My introduction at the fifth meeting of members of SMEalliance 


Welcome everyone to SMEalliance and thanks to you all for coming. Thanks also to Metro Bank for hosting us once again– we are very grateful to you .


This is a big day for me – I think this could be the first SMEalliance meeting not chaired by the semi-legendary Jon Welsby—huge shoes to step into.


Just over one year on and we are going brilliantly . Did Nikki , Jon and I think we would have got here by now – no way.


So, by way of a very short intro to today after which you will hear a selection of speakers , why do I think the SMEalliance is unique in how it’s doing what it’s doing, so well?   Maybe it’s all about silo-breaking—one of my pet topics and I’m hope I am on the right track as Gillian Tett, US managing editor of the FT has recently ​written an excellent book called The Silo Effect on this very subject​.

A bit of what follows  I wrote as an intro for one of our recent very successful sessions  at the Cambridge Symposium on Economic Crime. Some of you might have already seen this , but to me it is the key to how we operate .

Silos normally act as barriers. They stop people mixing and ideas mixing and therefore inhibit positive “ stuff “ happening. The SMEalliance is a wonderful example of silo breaking.

Our members are mostly ( but not entirely ), people whose businesses who have been hammered by various High Street banks over many years.

But that is by no means the whole of SMEalliance. For example, James Nicholls ( who sadly couldn’t get here today) and I are both lawyers ) and partners at gunnercooke . Although we are two of the few  not affected, we well understand some of the effects of what the banks and some of their advisors have done to you .  We both have a genuine interest in SMEs , their businesses , management and  how their owners take on large vested interests. These are normally, but not always financial institutions, which  you all know still deploy huge amounts of money and other resources against you , our members.

SMEalliance includes other experts  ranging from  those involved in derivatives to ex- police. As you will know we also work closely with some members of the media –and we have managed to interest MPs ,civil servants and senior government advisors  in developing several of our themes and schemes. I think I can say we continue to punch well above our weight–new and small , but noisy and growing.

As a practicing business lawyer, in my mind silos consist of four distinct groups – clients , academics, professionals and the Whitehall / Westminster machine. I am fortunate enough to straddle all of them. Too many people in each silo don’t, neither do they want to. Clive May the world’s greatest simple brickie can I think confirm the benefits of silo breaking . How else would Clive , the simple brickie and Nick Gould ,  the common sense lawyer, be working together so effectively.

We do however need to rope in some academics to help us with some of our projects. I have tried many , but no luck so far they always seem to have other things to do. ​Odd,  because this would give them a lot of raw material for any number of projects—we must keep trying.

Can I also please make a plea for as many of you who can , to keep spreading the word. We simply don’t have enough members and although a lot of people know of us , we could do with a much broader membership. Use social media whenever you can. Thanks again to our core tweeters. Please join them as​ twitter and social media generally is a powerful tool and not to be underestimated.  We don’t want numbers just for the sake of it —  but there is no doubt a bigger membership would help.

I would like to give a special mention to Nikki and Paul Turner and their daughters Laura and Sophie for the enormous effort they have given to help not only SMEalliance and but many of our members individually. Thank you all so much. With help also from many others here and not here today , we have all made SMEalliance what it​ is, although we know we have much more to do.

Those of us who founded SMEalliance, believe strongly  that an inclusive, non-ego driven organisation will be a much stronger force  than the alternative —one which remains , for whatever reason , silo driven. And you know what our way has worked so far. Because so many of you have been ill-served by your advisors in similar ways , please remember the SMEalliance can try and assist just by being around for you — the coming together in events such as the one today I hope ​will be seen as beneficial for you all.

Too many people tell me they feel stupid because essentially they have been done over by people in suits and ties . That is completely the wrong way to look at things. Owners of businesses are entitled to trust their advisors- it is those advisors who have been found badly lacking in professional skills as well as morals and ethics – not you.

Two other points – I know many of you dislike intensely almost all professionals – particularly lawyers bankers and accountant/insolvency practioners. The other groups can speak for the themselves and am I certainly not here to defend the entire  legal profession—many of you know my views on the topic  but please don’t forget this  . There are many , many lawyers doing the most amazing work to help,for example abused women and  children. Others take on the power of the State when those affected have no way of doing so themselves.  Others help their local communities in numerous ways . So we are not all the lying, greedy bastards some of you keep thinking  we are –as I have said in the past, generalisations to my mind are never helpful.

Last and importantly for me right now—slightly off topic but to me ,completely relevant.  I have just read a most sorrowful yet uplifting book by a US lawyer called Bryan Stevenson. The book is called Just Mercy.  From a small office in Montgomery, Alabama which he started over 30 years ago he and a group of dedicated lawyers and others  have essentially forced changes to key parts of US criminal law .

For example in 2010 they won a case  in the Supreme Court which agreed that life imprisonment with no parole  for children ( as young as 14 ) for non-homicidal crimes was a cruel and unusual punishment and constitutionally impermissible . This affected some 2,000 children. In  the same year they won a case to free Joshua Carter, jailed for rape at age 16 and still in jail nearly 50 years later. The fact his confession had apparently been beaten out of him , seemed to be irrelevant to the legal system.  Nikki maybe that is the difference between law and justice as we keep discussing.

If Mr Stevenson and his organisation , the Equal Justice Initiative, can succeed in the Supreme Court in this way– imagine what we should to be able to do.  So let’s go and do it.

Thanks very much

Nick Gould

For some of my co-members of the www.smealliance .org , who have little time for lawyers …..a further short  set of short comments on ideas of problem solving and common sense.

