Corporate Governance – Cost versus Benefits

What is good governance?

1. Clear, consistent strategy

2. Clarity of business purpose

3. Board articulated values

4. Clear and appropriate communication

5. Robust processes and controls

6. Good open relationships with stakeholders

7. Board has balance of skills and experience

8. Sufficient independent directors

9. Transparent appointments process

What is good governance?

10.Clear distinction between roles of chairman & CEO

11.Good succession planning

12.Clear delegations of authority

Complying with governance provisions

How much attention should be given to this?

Proportionate approach

Governance measures embedded on a ‘business as usual’ basis

Factor into the annual cycle

Look at governance policies/views of major stakeholders

Engage early if planning to depart from published governance policies or the Code

Complying with governance provisions

Box ticking’ - a missed opportunity

One can tick all the boxes and miss something crucial

Not being able to tick all the boxes is not necessarily a sign of poor governance

Essential to think through what is right for your organisation

Governance essentials

Clear board and committee structure and terms of reference and delegations of authority –

right number of meetings

Clear and embedded process and controls

A committed, skilled, ‘challenging’ board

Keeping up to date – high quality MI

Transparent and open relationships with stakeholders

Tesco

The problem:

• £263m accounting misstatement in accounts in 2014 due to disputed supplier agreements

• Lost £2bn in stock market value in September 2014 then further £1bn in October 2014

The penalties:

• Eight executives suspended and Chairman resigned.

• Former UK Finance Director, UK Managing Director and Food Commercial Director

charged with fraud and false accounting in a case brought by the Serious Fraud Office.

Pleaded not guilty and trial confirmed for September 2017.

Tesco

• FRC investigation into a member firm and members – PwC and members of the

accountancy profession involved in the preparation, approval and audit of Tesco’s

accounts for the financial years 2012, 2013 and 2014 – is ongoing. Only confirmed so

far that the investigation into former Chief Financial Officer has been closed as there

was no realistic prospect that a Tribunal would make an adverse finding in relation to

his behaviour.

• FCA also investigating and has the power to prosecute companies and individuals if

they have provided misleading information to investors

• A shareholder activist group is bringing legal claim that Tesco made misleading

statements to the stock market which investors relied on when making investment

decisions and seeking compensation for losses.

Volkswagen (aka Hoaxwagen)

The problem:

• Admitted cheating emissions tests using a ‘defeat device’ in diesel engines that could

detect when they were being tested and was fitted in about 11m cars worldwide.

• Between September and October 2015, preference shares lost 45% of their value.

The penalties:

• Recalling millions of cars, had to set aside €18.2bn to cover costs and posted its first

quarterly loss for 15 years of €2.5bn in late October 2015.

• Agreed a $14.7bn civil settlement in the US, which involves either buying back or

repairing cars and compensation and compensation for customers

Volkswagen (aka Hoaxwagen)

• Settlement with Department of Justice – VW pleaded guilty to three felonies &

paying criminal fine of $2.8bn & $1.5bn to settle EPA & US Customs civil claims.

• German prosecutors are investigating the chairman, who was the CFO when

scandal broke in September 2015, an unnamed other member of the board, and

the former CEO.

• EU Commission is taking legal action against seven nations, including UK and

Germany, for failing to take action against VW for cheating emissions tests.

• A claim for €8.2bn in damages has been launched by 1,400 German investors.

• Legal action has been launched against VW. Asset manager Blackrock in Australia

and a group of institutional shareholders are suing for €2bn due to the fall in the

share price.

Wells Fargo

The problem:

• Revealed in September 2016 that it had fired 5,300 employees, roughly 1% of its

workforce, for signing customers up for checking accounts and credit cards without their

knowledge. 2m sham accounts opened from 2011 onwards, due to pressure to meet daily

account quotas. The bank then charged customers at least $1.5m in fees for these

accounts.

The penalties:

• $185m in fines by the Consumer Financial Protection Bureau in the US and $5m to

customers.

• Facing a $2bn lawsuit.

Wells Fargo

• Probed by the FBI and federal prosecutors in New York and California, which could lead to

criminal charges.

• CEO resigned and forfeited $41m in bonuses.

• Head of Retail Operations forfeited $19m of bonuses and left without a payoff.

TalkTalk

The problem:

• Failure to prevent a cyber attack in 2015 in which 150,000 customers had their details

stolen, including bank account numbers, birth dates and addresses.

The penalties:

• Record fine of £400,000 by Information Commissioner’s Officer

BHS

The problem:

• Went into administration in April 2016 having been sold for £1 in 2015 with a

pension fund deficit of over £570m.

The penalties:

• Investigated by the Work and Pensions Committee and the Business, Innovation

and Skills Committee.

• Pensions Regulator seeking £350m from Sir Philip Green and Dominic Chappell,

the former owners, to cover the deficit.

• MPs have suggested a fine from the Pensions Regulator for Sir Philip Green,

which could be as high as £1bn, and that he should be stripped of his

knighthood.

Benefits of good governance

1. Saving time and money

2. Better risk management

3. Lower cost of capital

4. Enhanced reputation

5. Better stakeholder relations

6. More investor support when ‘non-compliant’ or when problems arise

The value of governance

1. Good governance should help support corporate value by enhancing reputation,

reducing losses and inefficiencies, saving board time and improving the

decision-making process

2. Why do it otherwise?