees, its customers, its suppliers, the community within which it operated, and so on - referred to throughout our discussions as stake-holders, a convenient if inexact neologism. The link could be stronger or weaker, but it was contended that it was only common prudence and good business for a board to have regard to these stake-holders, since in the longer run, failure to do so would damage the business and cause it to fail. It was noted here that while all legislative regimes required boards of directors to give primary attention to the interests of the shareholders and to be accountable to them, in many jurisdictions the interests of stake-holders were also permitted to be taken into account - and in some instances, e.g. health and safety of employees, pensions, training, pollution, that aspect might be the subject of specific mandatory regulation. It was in the areas not so regulated that doubts might arise. Here published company codes of practice could be useful both to set standards by which the company might be judged and to educate employees in what was expected of them. It was noted that the number of companies in the UK issuing such codes had risen over recent years and now stood at 28%. The practice should be strongly encouraged.
If the shareholders were in law the owners of a company, the conference considered to what extent that legal status reflected reality. Having relied on risk capital to establish itself, the modem company tended to look to retained profit or borrowing to finance its further expansion. Rights issues were sometimes seen as a sign of weakness and managements saw themselves as being judged in the stock market by the share price and the dividend. Many investors in the secondary market, including notably those financial institutions which operated on an indexation basis with extensive portfolios, were better described as “punters” or speculators, content to see their money grow, but not interested in exercising influence or control if it did not - except by selling. And even those institutions which adopted a more proprietorial approach encountered difficulties: they were often not organised to represent their own shareholders’ views, and if their holding was large enough to give them a significant influence, the option of selling was not readily open to them. In many regimes, there were obstacles to share-holders coming together. The point was made, moreover, that there was no evidence, for example in Canada where 80% of businesses were owned by one controlling share-holder, that influence exercised by a shareholder or group of shareholders, led to better performance. The conference toyed with such ideas as “maturation” (incremental voting rights geared to the length of time the share is held), tax incentives designed to encourage long-term ownership, proxy banks (a growing practice in Germany) to act on behalf of shareholders who wished to delegate their voting rights, and so on, but saw difficulties, particularly with maturation (in the context of take-overs) and tax incentives. Information to shareholders was vital if they were to exercise proprietorial responsibilities, especially to the larger shareholders. Such information should cover such criteria as performance against budget, quality of product, customer satisfaction, etc… even though there were difficulties of measurement. Problems of insider dealing in that context were manageable - indeed some questioned whether in the Anglo-Saxon culture we had not leaned too far towards the principle of absolute equality of share-holders.
The conference looked at boards, their composition, duties and responsibilities. There was general support for the concept of the unitary board, each director, whether inside or outside, representing the interest of all the shareholders (with no special constituency representation) and sharing responsibility: but equally there was agreement that the outside or independent directors (terms preferred to non-executive) should be truly independent (though, for example, in Japan that was seldom the case, since firms tended to be so much inter-linked, or the so- called independent directors had graduated through the company). In most cultures there was too much recruitment through the “old boy” network. With the weakness of shareholder democracy, the reality and risk were that boards became self-electing. Independent directors should be professionally qualified (and perhaps trained) and should be able to act against the chairman or chief executive if necessary (but the point was made that for that power to be exercised, other than in extreme circumstances, a leader of the independents was probably necessary, nominated in advance: decline was usually gradual and without a leader the point at which to take a stand was often missed). There was a case for the independents having regular publicised meetings rather than being forced to meet surreptitiously, provided that the unitary responsibility of the board was preserved. There was a notable difference between the US and the UK in the amount of time an independent might be expected to devote to his board work. The key to the effective discharge of their responsibilities by independents, was access to information which should be at least as good as that of the institutional shareholders. It was the duty of the chairman to see to this: independent directors should never be taken by surprise. Audit, nomination and remuneration (compensation) committees were important and should be composed of independents, who might also be in a majority on the main board.