Don’t necessarily assume that a document which is 60 pages long, is any “better /more correct” than a shorter one. I try to use “letter agreements” on a much more regular basis, rather than more formal and formulaic agreements– why? I started, because a  client wanted to split his business from his co-owner and each would take a part of the whole. Having received a draft from the other law firm of about 30 pages, my client said he would only sign a document if it was less than 10 pages long . So we did it, it took some thought and an understanding of the core issues — what was important to the client and  what wasn’t. There are as many simple ways to make a document shorter– and not just changing the size of the font  and/or narrowing the margins.

Next I bought a set of contracts, assets and employees for a travel group in much the same way. Now I am working on a small asset acquisition for an international trading group, and they accepted (maybe because this is only a £1m deal– small for them ), that a letter agreement is the best way to document it. Seems to me the key here is to think about the draft and what the parties want to achieve first and then work out how to get there, rather than start with the draft document.

As I said in my last blog , commercially aware transactional lawyers are here to facilitate the deal— make it happen. There are law firms and lawyers in London who used to be known for killing deals. One client told me years ago that if  Mr zzzzzz,  ever acted for the other party in another deal where my client was involved, he would rather walk away than negotiate. After an 18 month period when we negotiated and signed a deal every two months , the lawyer on this one wanted to show he was tough– he certainly was, but it cost his client the deal and about £5 million. That was more than 20 years ago and it left , as you can see , a lasting impression.

In London and particularly on the larger deals, lawyers are normally just  ……….lawyers … they aren’t, nor are they usually meant to be, business advisors – for numerous reasons, one being that  their insurance policy won’t cover them. And I guess it’s an experience thing too– the older you get the more you realise what you don’t know, so you go back and ask people (auditors, bankers,especially  clients) for clarity.

Realise also that the lawyer is not meant to be the ultimate arbiter of the risks in a deal—most of us don’t have the skill sets, to do so. That has to be for the client. After all if we wanted to take those decisions, we should be on the other side of the table. What that probably means is not to say to a client “you shouldn’t” or you can’t do this” …. But rather “if you do this, then some of the risks might be as follows” or “ there is another way to get to more or less the same result”.  As the song says ” It ain’t what you say , it’s the way that you say it”.

Of course that doesn’t mean lawyers shouldn’t have views. One longstanding client says the reason he instructs me and refers me to others is that I will give him an answer. I may be right or I may be wrong– but I’ll say something. As he says to me ,” I am not right all the time, so I don’t expect you to be.”

Common sense ideas don’t always work and are sometimes genuinely dangerous , but are often worth a thought.

Recently the blog and website kindly published a short note from me on why SME’s are ignored. I thought I would to publish the longer version and there are good reasons for doing so today. I originally asked one of my summer students , Annette Muller , to have a first go at the piece below , and she , interestingly, chose to focus on why many of those looking for training contracts in law firms focus initially on the bigger firms.

We wrote the piece in the mid-summer when the idea of the SMEalliance was still just that, an idea ..and now “It’s here ! “

So before launching into this  piece , I would like to say that within a few days of this blog appearing, anyone interested should be able to read about and join the SMEalliance. I have prepared a separate blog for the new website so won’t repeat it here . I will  only say ( because this is my blog so I can !! ) that we hope  this new organisation will be unlike any other and will genuinely help SMEs in many ways.

And now ………….

Why Are SMEs Ignored—a personal (and not a legalistic ) overview intended to stir up some discussion.

The main needs of SME’s (as defined at the end of this note) from the institutions they interact with include ( among many other things) access to money, specific advice , whether financial , employment,  contractual and so on; and qualified leads to potential sales.  I suggest that banks, and other financial institutions have historically under-served SME’s. While the size of the SME market in the UK remains relatively constant, although growing significantly at the moment ( huge number of new start-ups), there is on  the whole a high turnover with a far greater birth and mortality rate compared to more established firms. This perhaps makes them unattractive to…


–          High-risk loans are unattractive and due to the uncertainty of SMEs success banks are reluctant to provide financial support.

–          Banking regulation has become increasingly strict (regulators require ever higher capital ratios) and tick-box driven,  so why take the risk (from their perspective) when they can simply loan to a larger business and ensure a much safer return?

–           SMEs have limited brand recognition and tend not to be a focal point. Are they perhaps at times to blame for not approaching banks for loans for fear of rejection… this seems to be a vicious cycle

–           ‘Missing middle’ debate , SMEs have financial requirements too large for microfinance yet too small to be served by larger corporate banking models. This to my mind is a key problem. Where is the funding between start-up levels ( say up to £20,000) and £250,000. It can’t all come from Dragon’s Den !


[ This part particularly  from Annette Muller who deserves much of the credit for this paper] Another major issue is that SMEs have limited access to talent due to their weak brand presence. Students ‘ignore’ SMEs for a number of reasons. Students are conditioned to be competitive and aim for the best, the best being the Fortune 500 companies and thus SMEs tend to be the ‘back-up’ plan. (Sad but true, especially in the top universities). Secondly, and now we need to look at the way SMEs market themselves, students often do not know that an SME is looking to hire. This applies to SME professional firms as well as those in other sectors. Established firms spend far more on their hires and their graduate schemes are often world-renowned and as such attractive to students. SMEs tend not to have the financial means to implement such schemes… BUT this is not always the case. The counter argument would be that working in a smaller company actually teaches much more as the student is given a greater variety of tasks with  much more responsibility etc… Often the larger corporations are only attractive to a student because they provide funding and tend to offer greater salaries. It is also much easier to find a job later on if you have worked at a well-known brand at the outset.


Price is perhaps a core reason for SME failure to draw customers. In the economic downturn it is unsurprisingly the case that price is the highest priority and SMEs simply cannot compete with the largest companies due to economies of scale.

