Businses View: Corporate dinosaurs have been hunted down. Now they must be finished off

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The Independent Online

Are you a company "dinosaur" or a corporate governance "terrorist"? The year 2003 produced one of the biggest ever shake-ups of the way companies are run, and with it came some pretty colourful descriptions of those in the debate.

You were, according to the Department of Trade and Industry, a dinosaur if you rejected Derek Higgs' review of corporate governance. Meanwhile, Lord Black of Crossharbour became one of the biggest casualties of the new wave of shareholder activism, when he resigned as chief executive of the Hollinger newspaper group. "Corporate governance terrorists" is how he described his nemesis Tweedy Browne, the fund manager that blew the whistle on unusual payments to Hollinger executives.

There have been some disappointments - notably Rupert Murdoch's insistence, against the wishes of many institutions, that his son should be the boss of BSkyB. But many sloppy and outdated company practices met their end in 2003.

Take executive contracts: around three-quarters of FTSE company directors are on a notice period of one year or less. This means that if an exec is forced to resign, the bounty he or she will receive to pay for that third home will be severely restricted. For example, Jean-Pierre Garnier, chief executive of the drugs group GlaxoSmith- Kline, will be forced to forgo his £22m severance package, should - heaven forbid - he lose his job, after shareholders kicked up a fuss.

Joint chairmen and chief executives also saw the writing on the wall last year. Even British Land boss John Ritblat, long regarded in some quarters of the City as a corporate governance tyrannosaurus, agreed to split his dual role. But his son, Nick, has emerged as a strong candidate to become chief executive, and this may bring with it a new set of issues.

Now that the Higgs recommendations are to be incorporated into the combined company code, issues such as the appointment of senior non-executive directors will feature strongly at this year's crop of annual general meetings.

And the Parmalat rumpus - which has silenced those who claimed that Europe would never have a fully blown Enron-style scandal - reinforces the need to drive forward standards of good corporate behaviour and transparency.

There is, however, a danger that the momentum gained last year in getting shareholders exercised about corporate governance could run out of steam. Shareholder activism thrives when the markets are down. The investment guru Warren Buffett famously said that it is only when the tide is out that you can see who has been swimming without their trunks. So the two-and-a-bit-year bear market made it easy for shareholders to identify the skinny-dippers. With the FTSE up a solid 13 per cent in 2003 and commentators predicting further gains this year, the desire to target sloppy corporate governance practices must not wane. In the long run, this is in the interests of shareholders and fund managers, as surveys have shown that well-governed companies enjoy greater returns than poor ones.

Some shareholders will still take the easy option. They spot a problem with a company and, rather than taking the executives to task, quietly sell down their holding, before anyone else cottons on. It is no wonder, then, that institutional shareholder turnout at annual general meetings barely registers 50 per cent.

This is not good for British business. The better run the country's companies, the more money they will attract from institutions, both British and foreign. The Trade and Industry Secretary, Patricia Hewitt, has twigged, and late last year she criticised institutions for their poor voting record. Behind the scenes, the DTI is looking at ways of improving the situation. One idea the Government has let slip is to force shareholders to vote, with the introduction of new laws. In reality, it is unlikely to do this, given that it is against compulsory voting at general elections, where turnout is just as poor. But at least the proposal shows ministers are taking the issue seriously.

Shareholders should take note. To build on the success of 2003, and to prevent the Government introducing prescriptive rules, they should at the very least turn up to company annual general meetings and vote against Jurassic corporate governance.

clayton.hirst@independent.co.uk

Jason Nissé is away

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