There was a division of opinion whether the task of chairman and chief executive should be combined, some arguing strongly on grounds of efficiency in favour, and others for separation. As in the whole area, the key lay in personalities: good people made either system work. Separation however reduced the risk of the “chairman/roi soleil” phenomenon.
The German two-tier board system was examined, and the point was made that US practice was quite close in reality though not in name, the main board setting strategy and exercising overall supervision of the management committee - though it was management, all agreed, that drove a company forward. Worker participation had worked well in Germany, at least in times of prosperity, but in general the conference saw problems with it arising from conflicts of interest. All agreed, however, that as stake-holders, employees were entitled to timely information.
As for regulation, some legal framework was essential. Ideally general principles only should be laid down, within which, at least in the Anglo-Saxon cultures, self-regulation would operate; but in practice things had gone too far for a return to that to be possible. Dissatisfaction was expressed with both the US and British regimes: self-regulation, especially in Britain, had turned out top-heavy, bureaucratic, expensive and inefficient, with too many over-lapping agencies. There was a strong case for simplification (the Canadian example of a single governmental supervisory body was noted). It was remarked that there was a tendency for convergence between the Anglo-Saxon self-regulatory approach and the more clearly regulated German or Japanese regimes. (France seemed to be moving towards the latter.) No system was proof against fraud, but criminal prosecution (with no discrimination in sentencing) was a strong deterrent to white-collar crime. There was some underlying conflict between the need to protect society and thus to act early, and the requirements of criminal investigation. But there was little evidence of arbitrage among legal regimes in North America or Europe and with improved international cooperation in the regulatory and criminal fields, problems of coping with trans-national corporations were manageable (though there should be one clear leading regulatory authority in each case). Audit had an important part to play and audit reports should be able to be relied on by the public at large. Various ideas for ensuring and confirming the independence of auditors had been canvassed but all had drawbacks. “Loss-leading” in what was the core business of auditors, could only lead to ruin.
Finally, the idea was aired that with the collapse of the socialist command economies, capitalism was alone in the field; and that the issue now to be addressed was the nature of capitalism itself. Recent scandals and abuses had focused public attention on the behaviour of business. While the black sheep were the exception, the better suffered by association. If business did not put its own house in order, governments would step in and regulate with a heavy hand, which would shackle the entrepreneurial spirit which gave capitalism its vitality and strength.
This Note reflects the Director's personal impressions of the conference. No participant is in any way committed to its content or expression.
Chairman: Sir Nicholas Goodison
Chairman, TSB Group
LIST OF PARTICIPANTS
BRITAIN
Sir Adrian Cadbury
A Director, Bank of England; Chairman, Committee on Financial Aspects of Corporate Governance
Sir Geoffrey Chandler CBE
Industry Adviser, Royal Society of Arts
Mr Jonathan Charkham
Adviser to the Governors, Bank of England
Mr Nicholas Colchester
Deputy Editor, The Economist
Ms Brenda Dean
Deputy General Secretary, Graphical Paper & Media Union (GPMU)
Mr Michael Fowle
Head of Audit, KPMG Peat Marwick
Lady Howe JP
Director: Kingfisher (formerly Wool worth Holdings) Pic
Mr A Stanley Kiaer
Director, Institute of Business Ethics, London
Sir Richard Lloyd Bt
Deputy Chairman, Vickers Pic
Mrs Barbara Mills QC
Director of Public Prosecutions
Mr Peter Morgan
Director General, Institute of Directors
Dr Rosemary Stewart
Fellow in Organizational Behaviour, Templeton College, Oxford; author
The Rt Hon the Earl of Stockton
