Jeremy Warner's Outlook: Rentokil's Mr 20 per cent meets a sticky end

Sainsbury/Davis
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The Independent Online

Sir Clive Thompson's epitaph should read exit stage left pursued by regulators. The Rentolkil Initial chairman is said to have been completely unaware of the boardroom coup he was about to fall victim to when he sold 5 million shares a month ago - 70 per cent of his holding - but the Financial Services Authority is going to take some convincing that nor did he have any inkling of the calamitous profits warning the company was about to spring on its shareholders.

Sir Clive insists that his information was no better than was available to everyone else when he sold, so I guess we have to believe him, but it's no wonder Rentokil's gang of five non-executive directors decided to act. Sir Clive is damned if he knew and equally damned if he didn't, for what kind of a chairman is it who is so far removed from the pulse of events that he has no idea his profits and revenues are evaporating before his eyes?

Sir Clive's chairmanship provides all the justification needed for the corporate governance rule, which discourages boards from allowing their chief executives to move into the chairman's seat. As "Mr 20 per cent", Sir Clive was the entrepreneurial genius behind Rentokil's growth from small-time pest control company to the giant of office services it is today. Sir Clive earned his nickname not for the disreputable meaning it is now bound to acquire, but for the consistent year-on-year earnings growth he managed to achieve.

Over nearly 20 years as chief executive, the target became a curse. There was always a suspicion that Sir Clive was foregoing necessary investment in the company's long-term future for the short-term fix of meeting the City's profit expectations. When Sir Clive decided to move upstairs, the new chief executive James Wilde, struggled valiantly to change direction, but Sir Clive had about as much time for Mr Wilde's strategic meddling as he would his chauffeur's cat. As Brian McGowan, the executioner in chief, observed yesterday, Sir Clive's presence and dominance remained so all pervading that changing the culture, style and emphasis of the company was altogether impossible.

Mr McGowan wants us to see yesterday's coup as a triumph of good corporate governance, yet by his own admission, the business has gone nowhere for at least four years now, during which time there has been a string of downgrades and disappointments. There must have been a case for acting earlier. Still, better late than never. That one of the five executioners was Ian Harley, fired last year for bringing Abbey National to its knees, is an irony that won't be lost on either Sir Clive or the man himself.

Mr McGowan says that after years of drift, the company needed to be liberated from its past. Unfortunately, the lesson of history, confirmed again by Iraq, is that acts of liberation are usually only the start of the trouble. Sir Clive's fall will almost certainly expose a whole host of problems that had previously been swept under the carpet. Office services are an infinitely more competitive business than when Sir Clive was building Rentokil. Both pricing and margins are under intense pressure, and it is in the way of corporate blood lettings that there will be a lot more bad news to come before things start to get better.

For Sir Clive, the lesson is the old one. Never outstay your welcome, for everyone's luck will eventually run dry. The time to have gone was four years ago when he was still at the top of his game. Instead, he's had to suffer the humiliation of being fired. The curse of the CBI, under which seemingly all those who take up the presidency of the industrial lobby group eventually meet a sticky end, has struck again.

Sainsbury/Davis

Sir Peter Davis, chairman of J Sainsbury, is another classic example of corporate governance gone wrong. He should never have been allowed to move from the chief executive's role to the chairmanship, the more so as the turnaround strategy he was responsible for while chief executive has plainly failed. With every new set of results, the company falls further behind its leading competitors, and with nearly all aspects of Sir Peter's turnaround strategy now complete, the situation should now be improving. Instead it is getting worse.

Now routinely vilified in the press, both for his lack of performance and for his greed, Sir Peter's only purpose in staying on seems to be for the money. For a non-executive chairman, this remains astonishingly high, even though, bless him, Sir Peter has elected to forgo the £850,000 originally agreed and opted for a straight half mil instead. For that, Justin King, Sir Peter's successor as chief executive, can call on Sir Peter's "advice" full time. It was clear from Mr King's carefully chosen words yesterday, about there still being a way to go on execution before he could start to think about how to position the brand, that the new man at the checkout has already decided against taking it.

Only Sir Peter could have conspired to ensure he was awarded 864,000 free shares in bonuses, worth £2.4m at yesterday's price, in a year when both pre-tax profits and like-for-like sales fell. Well, he has got an expensive new yacht and country house to pay for, hasn't he. I've been kinder on Sir Peter than I perhaps should have over the years. As he's repeatedly said, the company was in a shockingly run-down condition when he rejoined as chief executive four years ago. Yet shareholders were entitled to expect more.

For me, the scales finally fell from my eyes on a recent visit to what had once been one of Sainsbury's flagship London stores. There was no rhyme or reason to the way the shelves were stacked, with non-foods crammed in alongside the baked beans in a manner fit for bedlam. Even after establishing the supposed location for what I was looking for, the store was repeatedly either out of stock or the line had been discontinued. Frustrated, I eventually abandoned the trolley and drove to the nearest Tesco's.

The time for the non-executives to have acted was the fiasco of Sir Ian Prosser's appointment as chairman in waiting. This was very much Sir Peter's fault, as he had a finder's fee riding on securing a successor. It would have been easy for the non-executives to have made Sir Peter pay for his misjudgement with his job. The humiliation was deeply felt by all when the luckless Sir Ian was appointed only to be unappointed a few days later after the City screamed blue murder. But the board did nothing, preferring an easy life to the fallout of a public execution.

Sir Peter is said to be keen to go as soon as a credible successor can be bedded in. Few in the City think he'll see out his contract. But what kind of a legacy has he left? In the search for a new chief executive, Sainsbury's headhunters tried long and hard to attract one of Tesco's up and coming young turks. With Sir Terry Leahy showing no sign of wanting to hang up his boots, you might have thought they would have been queuing down the aisles for the chance of the top job somewhere else. There's no mystery as to why they weren't. Most executives in the supermarkets sector regard Sainsbury's as mission impossible.

The awful truth is that Sir Peter's reign has failed to improve matters. Insiders say that the spanking new distribution system, installed by Sir Peter at vast expense as a cornerstone of his turnaraound strategy, is failing by a big margin to deliver the productivity gains planned for, while my own little vignette demonstrates just how far it's got to go in improving poor levels of availability. The decision to outsource IT to Accenture was an expensive mistake, while the posh new, glass fronted headquarters in central London look a ludicrous extravagance set alongside the unsalubrious out of town sheds that house the company's more successful competitors.

There's no apparent solution to the now yawning 7 per cent price gap that separates Sainsbury from Tesco. With every price cut matched pound for pound by the competition, the effect of a price-cutting strategy for Sainsbury's is only to clobber profits while adding little or nothing to sales. Little wonder no one from Tesco would take the job. Mr King has a Herculean task ahead of him.

jeremy.warner@independent.co.uk

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