Loyalty – it takes time, consistency and reputation to generate loyal customers and because most SMEs do not have this, loyalty lies with larger corporations which we have all been using for years and all ‘trust’… But… there is hope… as customers are becoming increasingly aware of the unethical practices of large corporations. Slowly but surely customers are realising that huge sacrifices must be made to achieve such low prices… (Rana Plaza in Bangladesh). As someone said to me while I was writing this piece”  I believe and hope that over time the more knowledgeable the customer becomes, the more likely the trend will change and SMEs will stop being ignored… Customers do not want to eat hormone-pumped, battery foods anymore (grocery stores) and so smaller local farm stalls are becoming a growing trend. SMEs in this sector have a chance to flourish..”  In your dreams , who knows? I am less optimistic.

Ambiguity and perspective

Is it also as basic as many people simply not knowing what an SME is. In certain African countries SMEs are defined by receipt of  loan size rather than actual size and profitability , causing further confusion. No one has a clear definition and so they are all lumped together and shoved aside. The SME sector is massive (99.% of all businesses in the UK by number ) but oh SO diverse…


The article above classifies SMEs into four sectors:

The lifestyle business;

The churn business;

The innovating business; and

The high-returns business

Quite an interesting summary explaining why, for example, in the ‘churn’ sector SMEs, like the  local fish shop, are of no importance because they compete with every other fish shop on the street and are simply ‘churned’ up when their time is due…again sad but true , on the whole.

Similarly in the ‘lifestyle business’ sector these SMEs are of great importance as they essentially provide vital services to the public BUT they are ‘invisible’ as they are not seen as opportunities for investors and are not seen as innovative. They do not provide new business revolutions and so focus remains elsewhere…

Sustainability / Environmental

Another issue with SMEs being ignored is that they too are not targeted by environmental programmes. Again the ‘perspective’ issue, whereby companies believe a small SME being sustainable/ eco-friendly has such a minor impact compared to a major corporate and its £50m plus savings through sustainability. These figures can  make many SMEs feel insignificant and so they do not begin to approach such an idea (sustainability) YET they account for 99 percent of businesses! It’s proven that even the smallest change in a company’s cost and sustainability structure will inevitably reap financial benefits.


Brighter future…


The sheer volume and possible power of the SME segment is finally being realised by many and overtime it appears a shift in this attitude of ignorance towards them. Emerging economies, such as India , have an SME segment of around 25-30 percent, much less than the UK but growing exponentially.

There are hopes that a new ecosystem is emerging and SMEs are finding funding more achievable. Regulations are changing and allowing great dissemination of banking products and services which could change matters. The advent of new digital technology is also promising as it allows new services and strategies to be created at a much lower cost. Along with this technological boom and the increased competition from new entrants, banks are finally beginning to look more closely at how to create tailored solutions for the SME sector.

In summary I believe ( which why this article finishes on a positive rather than a negative manner) that the SME sector is and represents a massive potential and should not be ignored.


 At the start of 2013 according to the Federation of Small Businesses

  • There were an estimated 4.9 million businesses in the UK which employed 24.3 million people, and had a combined turnover of £3,300 billion
  • SMEs accounted for 99.9 per cent of all private sector businesses in the UK, 59.3 per cent of private sector employment and 48.1 per cent of private sector turnover
  • SMEs employed 14.4 million people and had a combined turnover of £1,600 billion
  • Small businesses alone accounted for 47 per cent of private sector employment and 33.1 per cent of turnover
  • Of all businesses, 62.6 per cent (3.7 million) were sole proprietorships, 28.5 per cent (1.4 million) were companies and 8.9 per cent (434,000) partnerships
  • There were 891,000 businesses operating in the construction sector – nearly a fifth of all businesses
  • In the financial and insurance sector, only 27.5 per cent of employment was in SMEs. However, in the agriculture, forestry and fishing sector virtually all employment (95.4 per cent) was in SMEs
  • Only 22.5 per cent of private sector turnover was in the arts, entertainment and recreation activities, while 92.7 per cent was in the agriculture, forestry and fishing sector
  • With 841,000 private sector business, London had more firms than any other region in the UK. The south east had the second largest number of businesses with 791,000. Together these regions account for almost a third of all firms

micro: 0-9 employees, small: 10-49 employees, medium: 50-249 employees

I tweeted about this earlier , but want to add a bit more detail.

Earlier this evening on BBC Radio 4 , there was a profile of the recommended candidate for  Chairman of the BBC Board of Trustees, Rona Fairhead.  I should make the point that I have nothing against her personally. Indeed I had never heard of her till the other week when her name came up for this absolutely key role. I was interested to learn more about her, as I used to be a big supporter of the BBC ( and I should note — a lot of what it produces is still rather good).

Actually the one thing I had read previously was that she was / is a director of HSBC. She has been a non-executive director there since about  2004; well before the 2008/9 etc.,(and still partially unresolved)  banking crisis. I guess that position has taken up a good part of her career. She is apparently a member of the Bank’s “Financial System Vulnerabilities Committee ( no,I have no idea either, but the wording is taken from the bank’s website).

I have no idea either whether she has done a good job in that role, she may well have been an excellent non-executive. She may be the right candidate for this position, again I have no idea at all and that is not my concern here. The question for the BBC, and I will be sending them this piece if someone else doesn’t tweet it to them, is a perfectly obvious one .

How can the BBC hold itself out as an objective supplier of information if it mentions nothing about her role at HSBC in its 15 minute profile of Ms. Fairhead? To say the BBC keeps shooting itself in the foot is maybe an understatement . If it can’t be objective factually  on such a seemingly simple issue, what hope for the difficult stuff ,such reporting from Israel /Gaza, or [….pick your own subject].

