The Financial Reporting Council (FRC)’s latest publication, “Proposed Reforms to the UK Corporate Governance Code”, is rather a waste of time. Changing an ineffectual and irrelevant code, even though at considerable expense to the tax payer, is hardly a matter of huge importance. And when the changes themselves are so slight they will have no impact at all on what is done, the significance is disappearingly small. But perhaps that was the intention.
Cadbury’s future as a British owned confectionery manufacturer seems doomed, for reasons discussed in ‘The Rise and Fall of Management’. Cadbury’s management may well have sought to fulfill their legal corporate duty, as defined in the 2006 Companies Act, to have regard to the company’s long term future and to the interests of employees and other stakeholders rather than just the shareholders. But, despite the law, shareholders’ interests are widely held to be paramount, and in the face of a hostile takeover bid, management are driven to simply maximizing the price that can be obtained for Cadbury shareholders. In the frenzy of this battle to the death, they most probably have little time for anything else, least of all making chocolate.
Earlier this year it was reported in the national press that, despite the decline in its investments and fall in profit from £576m to £17m, the former mutual Standard Life’s chief executive, Sir Sandy Crombie, received £380,000 bonus on top of his salary of £754,000. Fellow director Keith Skeoch’s take was £1.3m while finance director David Nish’s take was £885,000.
The following extracts are from a letter, arguing the case made from a historical perspective in ‘The Rise and Fall of Management’, written to Sir Sandy Crombie asking how these payments could be justified:
Dear Sir Sandy,
Successive governments from Thatcher on, have been committed to free market capitalism with minimised regulation. That was the bad theory that got us into this mess. But the prescriptions for what will get us out of it, permanently, have so far been piecemeal and fragmentary. The pragmatic response of the British government may restore confidence short term and get the wheels turning again, but it does not offer a coherent long term alternative to the erstwhile orthodox wisdom propounded by the late Nobel laureate Milton Friedman and colleagues.
The long standing fixation with creating shareholder value still persists just below the surface despite the current crisis. ‘The Rise and Fall of Management’ flags up the much broader responsibilities that directors have legally shouldered for the past 150 years, but if the City and top directors have their way, when the current crisis is over, it’ll be ‘back to business as usual’. Those directors will still be aligned with shareholders rather than customers and employees, and paying themselves extreme amounts of money irrespective of either short or long term performance. The bonus culture is regaining momentum and no matter how much the media and politicians berate the greed of City martinets, until action is taken to restrict or tax unwarranted bonuses, they will continue to be taken.
A key tenet of free market capitalism is that businesses should focus exclusively on maximising shareholder value and not allow other considerations, apart from compliance with the law, to intrude on their business activities. As demonstrated in ‘The Rise and Fall of Management’, approaches such as corporate philanthropy, corporate social responsibility and business ethics, are only justifiable if they add to profitability. This appears to be a clear and simple model for businessmen to work.