Outlook: Why bother with non-execs? The Pru's Hurn might agree

Internet survivor Egg
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The Independent Online

This is the way it is supposed to work. After a long and distinguished career in industry, the chief executive retires and becomes part of the City great and the good by taking on a number of non-executive directorships at top drawer FTSE 100 companies. The work is interesting, fun, not too demanding and, for the number of hours put in, pretty well paid too. Only it hasn't worked out that way for poor old Sir Roger Hurn, whose business reputation has been beaten to a pulp since he gave up a life long and highly successful career at the engineering conglomerate Smiths Industries for the stewardship of Marconi and Prudential.

The nightmare of Marconi's boom to bust hardly needs any repeating. When the full horror of the corporate disaster he had presided over became apparent, Sir Roger resigned, saying with characteristic dignity that he had neither been offered a payoff nor had he sought one. The same could not be said of his chief executive and finance director, the architects of Marconi's nemesis. Both eventually had to be fired, and in the process they fought tooth and nail for their contractual rights.

Six months later, and Sir Roger is being forced to give up his non-executive chairmanship of Prudential as well. Perhaps the biggest surprise is that it has taken him so long to do so, for the Marconi affair raised serious questions about Sir Roger's judgement all round. One of the main functions of a non-executive chairman is to rein in the ambitions of over-enthusiastic executives, and, on shareholders' behalf, prevent them betting the farm on a high-risk gamble. This he plainly failed to do at Marconi, though to be fair on Sir Roger, the roll of the dice Marconi engaged in had the full backing of the City at the time.

Still, is it appropriate that someone who has allowed a boring but financially robust industrial conglomerate with a £1bn cash mountain to be transformed into a financial basketcase in just three short years should also have ultimate stewardship of one of Britain's biggest savings institutions? The question only needs to be posed to be answered.

That's the backdrop to Sir Roger's departure from the Pru but, as it happens, he's not going specifically because of the series of misjudgements that led up to Marconi's demise. Rather it is because of the cock-ups that occurred on the day of Marconi's momentous profits warning. Marconi had arguably misled the market right the way through the telecoms meltdown, persistently claiming that its own performance was bucking the trend when in fact it turned out to be just as bad if not worse.

But on the day when Marconi finally allowed the veil to fall and revealed the full extent of its troubles, there were a number of specific offences. First thing in the morning, Marconi announced the upbeat news that it was disposing of its medical equipment arm only to realise that with a profits warning coming down the line later that day, the stock market was being hopelessly misled. The shares were suspended and complete radio silence maintained during a day of frantic rumour and counter rumour.

Given the scale of the job losses announced the same day, the company's attempt to rebase executive share options, supposedly because of the difficulty of recruiting and keeping top talent, looked positively crass. The chairman seemed to have lost control of both the management and the newsflow and for that he faces a public rebuke from the Financial Services Authority when it comes to issue its report on the matter next month. Sir Roger will already have seen the wording, which is being circulated among those cited, and it was undoubtedly this that brought matters to a head.

For Sir Roger, it is a sad, almost tragic end to a remarkable career. In his departing speech as president of the Institute of Directors, Lord Young of Graffham, yesterday questioned whether it was ever possible for non executives working on a part-time basis to know enough about what was going on in an organisation to blow the whistle on bad bad practice and decision making. Why bother with non-executives at all, he asked. Those that remember his executive chairmanship of Cable & Wireless, which ended in a spectacular boardroom row, will know the answer. The board was almost wholly out of control by the time non-executives decided they had to rid themselves both of Lord Young and his chief executive. At the time they only knew the half of it. Sir Roger probably knew even less at Marconi.

Non-executives are in much the same boat as regulators. It is only the failures that get reported. The successes go unannounced and unrecognised. Sir Roger may already have achieved some success at the Pru for all we know, but it will be for the monumental failure in controls that took place at Marconi that he will be remembered.

Internet survivor Egg

For an internet stock, Egg is showing uncharacteristic signs of life. Its shares are 22p above their 160p float price, and yesterday the company posted its first quarterly profit. Customer growth in the core business is still accelerating, even though Egg is no longer spending heavily on land grab. Most internet chancers have fallen by the wayside. Egg looks as if it will make it.

But whether it is quite the outstanding success story its parent company, Prudential, would have us believe is another thing entirely. The reality is, not withstanding predictions that the internet would wipe out traditional retail banking, you would have done much better to have stuck your money into Barclays and Royal Bank of Scotland shares than those of Egg. The same may not apply to current accounts, but as an investment, the traditional players have beaten the newcomers hands down. Since Egg's flotation, shares in Barclays have gained more than 60 per cent, hitting an all-time high yesterday. The rest of the sector has done a lot better than Egg too.

No one would say that Egg's maiden profit was easy money. Egg borrowed at a higher rate than it lent for some two years after launching in 1998 in a successful attempt to entice famously inert savers away from the incumbent banks.

The market-leading savings rate succeeded in pulling in billions of pounds, which helped fund Egg's launch into the lucrative credit card market. Aware of the inertia that keeps banking customers sitting tight, Egg again offered market-leading interest rates to persuade customers away from rivals. Zero per cent for six months is hard to ignore, especially if the following rate is still only two-thirds that of Barclaycard.

Egg's success to date has been founded on attracting a highly unrepresentative, price-sensitive segment of the market. Such customers are notoriously promiscuous. They will switch funds to chase the highest rates at the drop of a hat. Egg's hope is that the big high street banks can't or won't respond because they would be kissing goodbye to their profits if they were to apply competitive interest rates across the board. Even so, Egg is going to find progress from here on in much more difficult. Egg has survived, which for an internet brand is remarkable, but it hasn't yet succeeded in transforming the landscape.

jeremy.warner@independent.co.uk

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