Lawyers damn Hampel report with faint praise
19 August 1997
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Robert Lindsay discovers that Hampel raises more questions than he answers. Details of deals should be sent to the City editor, Robert Lindsay. Please include all other law firms acting on deals and the value, where possible.
In November last year Sir Ronnie Hampel, the chairman of ICI and the Corporate Governance Committee, got involved in a revealing argument with Linklaters & Paines lawyer and former Law Society president Mark Sheldon.
Hampel was addressing a meeting of the great and good in the City, called by the Institute of Chartered Accountants to discuss what made good corporate governance, and had made several sceptical remarks about the concept.
He commented: "If a visitor from Mars were to look down on the last couple of years he would wonder about corporate governance. He would think a new industry had been created, one which was a sort of bonanza for conference organisers, for consultants, for the media and even for committees on corporate governance."
He implied that the growing responsibilities being put on directors might make it less attractive for people to join boards, and that company reports had too much information about directors' remuneration and not enough about the health of the business itself.
Sheldon picked him up on this comment. A member of the Cadbury Committee, which, after Maxwell, Polly Peck and other prominent abuses of boardroom power, drew up stringent guidelines on corporate governance, Sheldon said: "We saw a time when, after the catastrophes had gone, people would become less interested in the prudential aspects... I am afraid governance is always going to have to be slightly slanted towards the prudential aspect. The problem is that in pursuit of profits people sometimes do tend to forget the cautionary aspects."
Hampel gruffly replied that his perception was that the debate had been too much slanted the cautionary way. He then warned, tellingly: "Like all things in life, the pendulum swings." And while lawyers are reluctant to openly criticise Hampel, they are all in agreement that his interim report released two weeks ago has given the pendulum a shove in the other direction.
Clifford Chance employment partner Bruce Hedley predicted at a conference for in-house counsel last June that Hampel might introduce codes that could be legislated for.
He highlighted five areas in which institutional investors and other "stakeholders" had been calling for movement. Of these Hampel either ignored or reversed three.
The first was a call for more non-executive directors. Most companies already have non-executives making up around half their board. Hampel recommends that non-executives should comprise a minimum of only one third of the board. Hampel does not even insist that the chairman need be a non-executive. Instead, the committee recommends that the board's non-execs should be led by one of their number who is not the chairman.
The second referred to directors' remuneration, suggesting that it should be scrutinised by shareholders, possibly with the right to vote on remuneration packages. Hampel, however, ruled this out.
The final suggestion was that supervisory boards should include stakeholders such as unions and institutional investors. In fact, as the TUC has pointed out, Hampel acknowledged the usefulness of the stakeholder concept but did not call for workers, union representatives, or even institutional investors like large pension funds and insurance companies to sit on supervisory boards.
So in only two areas did Hampel reinforce the Cadbury and Greenbury codes. He agreed that non-executives should be appointed for three-year terms and that they should be elected by shareholders.
Herbert Smith has a corporate governance unit, set up at the time of the Cadbury report and comprising five partners from corporate, employment and employee benefits departments who meet to keep abreast of corporate governance issues. Its head, David Paterson, who advises directors on conforming with the "Yellow Book" on directors' duties, appears at first to welcome Hampel's beliefs.
He claims pressure groups and the media have turned codes of practice into "holy writ". But press him on Hampel's remarks about institutional investors and Paterson becomes less positive.
Hampel wants institutional investors to adopt a "considered policy" on voting their shares, but he does not think voting should be compulsory, and he does not want a supervisory body on which they can sit. Yet institutional investors would argue that they already adopt a "considered policy" when voting at AGMs, and that they cannot do more without being allowed greater say in the boardroom.
"He's being a little bit contradictory," concedes Paterson, "I think he's a bit half-hearted."
Bruce Hedley puts it rather more bluntly: "Hampel's calling for the onus on ensuring good corporate governance to be on the institutional investors, but without providing a mechanism for doing so."
Even Vanni Treves, corporate governance expert and Macfarlanes senior partner, who is broadly in sympathy with Hampel, has admitted: "There is not enough exhortation of institutional investors to stick their heads above the parapet and criticise companies they feel have unacceptable standards." Treves thinks the disinterest of most institutional investors is the biggest stumbling block to improving standards of corporate governance.
On the subject of Hampel's lack of tough codes on the role of non-executives, Peter Butler, corporate focus director at fund manager Hermes, told the Hampel committee that Hampel had left the definition of "independent non-executives" to individual boards to determine. He described this as "a hole at the heart of Hampel".
Hampel is treading carefully. A businessman first, he wants the emphasis to be on enabling businesses to succeed.
Sooner or later another corporate disaster is bound to hit the headlines. As Paterson points out: "When the next catastrophe comes along, the Government will think this attempt at a voluntary code didn't get anywhere, and that they'll have to legislate."
Hampel may be being too careful for his own good.