Again, making an obvious point, there is so much distrust around so many of our public institutions at the moment; matters such as this just don’t do anything to help.

We have heard today details of the most horrific child abuse in the English town of Rotherham. This abuse could have involved more than 1,400 children over a 16 year period from 1997 until 2013. So this is not ancient history– it is now.The author of the report mentioned blatant collective failures by the council’s leadership and by senior managers who had underplayed the scale of the problem . Meanwhile the police failed to prioritise the issue; but what could be more important than the well-being of children.

In a telling phrase the author of the report stated ” the authorities involved have a great deal to answer for“.

However the author of this blog is not a lawyer involved in child welfare law nor indeed does he have any knowledge of the nature of structures and responsibilities within local politics and the opinions are strictly his own.

The author of this piece does know and will no doubt be saying it until the day he stops writing that if laws are not properly enforced, for whatever reason, this is what happens. There is absolutely no point in having layers and layers of rules, regulations, statutes, policies, guidelines and / or the resulting  box-ticking if those rules aren’t enforced and no-one will take ultimate responsibility for them. Fulsome apologies after the event, as today, just don’t do it for me. Those who are tasked with enforcing the rules and taking responsibility for that enforcement, be they child abuse rules in Rotherham, the rules relating to mis-selling by financial institutions, utility companies, airlines or whoever (as well as everything in between, of which there is much), need to start thinking very hard about things. 

If they can’t do whatever is they are tasked with,then everyone from Parliament, up or down, should first ask why not. And then they should get on and sort it. Because as above, the protection of children is a mark of a civilised society– and if we can’t manage that, we probably can’t manage much else.


Any note about so called  financial fiascos is necessarily going to be out of date almost as soon as it appears; but I don’t think that should stop us discussing it. This note highlights a few key themes, some of which I have written about previously on a general basis and some more specific to financial fiascos. All comments gratefully received as I suspect there is a lot more to come. I originally prepared this note some two years ago—sadly, but to many who I hope will read this not surprisingly, on and on and on we go. The views below are entirely personal to the author.

The insider says “this is why we don’t really need anything different to what we have now.

The financial sector needs to succeed to enable the economy as a whole to be successful and grow. It needs to be able to take risks, to allow innovation and to reward those who bring in profits. Light touch regulation is a necessity and anything to the contrary will result in a flood of top talent departing for other financial centres. The FCA has more than enough rules in its handbook and there numerous regulatory authorities in the UK. Directors are well aware of their roles, responsibilities and duties so why don’t we leave them to deal with things. And in the end, if shareholders don’t agree with what is happening, they can vote the board out— look at what has happened recently. The authority of the Governor of the Bank of England and the head of the FCA ought to be too strong for anyone in the City to fight against. Together this lot should do the trick. But if we do need more of them, the financial services industry will just have to factor that into its costs…this will all soon be forgotten as just another small hiccup in the City’s ever upward curve”

The onlooker says “we are in big trouble, you better believe it”

The financial sector makes too much money for itself, it puts its own interests first and second… its directors and senior employees are overpaid. They don’t have any understanding of and don’t care about the real economy—essentially everything outside the City. They have no fear of the mass of rules and regulations which are meant to rein them in and moderate their behaviour. These rules are so complex, even the various regulatory authorities don’t really understand them and if they do, there is always another loophole for people to squeeze through. Those with money will always be able to beat the system and if they get fired, they usually end up getting a huge payoff and walking into a job with a similar organisation, here or abroad… And so what if we lose all this so-called talent, we should be encouraging kids to look at all the other alternatives; what’s wrong with working in the sciences or the arts, rather than seeing the financial sector as some sort of Holy Grail. If money is all we measure things by, we are tumbling down a slippery slope.“

I say…..and having been saying for several years (and you know what I am going to write here)

We have too many rules and rules which are for whatever reason, over-complex, unenforceable and unenforced. LIBOR hit each one of these issues full on. I understand, if past experience is anything to go by, it may never be possible to resolve fully these types of problems; there are no easy solutions—certainly knee jerk political reactions won’t do it—they never do. But here are a few initial thoughts for further discussion and to add to the general melting pot….

The fallout

The financial fiasco itself is now far behind us, remember, it took place apparently mostly between 2005 and 2008. However, the fallout is most certainly not. Possibly the first thing for a few senior  people to do (and not just those juniors and mid-levellers who rigged the system and who have deservedly been fired) is to apologise ( ok, I also believe in the truth fairy(!!)). Comments from my clients (and this is added in 2014) include the key phrases, “they still don’t get it “; “what world are they living in” and “they need to get out more”; and finally ” why is there one set of rules for them and one for everyone else”  “They”, doesn’t just refer to the senior bankers and the regulators under whose watch this all happened. It also refers to those politicians, including ministers and ex-ministers who seem to think, if the recent slanging match in the House of Commons is anything to go by, the one who shouts the loudest will score most political points. I think the public now knows better.