President, Macmillan Ltd
Mr Tony Strachan
The Bank of England: Industrial Finance Division (Group Leader
Mr Richard W Tookey CBE
CBE, Shell International Petroleum Co Ltd: Director and Group Public Affairs Co-ordinator
Sir Christopher Tugendhat
Chairman, Abbey National pic; Director, BOC Group pic; Eurotunnel pic, LWT (Holdings) pic
CANADA
Dr James Gillies
Professor of Policy and Director, Max Bell Business Government Studies Program, Faculty of Administrative Studies, York University
The Hon Thomas Hockin
Member (Progressive Conservative) (London West), House of Commons, Ottawa-Hull; Minister of State (Small Businesses & Tourism) Government of Canada
Mr John D McNeil
Chairman and Chief Executive Officer, Sun Life Assurance Company of Canada; Director: Marathon Realty; Shell Canada; member, Business Council on National Issues and Vice Chairman, C D Howe Institute
Mr Howard I Wetston QC
Director of Investigation and Research (DIR), Bureau of Competition Policy
EC
Mr Geoffrey Fitchew
Director-General DGXV (Financial Institutions and Company Law), Commission of the European Communities;
FRANCE
Dr Michel Ghertman
Hautes Etudes Commerciales (HEC), School of Management, Strategy and Business Policy, Jouy-en-Josas
Mme Hélène Ploix
Deputy chief executive officer, Caisse des Dépôts et des Consignations, Paris
GERMANY
Miss Ellen Schneider-Lenné
Member of Board of Managing Directors, Deutsche Bank AG, Frankfurt, responsible for Financial Institutions Division ( Managing Director, 1990-); Chairman, Supervisory Board, AKA Ausfuhrkredit GmbH; Deputy Chairman, Supervisory Board: Industrial Bank of Japan (Deutschland) GmbH; Zurich Investment Gesellschaft mbH; Member, Supervisory Board: Honsel-Werke AG; Karstadt AG; Orenstein & Koppel AG; Rheinisch-Westfalische Kalkwerke AG; Member, Board of Directors, ICI; Morgan Grenfell Group plc.
Herr Dominik von Winterfeldt
Director, Public Relations and Communications, Hoechst
ITALY
Sr Francesco Pellei
Managing Director, AGIP UK, London
JAPAN
Mr Hideo Ishihara
Deputy President, The Industrial Bank of Japan, Tokyo
USA
Mr Richard I Beattie
Managing Partner, Simpson Thacher & Bartlett (lawyers), New York
Mr Robert G Engel
Senior Adviser, Dillon Read & Co Inc
Mr Richard N Foster
Senior Partner and Director, McKinsey & Co Inc; committee member: National Academies of Science and Engineering; Conference Board; Industrial Research Institute; contributor to several journals; author.
Professor Ronald J Gilson
Charles J Mayers Professor of Law and Business and Director, Law and Business Programme, Stanford University School of Law
Professor Harvey G Goldschmid
Dwight Professor of Law, Columbia University School of Law, specialising in corporate law, securities law and antitrust; Director, Columbia University, Center for Law and Economic Studies
Mr George N Lindsay
Of Counsel (former Presiding Partner and former Resident Partner, London), Debevoise & Plimpton, New York; Honorary Trustee (former Vice Chairman), Carnegie Institute for International Peace; Director (former Chairman of Board of Directors), African American Institute
Mr Martin Lipton
Partner, New York City lawyers, Wachtell Lipton Rosen & Katz; Trustee: New York University; University of Pennsylvania; President, Board of Trustees, New York University Law School; member, Council of American Law Institute
Professor Jay W Lorsch
Harvard Business School: Senior Associate Dean for Executive Education and Louis E Kirstein Professor of Human Relations; Chairman, Organisational Behaviour Area
Professor George S Mclsaac
American Telephone and Telegraph Company Resident Management Fellow and Executive Professor of Business Administration, William E Simon Graduate School of Business Administration, University of Rochester, New Yor
Mr Glen R Moreno
Director: Fidelity International Ltd, London; Fidelity Funds, SA; Rea Brothers Group pic; Knightsbridge Futures Ltd; Chairman: Taiwan Fund; The Indonesian Capital Fund Ltd; Latin American Capital Fund Ltd
Mr Philip R O’Connell
Lawyer and corporate governance consultant in Stamford, Connecticut; member: Corporate Governance Subcommittee, Legal Advisory Committee, New York Stock Exchange
Ms Sarah A B Teslik
Executive Director, Council of Institutional Investors