Business View: Vickers in a twist unless the OFT is called to account

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John Vickers has always come across as a pretty good egg. Clever, without being too donnish (despite having been a professor of political economy at Oxford). Determined, without being too dogmatic (a criticism sometimes levelled at his predecessor as director general of Fair Trading, John Bridgeman). Clubbable but discreet (a legacy of his time on the Monetary Policy Committee, perhaps). So it would be a terrible shame if he allowed the OFT's report on auditor liability to go uncorrected and turn into a stain on his reputation.

John Vickers has always come across as a pretty good egg. Clever, without being too donnish (despite having been a professor of political economy at Oxford). Determined, without being too dogmatic (a criticism sometimes levelled at his predecessor as director general of Fair Trading, John Bridgeman). Clubbable but discreet (a legacy of his time on the Monetary Policy Committee, perhaps). So it would be a terrible shame if he allowed the OFT's report on auditor liability to go uncorrected and turn into a stain on his reputation.

I point out in an article on the next page some of the things that are factually wrong with this report, but it is hard to give the flavour of how glaringly shoddy a piece of work it is.

I don't spend my life studying case law on auditor liability, but when I came to the section mentioning the seminal case of Caparo v Dickman (which limits the duty of care of an auditor to the shareholders of the company it audits), I was immediately looking for the more recent case involving ADT and Binder Hamlyn, which widened the net of who is able to sue. It wasn't there. Nor were lots of other issues relevant to this discussion, like the well-publicised £2.5bn legal action against Ernst & Young brought by Equitable Life. In the profession, it is considered that if Equitable wins, E&Y might not survive. Yet the report argues there is no risk that one of the big four accounting firms could be brought to its knees by litigation.

I contacted the OFT and was asked to detail the errors and omissions in writing. I did and was given an unconvincing defence of the report, citing time constraints and the inability to do any research beyond reviewing submissions made by interested parties.

Golly. Next time someone complains to this paper that we've got something wrong, I'll try that excuse. And it won't wash. We have to do our research rapidly and get our facts right as well. If we don't, we run corrections. Every paper does. Sometimes it goes further. Newspapers have been sued for many hundreds of thousands of pounds for quite minor mistakes. At the BBC, a factual error in a story led to the resignation of the chairman and the director general. Yet these are the errors of mere journalists. Not the custodians of commercial competition in the United Kingdom.

Professor Vickers has been on holiday. As has Trade Secretary Patricia Hewitt. When they return, they might consider that unless they do something to correct this flawed and dangerous report, the reputation of the OFT will be severely undermined. And as Professor Vickers only has one year left of his term of office, he surely does not want that to be his parting gift.

Hubris at Hermes

As the cobbler's children tend to be the ones with holes in their shoes, so it is that the corporate governance experts cannot agree about the right way to manage their business. After rows about how much of the pie they should get at the giant fund manager, out went Hermes stars Peter Butler and Steve Brown.

Ignoring the questions about whether guys with contracts giving them a potential £6m should complain about corporate greed, the issue here is how you remunerate star fund managers. The rise of the hedge funds, with their stellar pay packets which give fund managers as much as 20 per cent of the upside on money they invest, has presented traditional asset managers with a dilemma. How can they pay their stars enough to stop them going off and starting their own boutiques?

However, the Hermes model does not work well with a hedge fund. They tend to use their relatively small size to their advantage, moving quickly in and out of situations. Hermes, with its £46bn under management, used its size as muscle. By having 4, 5 or 10 per cent of a company, it could force changes through that it thought would improve the governance and so the performance of the business.

The departure of Messrs Butler and Brown is a shame, not a tragedy. While they were good at their jobs, it is the ethos and structure of Hermes which makes it successful, not two avaricious fund managers.

j.nisse@independent.co.uk

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