The rules
I have been wondering as ever, what all these rules, in this case financial rules, are actually for? Are they to stop people from acting or not acting in a certain way, or are they trying to set some sort of overarching “moral” framework to assist people in working out what their behaviour should be. This is a crucial distinction and point for discussion in deciding how to proceed. The purpose of legislation, primary and secondary, should be fundamental to this discussion. Politicians have a natural reaction to pass rules and laws–many people wonder why else they are here–but sometimes proper reflection is best. In what is now clearly a crucial time for the confidence of the UK banking industry, passing the wrong laws or making snap judgments could be a catastrophic mistake. We don’t necessarily (although in this specific case we might) need more laws and rules; we do however need the right ones and they should be fit for purpose. We also need the banks, and by that I mean in particular their boards and their senior employees to accept that rules are not there to be broken—it’s actually not a game, it’s real with real effects and consequences.
In the same way we need to know that the rules which exist are enforceable and enforced. Are we perhaps, with our so-called “light touch regulation,as someone one said,  “currently the laughing-stock of the financial world? “You mean those guys in London rigged the LIBOR market but according to thousands of pages of rules, they did nothing wrong, so no criminal charges for them— hey, pass me another glass of champagne—I wonder what other non- existent rules I can break !”

Of course if the rules don’t exist, they can’t be enforced. It seems to be peculiarly British in that the way a key (the key) interest rate is set, as I understand it, is not subject to any form of regulatory control. The relevant organisation which oversees LIBOR is the British Bankers Association, the leading trade association for the UK banking and financial services sector. To date they seem to have kept a very low profile indeed. I see that the SFO are now, as one newspaper put it “bowing to pressure for crime probe into LIBOR affair”. There are just a couple of initial problems , the SFO needs extra money from the Treasury and technical help from the regulators, so I am not immediately filled with a sense that this will lead to anything like a result, although the new regime certainly can’t do worse than the previous lot.

Some old-fashioned words— I suggest they applied then and they should apply now

What about the meaning of being a “professional” within this debate? Many people have commented on the fact of a lack of professionalism of some key players in the finance industry over recent years. I wonder whether, by analogy , the legal profession is less or more “ professional “ than it was before we, too, had mountains of rules and regulations to comply with, forms to complete and boxes to tick. That is probably for our clients to determine.

Another old-fashioned word in this context is “relationship”.

I don’t think there is anything wrong with being a relationship lawyer or banker; so why do so many people get embarrassed when they use the term? As someone noted the other day, the more box ticking there is, the more that common sense (and I suspect professionalism), goes out of the window. Being a predominantly rule based society won’t solve these problems. They go to responsibility, culture and leadership, all very difficult topics to get to grips with, but we must.

We have so many rules already, immediately producing more which attempt to deal with react to) specific circumstances such as LIBOR, will not necessarily not solve these core issues. They are about human behaviour as much as anything else. Sir David Walker recognised this in his report on the banking collapse of 2008. But ideas such as responsibility, true – not faddish – leadership, morals and ethics are still considered by many “wet” topics; rather like the idea of acting in a “professional” way.

After the 2008 banking crisis, discussing these ideas became popular and even trendy! But for how long? It seems to me they started to disappear fairly quickly. They are likely to rise to the surface of the current debate now, as so they should. But this time they should be a fundamental part of the debate. We need to find alternatives to box ticking and process driven regulatory systems, which clearly don’t work, because one day the failure really will be serious!

Oh yeah, it was really serious, it still is really serious and will probably continue to be really serious.

Still adding old papers ( but still very relevant) to my blog.Here is another of my personal and individual commentaries on good law/ bad law– I wrote it a couple of years ago. It was about the year ended December 2012 and will be of particular interest to those who don’t like the banks very much… here we go

Reflecting on what has been a terrible year for many of the world’s largest companies and their boards, particularly in the financial sector, I wonder if there is anything useful left to say on the subject. Millions of words have been written, for example, on the rigging of the wholly unregulated Libor market; the on-going crisis at Olympus in Japan; the various debacles at Barclays UBS, HSBC, to name just three and, most recently, at Spanish banking giant Bankia which will leave some 350,000 investors virtually wiped out. Add to that the technology meltdown at Bank of Ulster, a subsidiary of RBS and the failure of the Facebook IPO, unless you happened to be a seller, and there is no doubt things could be a lot better!

Far from anything having really changed over the last few years, we appear still to be in the midst of a continuing cycle of failures of governance, as well as a lack of accountability and of responsibility; themes that remain a constant and major concern as noted below.

So as a starter, here is my wish list (and I should mention that I also believe in the tooth fairy!):

1. Those who are chosen to lead companies, whether they are individuals or boards, to take more responsibility and stop blaming others for the errors of and in their own organisations.

2. Regulators to take more responsibility for regulating effectively and also stop trying to pass the buck.

3. Much tougher sanctions for individuals, who are shown to have screwed up, screwed the public and screwed the system. This should not apply just to the junior trader who goes to jail, but as far up the line of responsibility as necessary.

4. Legislators to make sure the laws they pass are (at least vaguely) intelligible and open to (reasonably) clear interpretation. As I am often told the Victorian draftsmen managed to do so, why can’t we?

5. I know this final wish is like trying to grab a cloud but I would like to see an acceptance that (i) most core rules of whatever description will only work effectively if they are based on a genuine moral and ethical code, and therefore as a corollary; (ii) box ticking, in its widest sense, should be sent by every regulator back from where it originally came; and I am interested to know why this appears to be such a fundamentally difficult issue for so many lawyers and others to discuss.

Perhaps the one piece of positive news for many investors in UK quoted companies, though hardly “payback time” as dubbed by one newspaper, was the so-called shareholders’ spring, which seemed to peak during “AGM season” in the first part of last year. I suggested in a note I wrote at the end of the summer that the real test will come later this year when we discover whether this was this a one–off case of investors venting their genuine anger, or the start of a real change in the dynamic between stakeholders and in particular Chairmen and CEOs. Personally, I wouldn’t hold my breath. A key “tussle” looks as if it will again be the one between WPP’s long-time CEO, Sir Martin Sorrell, and his institutional shareholders. Last year shareholders voted against the company’s executive pay report; let’s see who wins out in 2013.

