The days of unrestrained director power are over

This is an example of shareholders doing exactly what they should do: hold directors to account
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The Independent Online

The trouble with boardroom bust-ups like the eviction of Michael Green from the proposed chairmanship of the Granada/Carlton joint television company is that they tend to be reported in gladiatorial terms. Chief executives battle for survival. Boards fight to demonstrate their independence. Investors demand that heads roll. And so on.

This is a shame, partly because it gives the impression that the men (women don't get much of a look-in) who run large companies behave like spoilt brats when crossed - which they sometimes do. But more damaging is the fact that it obscures what is really happening to the way that big firms are run. What we need is well-run companies, not playground fights writ large.

The Granada/Carlton issue is both an old "playground fight" story and a new corporate governance one. The old story is very simple, for it is about who will be top dog of the merged group. Should it be one of the two chief executives of the constituent parts - in this case Michael Green of Carlton and Charles Allen of Granada - or should it be someone else?

The point made by the Granada board, that it should be led by an outsider, is really the only sensible way forward. In the case of Michael Green in particular, it must come quite hard to build up a huge business from nothing then suddenly find that you're out.

But we all know how the playground hero (or the playground bully) can suddenly be toppled when some new boys arrive. More seriously, if you lose a billion or so of shareholders' money on an ill-judged digital television venture, as did Carlton and indeed Granada, then those shareholders are liable to want someone else to run the show. Arguably they would not be doing their fiduciary duty were they not to press for change.

The puzzle is that the Carlton board did not see things this way, until yesterday seeking to support Mr Green despite the weight of shareholder opinion against him. And this leads to the more important issue: what does the tale tell us about trying to ensure companies are run as well as possible?

Corporate governance is one of those turn-off phrases - whenever I hear it I groan. It is not in itself a great virtue, for good governance is at best an intermediate goal. What we need is good companies, creating good products and services for their customers, good jobs for their staff and good returns for the savers who rely on it for their income in retirement. Whether some report says there should be independent non-executive directors or that the chief executive should not be the chairman is only a means to an end.

There is, however, a public interest here. If a company is privately owned then it has certain broad duties to be a good corporate citizen: it should follow the laws of the land, pay its taxes and so on. If it loses money, well, it is up to the owners to do something about it.

In the case of a public company, with a quote on the stock exchange, it is dealing with other people's money - the people who own the shares. Sometimes managers, and particularly chief executives, forget this. Provided they are successful and continue to be successful, they are usually forgiven. What would shareholders rather have: a well-run company that for whatever reason broke the formal code on governance or a badly-run one that ticked all the boxes? But when things go wrong the reaction of shareholders is all the more vicious.

Three things give the Granada/Carlton issue a special significance. One is that it is the first big bust-up since the Higgs report on governance. This report has been criticised for being too pernickety. For example non-executive directors are deemed not to be independent if they serve for more than 10 years. Well, I can think of long-serving directors who are very independent and new ones who are little mice. Chairmen should be non-executive and chief executives are not supposed to become chairmen - an issue at Barclays now. Again, there are plenty of examples where people have combined the jobs very well, at least for a while, and of people who make this shift in roles successfully.

What Higgs has done, and this is helpful, is change the climate. Boards should know that if they do not follow best practice they will be held to account. I suspect the Carlton board simply has not realised the extent to which the climate has changed. Michael Green has long seen the purpose of non-executive directors to support him and perhaps tended to attract people who felt comfortable in that role. Now shareholders feel emboldened and boards had better be aware of that.

The second big change has been the Equitable Life saga, where directors are currently being sued for negligence. They could be bankrupted if they lose and could face vast legal costs in any case simply to defend themselves.

Rates for insurance to cover directors' legal liabilities have soared. Suddenly the job of the non-executive director has become much more onerous. Those fees for turning up at board meetings and not making too much of a fuss now carry huge risks.

Up to now most directors have felt that the fees, the interest and, I suppose, the status compensated for such risks. But it may be a bit like being a member of Lloyd's insurance market. People sign up thinking that the risks are theoretical but suddenly fund they are practical in the most painful of ways.

The third change is the emergence of an alternative to public markets, private equity. There has been a boom in companies deciding that they would prefer to raise money from private investors - or at least investors who choose not to have the regulatory protection of the public markets. And many companies prefer not to have a quote on the exchanges and seek money from private equity managers instead.

In one sense this is great. It means that sophisticated investors can make bets on risky ventures and it means firms that do not qualify for a public quote can raise money. But it also means that if regulation tightens, more firms may simply walk away from the public eye and subject themselves to private scrutiny instead. It could mean that the best deals go to the most sophisticated investors, leaving the rest of us with the rubbish.

Were Mr Green starting a business now I suspect he would not have taken it public. Certainly many directors of public companies are pondering whether the risks are worth the rewards, when there is an alternative that pays better, carries less public scrutiny and fewer risks to their reputation.

None of this is to suggest that the shareholder action at Granada/ Carlton is wrong. Quite the reverse. It is a welcome example of big shareholders doing exactly what they should do: hold boards of directors to account. And when top dogs fail, they must be judged, in the first instance by the board, of course, but ultimately by shareholders.

Think back. Could a more orderly and tougher set of boardroom rules have prevented some of the disasters of the dot.com boom? I think the answer must be yes. But we should beware the advance of the culture of box-ticking. And we should not lose sight that we want good companies, not just good governance.

And the corporate buccaneers? They'll be fine. They should just run their own businesses instead of leading public corporations. They would enjoy it more, too.

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