FREE KIC - NO. 44 JUNE 09

SOME THOUGHTS ON CORPORATE GOVERNANCE
(PART 1)

 

Corporate governance is currently getting an enormous amount of attention. There is generally a feeling that in the last few years something went badly wrong and that in the future some major changes need to take place. In the past I have written a number of opinion pieces that touch on this subject. All my opinion pieces on Japan cover my concerns in relation to Japanese style corporate governance and in Opinion Piece 13 I wrote about the mad world of executive compensation. In that I talked about the need for the shareholders/owners of companies (primarily the big institutions) to vote for change.

This month I want to focus in on Ireland and the composition of boards of directors. In particular I want to look at the independence of members of the board. I want to concentrate on this because I feel that the current crisis has highlighted the need for directors that are independent and strong enough to ask questions of dominant personalities. I say this because my gut instinct is that the directors of Anglo Irish Bank and Irish Nationwide Building Society allowed Sean Fitzpatrick and Michael Fingleton to run their respective organisations with a fair amount of freedom. I guess that it would have taken a particularly strong personality to question Sean Fitzpatrick while the bank appeared to be so successful. The fact that he was prepared to go on the Marian Finucane radio show and speak in such a confident way highlights to me just how difficult it would have been to ask those difficult questions and not just blindly accept his apparently confident replies.

Sean Fitzpatrick

So who does have the power to shape the board? How do we determine if someone is independent? In theory the rules governing this area have been set out in what is called "The Combined Code".

The Combined Code sets out a series of recommendations and it also has a whole section looking at the independence of directors:

Out of curiosity I went back to look at the Anglo Irish Bank annual report of 2007 to see what it had to say. Naturally enough it said that they followed the Combined Code:

I then looked at the section that deals with members of the board to see which members were listed as being independent. I was surprised to find the following:


In other words Anglo Irish Bank claimed that Sean Fitzpatrick was an “independent” member of the board. The Combined Code as shown above says that you are unlikely to be independent if you have been an employee in the previous five years. Sean Fitzpatrick had been Chief Executive!
I was not as surprised to see the following:



Sean Fitzpatrick was chairman of Smurfit Kappa and Gary McGann was (and still is) chief executive of Smurfit Kappa. I would have thought that this might impact upon independence given the Combined Code comments on cross directorships and significant links with other directors but sure if Sean was independent surely Gary was independent as well!



In 2007 Michael had been on the board for nine years and the Combined Code states that after nine years you are unlikely to be independent.
In the annual report they do mention the following about Michael Jacob:



This is the only time I can find any mention in the annual report of not following the Combined Code. I cannot find any other reference to it. The minimum I would have expected was an explanation as to how Sean Fitzpatrick was deemed to be "independent". Instead all we get is the following:

I am perplexed by this statement because it suggests that they knew that there were question marks over some of the members in terms of their independence and yet they did not explain in the way that I think the Combined Code suggests they should. (This is known as the principle of comply or explain)
At the moment I do not know whose job it is to police these matters. I want to find out. Is it the Irish Stock Exchange or the London Stock Exchange or the External Auditors or the other directors? Is it possible that legal action could arise?
I feel that this subject needs further work and I intend to return to it next month. In fact there are a number of issues in relation to corporate governance that are worth looking at, so watch this space for Part 2.




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Killeevan Investment Consultants Ltd, trading as KIC, is regulated by the Central Bank as an Investment Intermediary.
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Directors: Kenneth Power (Managing) B.Comm, MBS, ASIP, Regular Member of the CFA Institute.
Siobhan Power