In 2012 nothing much was pretty about the business world. This belied the majority of comments in a recent publication from the UK Financial Reporting Council which appeared to extol the whole practice of corporate governance as a rather magnificent British invention brought into existence 20 years ago and now copied by much of the rest of the world. Ironically it is more than 20 years since Asdil Nadir stole a very large amount from the Polly Peck group and has finally be sent to jail for 10 years.

I should declare that on several occasions when I have thought about writing about many of these topics I have wondered whether I am perhaps being too critical and should give relevant “business” people and organisations the benefit of the doubt. How wrong could I be? When I have canvassed opinions from numerous clients, academics and other contacts I am generally told to get on with the article in question (currently this one) and stop being so wet!

Further examples of the less than pretty business world are numerous. Consider George Osborne’s “amazing” idea of asking employees to give up certain basic employment protection in exchange for shares in their employing company. Did he really think it through and is anyone, anywhere, in favour? Not from what I have read or heard. The proposal to split the so-called “casino” part from the retail part of commercial banks may, perhaps, be a good idea, but can it be helpful to wait for at least seven years to do it? What about the apparent “deal” struck between a well-known coffee retailer and HMRC by which it agreed to contribute some money to the UK economy by way of taxes? On the basis of that “gift”, it seems to have decided, on a unilateral basis, it has fulfilled its obligations. I didn’t realise that choosing to pay a particular amount of tax was an option, if only. One crucial issue for debate here is the difference between legal obligations and ethical obligations—but that requires a whole book to itself and also requires those who teach law to engage more in such matters.

Not long after Hewlett Packard bought Autonomy for over US $10 billion (and presumably having first carried out , or paid for experts to carry out, its due diligence) it was apparently forced to write down more than US $8 billion dollars, citing “accounting improprieties” among other things—consider responsibility and (no pun intended) accountability in this case. Finally, because various regulators need to be put into the frame as well, the shambles at the Serious Fraud Office under its previous boss is something to be noted. To have its accounts qualified by the National Audit Office because of improper payments to its departing chief executive, to my mind sums up much of what went badly wrong during 2012 in many areas of business and indeed various regulators.

So, another mind-bogglingly depressing year for those of us who believed that some of the key comments made in the major report of Sir David Walker following the banking crises in 2008, might have led to some real changes in the morality and ethics in the business world as well as a genuine improvement in corporate governance. It seems to me there are several threads that run through much of what has happened in 2012 which of course cannot and should not be taken in isolation and are part of a continuing process. Because a short paper I wrote about five years ago, put the point so well, that is where I will go next. My four original comments: too much law; too much bad / complex law; laws that are unenforceable; and laws that are unenforced, continue to ring true in many aspects of the business world. They also apply to many other areas of society including health and welfare, education and the justice system generally, but I need to stick to the task at hand. These four points are not in any way intended to be trite; they are a genuine reflection, to me and the many people who have been involved in this on-going debate with me over several years, as to how we see matters in the world of business.

That is not to say the last year hasn’t seen some extremely powerful and I am sure heartfelt speeches on these topics. I have been impressed, several times, with a number of high–profile City grandees telling it like it should be told, with no holds barred. However many people to whom I have spoken believe that nothing has changed fundamentally despite the rhetoric. For example when they read that Mr CEO or Ms FD have “paid with their job” perhaps for some of the major screw ups mentioned above (and often they don’t “pay” as most of us understand the word), they am not convinced that takes us very far. “Paid with their job after admitting responsibility and in the circumstances decided not to take their bonus or enhanced pension payment” would perhaps be an improvement.

Pressure from a wide range of organisations is a positive sign, but is it a big enough stick to force (indeed how do we / can we force) change. Can we really wait for a natural evolution in the way these core concepts need to be explained and then pushed up and down an organisation? I am still amazed by the fact (also mentioned in my “shareholders’ spring” paper) that so many Chairmen and CEOs of very large quoted companies have had to apologise for the lack of / breakdown in communication with key stakeholders. Haven’t they read the Corporate Governance Code? If something as basic as this seems to be such a problem, what about the difficult issues they have to sort out?

Discussing further the question of sticks (rather than carrots), one of the groups which so far seems to have escaped sanction—at least publicly– are the regulatory departments of many financial institutions. In the largest banks these can be made up not of a few dozen people, but many hundreds or more. Will the appointment of the recently knighted ex-head of the FSA, as a sort of super-internal regulator for Barclays, make any different to the culture there? It is too early to know, we can but hope. It seems fairly clear that until recently too many people in these organisations (from the top down) reckoned they could still play the system, beat it and then get away with it. Some still do, I’m sure. Even if they were forced to step down, so what? Having looked at some of the major board room crises this year, too many people still remain where they were 12 months ago. If we think that poor PR and loss of face are good enough reasons to force change, well I am not sure anyone involved in the Facebook IPO debacle has really suffered and I have already mentioned the SFO.

Laws which are unenforceable and laws that are unenforced, back to sticks and carrots. I was struck by a recent comment in a newspaper about the relevance of the ring fencing of banks, writing about Libor.

“Would an electric ring fence such as that proposed by the Parliamentary Commission on Banking Standards have stopped this alleged ring of dodgy dealers”, [was the question] and the writer failed to see the relevance. He suggested that when it comes to investigating bankers’ morals, “bringing the accused rate riggers to trial will do more than any parliamentary commission could to shed light on the issue.” I agree. If the law is too poorly drafted or too complex to bring these cases to trial, or if the prosecuting authorities get distracted, (one example – the SFOs humiliation this year following its dropping of its investigation into the activities of the Tchenguiz brothers) then let’s be brave and look at the system itself. Maybe we need to go back to basic building blocks, such as the language of regulation. As another aside, when I gave my talk a couple of years ago with the now well-known and catchy title “Common sense, the dark matter of business law”, I sent an invitation to the Parliamentary draftsmen’s office. I thought (as did my colleagues) that it was of some relevance to how they worked; well they didn’t come to the talk and I guess they didn’t read my paper either.

