COMMENT: A blacklist of poor performers is what's needed
Tuesday 27 February 1996
Hermes, which manages the Post Office and British Telecom pension schemes, intends to advertise for the new position tomorrow. The idea is to appoint someone with management/consultancy experience to comb the database for underperforming companies where the evidence points to management failure rather than simply market conditions, and take appropriate action.
Hermes has a particular problem on this front since most of the fund is index-tracking. It thus has shares in most publicly quoted companies, bought regardless of whether they are performing or not. Like most other institutional investors, Hermes is not good at intercepting management problems until they have reached the terminal stage; either the company receives a bid or it goes down the tubes.
A hostile takeover bid often proves the best way of galvanising management and releasing value to shareholders, but as pointedly illustrated again yesterday with news of Rentokil's pounds 57m bid costs for BET, it comes at a price and in any case most of the upside is meant to go to the bidding company. Mr Ross Goobey's new troubleshooter would parachute himself in with a series of proposed changes long before a company reached such a crisis point. Using this approach Hermes would also neatly avoid the problem institutional investors normally associate with active involvement in management - that of becoming an insider banned from dealing in the stock. Hermes believes it would be free to trade actively until it gets to the point of the company accepting its proposals for change.
All this is undoubtedly a good idea. Spring Ram and Fisons are among the very few recent examples of companies where institutional investors have become actively involved in the process of management change. Clearly there should be more of it. The real drawback with the troubleshooter approach, however, is that the Hermes prescription for change may not necessarily be the right one. Indeed it seems highly unlikely that one person on his own is somehow going to be able to wave a magic wand and make everything all right where it was not before.
The American approach pioneered by the likes of Bob Monks of the Lens fund might have more to commend it. His technique is also to target underperforming companies and make suggestions for change but he does so be creating a public debate about it. The Californian Public Employees Retirement Scheme goes further and publishes an annual blacklist of underperforming companies. If Britain's most powerful investment institutions were prepared to put their name to something similar, that might really do the trick. You won't see Mercury Asset Management and others that make their living from stock selection doing that, however. That would give the game away.
Plenty for the Exchange to think about
If the Stock Exchange had hoped that the biggest ever consultation exercise in its history would extract it cleanly from the misery of months of indecision and confusion over the proposed revolution in the way equities are traded in London, then it must be sorely disappointed. The responses to its questionnaire on introducing a fully automated order-matching system, which would bring London into line with all other major international financial centres, have certainly been fulsome. They fill three large folders. And they offer just about every possible permutation human ingenuity could produce.
About the only element of consistency is that everyone, from private client stockbroker to mega-market-maker, from institutional fund manager to retail punter, wants the system best suited to its needs. Unfortunately, these are wildly divergent, even to the ludicrous extent of different parts of the same firm, such as the asset management and broking arms at Kleinwort Benson or Schroders, not being able to agree the same line. Crunching this confusing multitude of preferences and options into a single, clear proposal for change is going to test the exchanges' computer to the limit.
It would be going rather too far to say, come back Michael Lawrence, all is forgiven, but the kaleidoscope of responses does dramatically demonstrate the difficulties in marshalling this unruly multitude of members, full of opposing vested interests, in favour of voluntary change. But change there will have to be, that much is clear from a preliminary assessment of the responses. There are plenty of diehard opponents, but there are many more who either see the benefits of introducing some form of order- driven system into the City, or accept that their scepticism is not enough to hold back the inevitability of reform.
Robust language in the world of accountancy
Sir David Tweedie, chairman of the Accounting Standards Board, has always been ready with a telling phrase. His knack of coming up with memorable quotes goes some way to explaining why this champion of such an exciting- sounding subject as transparent accounting has won favour with the media. But his latest soundbite - describing a document as displaying "all the vision of a mole and the eloquence of a whoopee cushion" - goes somewhat further than the norm.
What is going on? Can this really be the world of accountancy? Well, yes, at a time when writs fly at an increasing rate and the language of business is getting steadily more robust, it can and is. The document in question carries the stamp of Ernst & Young, and is a response to the draft Statement of Principles issued for consultation by the ASB late last year. E&Y, which insists that the firm's stance has nothing to do with the fact that over the years it has acted for BTR and Hanson, two of Britain's most acquisitive companies, claims to have serious technical concerns with the approach set out there.
The problem is that just about everybody else sees the attack as opportunistic marketing that threatens to undo the progress that Sir David and his colleagues have made since the late 1980s. As Chris Swinson, recently elected as vice-president of the Institute of Chartered Accountants, has famously admitted, the statement "true and fair view" once rarely amounted to any more than a guess. E&Y may have views that deserve to be aired but by seeking to out-publicise Sir David it is in danger of encouraging just those industrialists who have struggled with the transparency he has sought to introduce, especially since he and the board are only doing what standard- setters in others parts of the world are doing.
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