A quiet revolution has started in our boardrooms

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The Independent Online

When power shifts it is always a moment to sit up. Suddenly, in the space of few months, shareholders have begun to enforce their wills on boards of directors. Last week they vetoed plans by the directors of Prudential to enrich themselves at the company's expense. Take this striking example together with the case of the Equitable, where the directors who presided over the collapse of the venerable company are being sued in their personal capacities, and one can see that something big is happening. The consequence will be a change in the way companies are run.

When power shifts it is always a moment to sit up. Suddenly, in the space of few months, shareholders have begun to enforce their wills on boards of directors. Last week they vetoed plans by the directors of Prudential to enrich themselves at the company's expense. Take this striking example together with the case of the Equitable, where the directors who presided over the collapse of the venerable company are being sued in their personal capacities, and one can see that something big is happening. The consequence will be a change in the way companies are run.

No alteration in the law has been required. At any time in the past 50 years, shareholders could have taken such actions. And small shareholders have always been prepared to do so. The trouble has been that directors have long been protected by powerful networks.

The first of these has comprised the big shareholding institutions such as pension funds, life assurance companies and investment management firms. The rather timid former accountants and actuaries who run such organisations, leading, as they do, lives far removed from the heat of commercial battle, have long lacked the confidence to challenge established managements.

Sensing that they themselves couldn't possibly handle large workforces, puncture the pretensions of the sales staff, kick suppliers up the backside and do all the unpleasant tasks which confront the management of large enterprises, they have tended to stay safely in their offices and merely scowl when their investments have performed poorly.

As a result of all this, investment institutions have rarely been prepared to vote in favour of resolutions hostile to management. They have almost always meekly backed the board however critical small shareholders may have been.

Against this background, I find the case of the Pru truly remarkable. Until recently, the Prudential was unassailable. It was extremely old and extremely large. Its door-to-door sales force, with the famous "man from the Pru", now disbanded, was as much part of the English scene as warm beer, cricket at the Oval and Trooping the Colour. It was the largest shareholder in British industry. Its board of directors was utterly respectable; its investment managers and actuaries beyond reproach; it was a bulwark of the City, like the Bank of England and the Lord Mayor.

All this has gone. It has been heavily fined by the regulatory authorities; it is no longer the single most powerful institution; its chairman is leaving because of his errors of judgement at Marconi. And the Pru's large shareholders – who are rather similar, being themselves insurance companies, pension funds and the like – have turned against it.

They were confronted by a scheme for the payment of directors which had many obnoxious features. It was much too generous, it was complicated and it sought to remove power from shareholders by giving board members excessive discretion to alter the details. All these characteristics, by the way, reminded me not of the great Prudential of old, but of the habits of the worst type of companies, that is, breathtaking greed, obfuscation, and secret decision making.

Paradoxically, a second powerful network protecting managements has comprised the very people who are charged with supervising the executive – non-executive directors. Their failures have been manifold. Name any disaster – Marconi, BT, Railtrack – and you will find non-executive directors of unblemished character with many achievements to their name going down with the ship. Some are professional non-executive directors, with many such positions, who naturally don't wish to be known for causing trouble. Some have risen high in public life, but know nothing about business. Some are former executives who like to play the role of a kindly grandfather to the new generation. Some excessively value the income and prestige which a seat on the board of a well-know company gives them.

To all these incompetents, the fate of the former directors of the Equitable has come as a nasty shock. Being sued for failing in one's duty as a director is a nightmare whatever the eventual outcome. Of course, you are insured, but the former Equitable directors do not know whether the cover is sufficient. Meanwhile they must pay for expensive legal advice. And while the matter remains unresolved, they face the risk of humiliation and financial ruin.

That is why non-executive directors are beginning to spend much more time thoroughly checking the proposals put forward by ambitious executives. Whereas they formerly saw their posts as virtual sinecures, their duties being to attend one or two meetings a month for perhaps 10 months in the year, now they realise that the punishment for misjudgement could be severe.

Thus the rusty machinery of shareholder democracy at last cranks into action. Non-executive directors finally realise that their primary duty is owed to all shareholders rather than to their boardroom pals. And the big shareholders reluctantly accept that they must occasionally give a lead rather than supinely follow management in all it does. In British business that is a revolution.

aws@globalnet.co.uk

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