I know many people still say that “on the whole things are sort of ok and it is worse in most other countries” ( to paraphrase), but many others think it is this sort of lazy complacency across much of the system which was instrumental in what went wrong and in so much of what remains wrong. If we don’t want it to happen again, and I heard yet another commentator recently saying there would almost certainly be another banking crisis in the time it will take to ring fence the banks, then principles as well as procedures ( not the same as box ticking) need to change and it needs to happen now. I wonder what the 350,000 Spanish investors, whose holdings in Bankia have been virtually wiped out, think about this brave new world of investor protection? A bank which went public less than two years ago, should not, on any basis, now be worthless.

I have mentioned laws that are unenforceable and laws that are unenforced. I have also mentioned big sticks rather than measly carrots. Perhaps if the massive fines levied on the banks last year are anything to go by, a lot of directors will have woken up and looked around. Whether, in the UK, these fines are as a result of the FSA flexing its muscles one final time before it disappears, or something else, it has certainly done something positive at last, and perhaps the size of the fines will have an effect. In addition, I would be amazed if we had any more reports of ex-Chairmen of major banks similar to Lord Stephenson’s comments recently made public by the Treasury Select Committee to the effect that he was a somewhat part time chairman of HBOS. I hope those days have gone.

As I also said at the start, lack of responsibility and lack of accountability are two big issues for me. Playing the blame game, as so often happens, gets us precisely nowhere, but making those who ought to be, more accountable and responsible, might. I hope at least that the “shareholder spring” was not a one-off as I have mentioned. What I am sure about is that the inability of too many people in senior positions in many businesses ,and elsewhere, to accept responsibility for their actions and /or omissions flies in the face of both formal and informal systems, ranging from the FRC Governance Code, to the duties of directors codified and supposedly clarified by the Companies Act 2006. Rules that are too complex and convoluted, just don’t work. Too many laws lead to an ostrich-like approach by owners, managers and directors… Regulators who didn’t regulate also still have a lot to account for. The preservation of a cosy status quo, supposedly demolished years ago, still seems to be the way in which much of corporate Britain operates. The wish list I set out above makes a lot of sense to me and my team of feedback providers—at least to start a debate. If we get it, surely Chairmen, CEOs, Ministers, MPs and Regulators ought to start getting it as well.

I am pleased to say that Stephen Bloomfield’s excellent new book on corporate governance looks at many of these issues in detail and pulls few punches. It is about time too! It constantly amazes me that no-one has really got stuck in to some of the key questions which I, as have so many other people, raised and continue to raise, but which have remained unanswered for too long.


As we have been told, almost by way of a mantra, one of the overall objectives of CA 2006 “was to simplify and modernise company law so that it better met today’s business needs and provided flexibility for the future”.  The reform process aimed to ‘think small first’.  CA 2006 itself was to be written in simplified language, with a particular focus on small business.  I have explained why I do not feel it has achieved its objectives to date. Therefore another key question I have is this.  Why after an extensive consultation period and then a further implementation period altogether spanning more than 10 years,only in December 2010 did DBIS state “Our priority is to focus on those areas which have the potential to further simplify the business environment and deliver reductions in regulatory burdens for business.




  • Proposals to modernise and simplify the current system for the registration of company charges; [as an aside, when these changes were attempted in the Companies Act 1989 the whole matter was later dropped as being impossible to implement.  I agree entirely we do need a more effective system of security registration.  However whether now is really the time to start on this process, I am not convinced.];
  • A review of whether a new corporate form for single person businesses could reduce costs for small entrepreneurs.  At present there are hundreds of thousands of limited companies that are owned and run by a single person, and that person has to comply with extensive rules designed to balance the interests of multiple shareholders and directors [see below]; and
  • A range of options to simplify accounting and audit requirements, especially for small and medium enterprises.


I have mentioned #gouldsmantra –my “four problems” with the law.  I have also given some examples of administrative matters arising from CA 2006, which although might be considered tedious in some instances, show even at that level can be over complex and have no regard to common sense. This complexity invariably leads to additional costs, both monetary and in management time which cannot be ignored.  A large company might have internal systems in place to deal with these matters; alternatively it will have the comfort of knowing the work can be passed to outside advisers, be they lawyers, accountants or others. What of our constituent group?  Another comment from Government is the idea that the SMEs are going to be the economic force to pull the country out of the current downturn.


I hear continuously views on these topics from numerous trade organisations which represent the smaller businesses.  That said, I await to hear their practical proposals for reducing the burdens noted above. Several were asked to contribute to the ideas behind this paper.  None responded to my requests.


Here is my practical idea, and it isn’t really a particularly novel one.  All I have done is read the dozens of statements about simplifying company law, and I will tell you what these suggested to me.  If you only take one point away with you when you leave, let it be my idea for a new Companies Act.


