Boardroom watchdogs who failed to prevent disaster: Tiphook and Queens Moat have put non-executive directors in the firing line

Click to follow
The Independent Online
THE message flashed up on screens around the City. David Howell and John Gale, non-executive directors at the crisis- ridden Queens Moat Houses, had just resigned. 'I have sought to perform my non-executive duties conscientiously throughout my appointment,' said Mr Howell. 'I believe the non-executives were clearly misled.'

It was a defence he had already tried to invoke as institutional investors and analysts gave vent to their growing anger. It was not a defence that worked. One irate fund manager described it as 'extraordinarily limp-wristed'. He added: 'Howell has touted himself around the City as a man with financial experience. It's outrageous.'

The City has listened with growing dismay to the chapter of disasters unfolding at companies such as Queens Moat and Tiphook. What, it is asking, is the point of non-executive directors, when they fail to fulfil their policing duties?

Mr Howell, MP for Guildford and currently chairman of the Commons' Foreign Affairs Committee, and Mr Gale, formerly a senior executive vice-president at National Westminster Bank, have been two of the main targets. Both were appointed non-executive directors of Queens Moat some years ago - appointments they must now regret.

In March, the debt-laden hotel chain saw its shares suspended. Worse was to follow with the 1992 results, which showed a pounds 1bn deficit after exceptional losses of pounds 939m and halved the value of its property portfolio. Pre-tax profits for the previous year were also restated.

Certainly, Mr Howell has an unenviable track record as a non-executive. He is also on the board of Trafalgar House, the shipping and engineering giant that ran into the red with a loss of pounds 976m for the half-year to March. The company had earlier been forced to restate its 1991 figures, as a black hole emerged in the accounts, paving the way for Hongkong Land's stake- building move.

But Mr Howell is by no means the only focus of institutional fury. Rupert Hambro, chairman of the merchant bank JO Hambro Magan, has also been singled out as a non-executive of Tiphook. So, to a lesser extent, has Sir Charles Powell, formerly private secretary and foreign affairs adviser to Margaret Thatcher before he joined the board of the loss-making container-leasing operation in 1992. Tiphook issued its third profits warning of the year in October, after the introduction of more stringent accounting methods had converted pre-tax profits of pounds 75m into a pounds 22m loss.

Tiphook has long been regarded as more bold than prudent in its accounting policies. Yet Mr Hambro, a non-executive since 1990 and lately also deputy chairman, seems to have been notably unsuccessful in introducing tighter management controls. He, too, has come in for stinging criticism from institutional investors, who have asked how in the circumstances he could ever have accepted the position of deputy chairman.

Sir Charles is not exactly flavour of the month either. 'MPs and civil servants generally have good connections but no business experience,' said one analyst dismissively. He cited Forte as a role model, for recruiting Sir Anthony Tennant and Sir Paul Girolami rather than glitterati from the political world.

His view is widely shared. 'The question isn't whether you have non-executives on board to look good on the letterhead but whether they're effective,' said one businessman regularly courted for boardroom positions. 'I strongly believe the job of a non-executive is a professional one. Rear-admirals and ex-Cabinet ministers are not necessarily the right people.'

Yet even prior financial or commercial experience is no guarantee of results. Take Alan Clements, whose impeccable record as finance director of ICI has been followed by a series of non-executive misfortunes, including Trafalgar House, where, despite being on the board since 1980, he failed to spot the looming black hole. Mr Clements later signed up as a non-executive director of Mirror Group Newspapers in readiness for its flotation in 1991, and was also, briefly, a non-executive at Brent Walker. Yet he is reputed to have proved an excellent non-executive at Granada Group.

The common feature on the hit-list of companies over which Mr Clements has presided as a non-executive is, of course, their leadership by charismatic men who did not take kindly to being thwarted. Such people have often founded their companies but lack the management disciplines that become necessary as the company expands. 'The maverick chairman-chief executive who regards his corporate empire as a private personal fiefdom is precisely the sort of person with whom internal accountability breaks down,' said one City commentator.

Yet there is widespread consensus in the City as to the value of good non-executive directors. 'There are some outstanding non-executive directors, people like Sir Christopher Hogg and Graham Day. They get paid pounds 10,000- pounds 15,000 and contribute 10 times that value,' remarked one fund manager. He added, 'We don't pay good non-executives enough, though in many instances of course personal gain is not the motivation. The money goes to the company anyway.'

In fact, there is almost universal agreement that fees for non-executive directors need to be substantially increased. 'If a man is paid pounds 5,000 to attend 12 board meetings, you wonder what he's going to contribute,' said a City commentator. One highly respected chairman who is solicited for non-executive jobs on an almost monthly basis, said that he cannot accept less than pounds 80,000, given the time and effort he would expect to devote to the task.

The problem, said one, is 'all these old codgers'. He said a lot of non-executives were simply looking to top up their pensions 'and they're not trying very hard'.

Being a non-executive should be seen as a career 'for younger people who can concentrate and remember what people said last time,' he added. 'If you're talking to someone who tells porkies, you have to spot the gaps over time.'

The increasing threat of legal sanctions lends weight to these arguments in favour of greater remuneration. 'Neither common law nor the Companies Act 1985 makes any formal differentiation between the responsibilities of executive and non-executive directors,' said a leading City lawyer. He added: 'The effect of the Cadbury code may also be to increase the liability of directors. It has provided a yardstick to which any judge or DTI inspector may have regard in judging non-executive directors.'

This would cause two problems. 'The greater the liability, the more difficult it will be to secure indemnity insurance,' he said, while 'those companies which most need non-executive directors will be the very companies which find it hardest to recruit them'.

If the situation in the US is any precedent, institutional and individual shareholders may increasingly decide to invoke the assistance of the courts where they believe non-executive directors have been negligent in the performance of their duties. Ken Kramer, litigation partner at the New York office of Shearman & Sterling, said: 'Pension funds have become much more activist, though they are still reluctant to sue for a breach of fiduciary duty. It is more common to take action for securities frauds.'

As a result of such activism, however, he said: 'It has become more and more difficult for US companies to find qualified people to serve as independent directors. They are fearful of being involved in lawsuits that might attack their own assets.' The shortage of suitable candidates is already being felt in the UK. The Cadbury Committee addressed this point with its recommendation that companies consider a wider pool of candidates.

Some institutional investors and non-executives also believe that executive directors have too much power both in appointing non-executives and in running the company. Their remarks are supported by a survey completed this year by Mori, on behalf of Egon Zehnder International and Executive Interim Management. The study, which covered a random sample of 200 companies from the top 500 companies by market capitalisaton, showed a substantial gap between the number of non-executives eager to help develop and monitor strategy, and the chief executives who felt the same way. One in seven chief executives also opposed the separation of roles at the top.

The survey provided other evidence of how little has changed, despite the best efforts of organisations like Pro Ned. Two-thirds of non-executives surveyed said they were first approached by the chairman in person, and nearly a quarter already knew the chairman or chief executive socially.

Such personal relationships may impede the interrogation of executive directors. They also inhibit the last sanction available to any responsible non-executive - public resignation. Few non-executives choose this route unless, like Mr Howell and Mr Gale, it is forced on them. But it is worth remembering Leslie Warman, the man who stood up to Philip Green at Amber Day.

Initially criticised by the institutions for his resignation, Mr Warman has lived to see history prove him right. History, as one fund manager pointed out, is ultimately the only measure of a non-executive's performance.

(Photograph omitted)

Comments