Professor of Accounting
University of Essex
(published in the London Evening Standard, 13 September 2004, p. 69)
The allegations of pillaging at Hollinger once again draw attention to the way major companies are governed. Companies, such as, Maxwell, Enron, Barlow Clowes, BCCI, WorldCom, Versailles, Parmalat and others boasting the best directors, auditors and business advisers have been looted. As always, it was an ‘inside’ job. Few company executives and their advisers got richer but thousands of innocent people lost jobs, savings, investments, homes and pensions.
Almost every household is affected by corporate abuse. Banks, credit card, utilities and phone companies routinely make excessive profits. Nearly 1.4 million people have lost £13 billion in the pensions mis-selling scandal. Some 5.3 million endowment mortgage policyholders are facing a shortfall of nearly £30 billion.
Company executives and their advisers made millions by selling infected meat and cattle-feed, but 100,000 people may be suffering from BSE/vCJD. Argos, Littlewoods, major pharmaceutical companies, cigarette and cosmetic companies have been accused of price-fixing. Unprecedented fat-cattery at the top and low wage at the bottom is depriving many of decent housing, food, education and pensions.
The scandals highlight a number of weaknesses in the system of corporate governance. Too much power in the hands of relatively few unaccountable company directors; little or no countervailing power employees, investors, savers, consumers and pension scheme members, who bear the brunt of the losses, to call companies to account.
Non-executive directors failed to keep executive directors in check. Most are the directors’ chums and hold a large number of other directorships, giving them little time or the inclination to invigilate companies or bite the hand that feeds them.
External auditors collected fat fees but were asleep on the job, usually in bed with management. None blew the whistle on anything. They collected vast sums by selling consultancy services to companies: including tax avoidance schemes, executive remuneration packages and designed opaque corporate structures. They then pretended to audit the transactions that they themselves had created.
Parmalat, Enron and others used tax havens to conceal liabilities and boost income. Major UK companies already use offshore subsidiaries on a large scale to obscure their financial risks.
Rather than reform, successive governments have hushed-up scandals. The Bank of Credit and Commerce International (BCCI) was closed down in July 1991, but there has been no independent investigation of the frauds. Similarly, there has been no investigation of the closure of Polly Peck, Levitt Group of Companies, The Accident Group, Resort Hotels, or the UK parts of the Enron, WorldCom, Parmalat, WestLB, Hollinger and Xerox debacles. Successive governments have failed to prosecute or close down any of the defaulting accountancy firms or companies.
The scandals are the result of a rotten corporate culture where too many are willing to make a quick buck without any regard for social consequences. By any measure, Britain needs a major change to its systems of corporate governance. Yet this is not on the government’s list of priorities.
Last week, the House of Commons discussed a new Companies Bill, Britain’s answer to the mega scandals. It failed to address any of the above issues, as no political party wants to upset the corporate barons who finance political parties and provide consultancy jobs to potential and former ministers.
So it is business as usual. Britain continues with the system of a unitary boards dominated by wily CEOs. Despite suffering losses and risks, bank depositors, savers, consumers will have no rights to elect directors, auditors, or table resolutions at general meetings. In the age of one-person-one-vote, directors will continue to cast thousands of votes to defeat unwelcome resolutions at annual general meetings. However, government will enable companies to indemnify directors for lawsuit costs. There will be no statutory restriction on the number of directorships that individuals can hold. Beyond the occasional sermon, the government will do nothing about ‘fat cats’ and the resulting inequalities and social exclusion.
Company auditors will not be banned from selling other services to their audit clients. There are no proposals to make companies reveal the details of their offshore links, or tax avoidance schemes. There are no proposals for requiring disclosures or shareholder approval for setting up offshore subsidiaries. Therefore, it will remain impossible to make much sense of published company accounts.
Companies might fear retribution but there is no equivalent of the US Securities and Exchange Commission to speedily prosecute and punish wrongdoers. The feather-duster self-regulation so loved by accountants, lawyers and other advisers will continue.
How many people must lose their lives, health and wealth before the government will introduce reforms to check predatory corporate culture?