Underwater share plans should stay underwater

Marconi; Insurance debacle; Military transport
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The Independent Online

With the collapse of the technology bubble, it was always inevitable that someone would eventually take the plunge and attempt to rebase their share option scheme. The fact that Marconi is first through the hedge should, perhaps, come as no surprise. Lord Simpson, its chief executive, seems to be developing a habit of stirring controversy over executive pay. He provoked a monster of a fat cat row when he first joined the former GEC.

Actually, it isn't strictly speaking true to describe Marconi as the first, since there have been plenty of examples of it in the US, where the 90 per cent club (companies that have lost 90 per cent or more of their value in the technology crash) is a lot bigger than it is here. In this country, InterX and New Look have also taken a stab at it, and jolly angry it made investors too.

But Marconi is the first FTSE 100 company to attempt the feat, and if it succeeds, it will undoubtedly open the floodgates to a host of others that regard payment in share options as a key competitive advantage in the battle for top executive and technical talent. Marconi has bent over backwards to make the proposals acceptable to shareholders. The number of options given to qualifying members is halved, and even the rebased price is at a considerable premium to the present market price. The new options will still be some way "underwater", to use the jargon.

Even so, many major shareholders are far from relaxed about it all and you can see their point. Nearly all investors would these days accept that pay has to be competitive if companies are to perform, but they also expect to see executive reward structured in a way that aligns it with their own interests. Rebasing of share options fails this test in almost every respect. It dilutes outside investors and encourages the view among staff that they will be rewarded whatever the share price does. As it happens, the Marconi share price has been one of the worst performers in the FTSE 100 index since Lord Simpson and his finance director, John Mayo, embarked on their strategy of transforming GEC into a New Economy stalwart, focused on internet routers and other cutting edge communications equipment.

Indeed, there is a good case for arguing that the whole thing has been a total disaster. Marconi paid high prices for companies in markets now deep in recession, and its share price has suffered the consequences. Marconi may already have done enough work with its big shareholders to ensure they don't vote the new scheme down. But an unfortunate precedent is being set.

Insurance debacle

With most financial collapses, the old questions are usually the best, and Independent Insurance is no exception. Where were the auditors ­ in this case KPMG ­ when investors and creditors needed them most? How come the external actuaries ­ Watson Wyatt ­ were unable to ensure the company was adequately reserved? What were the regulatory failings ­ the Financial Services Authority is responsible for monitoring the company's solvency and regulating its practices more generally ­ that allowed Independent Insurance so spectacularly to go from boom to bust?

How did the City get so taken in, or was this just another case of judgement being surrendered to the higher priority of fees? And last but not least, where were the non-executives ­ Michael Baughan, a managing director of Lazards, Sir Ian Noble, a former merchant banker, and Daniel Hodson, a former chief executive of Liffe ­ to reign in the over enthusiasm of their chief executive, Michael Bright, and halt the pattern of over trading?

The standard answer to these questions has tended to be that any number of checks and balances is insufficient to stop the determined miscreant, that those hell bent on pulling the wool over everyone's eyes will always succeed. Rarely does this turn out to be the whole truth. Nearly always there is slowness to act, warnings that went unheeded, poor systems of control, inadequate supervision, and so on and so forth.

The shame of the Serious Fraud Office's now likely involvement in the Independent Insurance débâcle, is that we may never fully know the answers. Once the SFO is involved, everyone clams up, other investigators get frozen out, and since the SFO's raison d'être is to bring criminal prosecutions, all other charges such as breach of professional standards, regulatory failure and negligence tend to get lost in the wash.

The last such big case was the collapse of Brent Walker, which eventually resulted in a fraud trial, but where there was never any publicly available report into the many professional failings that allowed it to happen. At The Independent (the newspaper, that is), it still rankles, for we were forced to withdraw our original allegations of fraudulent accounting and pay out for legal costs because of an assurance from KPMG (them again) and the law firm Simmons & Simmons that having investigated the matter, everything was hunky dory. Little more than a year later the company went down with all hands. We would still like to see our money back.

Investors, policyholders and other creditors should not be so shy with Independent Insurance. The collapse demands answers, the more so because it involves insurance, an industry where people are entitled to expect the highest standards of competence and integrity.

Military transport

Much to everyone's surprise, the giant Russian Antonov, all 23 tonnes of it, actually took to the skies at the Paris Airshow this week, which is more than can be said for Europe's equivalent military transporter, the Airbus A400M. According to the script, Geoff Hoon (who, as you probably didn't know, is Secretary of State for Defence) and seven of his European counterparts should have cleared the way for take-off by signing a definitive production contract for the monster carrier.

Unfortunately, the Germans have still not found the money for their share of the $17bn programme. Indeed, they don't even seem to know exactly how many of the carriers the Luftwaffe needs. Instead ministers had to make do with another Memorandum of Understanding, which is almost identical to the one signed at Farnborough a year ago and which commits the Germans to precisely nothing. The A400M is fast becoming a fiasco, and a gift to the Eurosceptic cause everywhere, bound up as it is with the row about the European Rapid Response Force.

But the project also raises another question familiar to students of procurement battles down the years: does Europe need to build its own military transporter at all when it could buy an American plane off the shelf in the shape of the C-17? Airbus says the C-17 offers Europe a capability it does not need at a price it cannot afford. But at $80m a throw, the paper plane now being designed in Toulouse does not exactly come cheap either.

Moreover, anyone hoping that the A400M will be a shining example of how Airbus operates in its new guise as a commercial entity will be sadly disappointed. In addition to the four Airbus partners, the Turks, the Belgians and the Portuguese will be on board too. Even plucky little Luxembourg has a seat this time. If a camel is a horse designed by a committee, just wait until the taxpayers of Europe see what an eight-nation military transport plane looks like.

j.warner@independent.co.uk

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