If DBIS does decide to consider a simple route to incorporation for a defined group of those wishing to do so they could they grasp the problem, go the whole way and produce a “Companies (Smaller Companies) Act” applying to that group.  DBIS itself acknowledges that the constituents affected are “hundreds of thousands of limited companies”.  Perhaps they could copy from CA 2006, then simplify even further, those provisions which apply entirely to “smaller companies”, however we define them. One way might be to use the definition of “smaller companies” as these are applied by accounting provisions of CA 2006. However they could be much more radical and perhaps consider including companies with (i) a turnover of perhaps  £250,000 per year or less, and (ii) no more than maybe three employees  I have been wondering about the numbers of directors and shareholders and whether that is relevant.   I am not sure either way.  However, perhaps to keep it simple, the position could be that any person who is a director must also be a shareholder and the maximum number would be two .  For any action to be binding on the company it would require a piece of paper signed by both people.  It would, I suggest, be a relatively straight-forward exercise to pull together many of the pertinent provisions and simplify them at the same time. This would serve a number of purposes. First the core rules relating to Smaller Companies could be found in one place, so relieving many of the relevant owner/directors of the need to plough through the mass of current legislation.  The default position could be as set out in CA 2006 if rules are not included within the new legislation.


It would also put those companies in a standalone group. This might then assist, if we took the idea forward, into areas such as taxation. The benefit in saved time and costs might then give credence to the wish expressed earlier as to one or more of the purposes of CA 2006. Common sense suggests that rules should be not only relevant but also appropriate to those who need to use them. The current complexities of CA 2006,( and so much other legislation) means this is often not the case. Provided those who wish to take advantage of the simplified regime were made aware of its restrictions, I am not yet sure of any real downsides. It has been suggested that some companies would deliberately stay below the threshold mentioned above to benefit from this regime.  Somehow I find that an unrealistic proposition.  It is not part of this talk to attempt to develop this theme in detail, but perhaps this is something for future discussion.


In the same way as we might consider a possible statute to make doing business easier and less complex for a defined group, we should also note the difficulties, put to me as “one size is meant to fit all, but doesn’t”, in respect of many types of agreements. So I suggest [ with thanks to Laura M if she is reading this ] that common sense should lead us to consider that usually one size doesn’t fit all and that common sense is not so common.


I acknowledge some legal duties or obligations are so core that we would require them to be applied to all companies whatever their size.  For example, rules relating to employees’ health and safety.  But do they need to be applied in the same way to oil major and the local newsagent?  Comments following the publication of Lord Young’s report in 2010 include, “Putting Common Sense back into Health and Safety” perhaps too much of a sound bite; but more helpfully,one idea behind the report “was wanting to free business from unnecessary bureaucratic health and safety burdens and apply common sense to everyday decisions.”  If only….

                           Does Corporate Governance Really Work?

Some Personal Thoughts and Comments: Have a look as  it might be more interesting than you think.


[This set of notes are my personal views and were prepared originally in June 2010. Sad to say many of the key issues remain unsolved. This, despite huge efforts during the intervening period to sort some of them at least. The question will no doubt be asked why this is the case? Is it because of a lack of political will, economic circumstances, the power of the banks and other financial institutions, the sheer complexity of the issues to be resolved or a combination of these factors. I am the “common sense lawyer with mismatched shoes” and I don’t go for conspiracy theories in this area of the law whatever my readers might say. 

A re-read has suggested a postscript—so I have added a short one.



Many of the topics discussed in this paper are currently being considered in various countries. Some of the factual issues it mentions are changing almost on a daily basis. This paper contains some general comments as at mid June 2010. Key points and thoughts are in bold type.


The two words I want you to focus on during this discussion and particularly during some of the case studies mentioned below, are all too rarely used, which I think is a very big mistake. They are the words “common sense”. I have a feeling they are about to become a much more important part of this debate, as I hope you will see.


What is Corporate Governance?


Corporate Governance includes a wide range of issues. In its narrow sense it is concerned with the way in which companies are directed and controlled, including the systems and processes for ensuring proper accountability and openness. However, it is also concerned with the wider issue of protecting and advancing shareholders’ interests through setting the strategic direction of a company and appointing competent management to do so. In this paper I am going to concentrate mainly on corporate governance and the financial services industry. Many of my comments apply to a much wider range of quoted companies than those connected with financial services.


In the UK, the regulation of corporate governance is provided by a number of different rules, regulations and recommendations. Broadly, they are:

  • Common law rules (for example, case law relating to directors’ fiduciary duties).
  • Statute (particularly the Companies Act 2006).
  • The company’s constitution.
  • The Stock Exchange Listing Rules, Disclosure Rules and Transparency Rules.
  • The Combined Code on Corporate Governance (of which more below), administered by the


Financial Reporting Council (FRC), which applies to companies admitted to listing by the UKLA, including those whose shares are traded on the London Stock Exchange. Companies should include a statement in their annual financial reports indicating how they apply the compulsory principles of the Code. Its provisions are not mandatory but companies are required to include a second statement disclosing whether or not they comply with the Combined Code and give reasons for noncompliance so called “comply or explain”. The Combined Code has just been updated as will be explained later.


Why is Corporate Governance Such a Hot Topic at the Moment?


I suppose this is fairly obvious to anyone who reads the newspapers or indeed has any savings or investments. The financial crisis has shown us there have been, and probably still are, major problems in the corporate governance and risk management of companies operating particularly in the financial services sector. It has highlighted ways in which existing corporate governance arrangements have in many cases – but not all – failed to provide an effective check against poor decision-making. Although these weaknesses have been most evident in commercial banks and investment banks, many other financial services companies have been affected. This, in turn, has damaged the confidence of the general public in the financial sector as a whole.

In the UK, it has also, whether directly or indirectly, led to higher taxes, increased unemployment, the collapse and government bail-out of two of its largest banks and has contributed to a recession. Therefore, we can say that corporate governance, whether good or bad, has had a major effect on many areas of society which will continue for many years. On that basis, it needs to be much better understood. More recently it has been highlighted in the actions and decisions taken by the boards of The Prudential (“Pru”) and BP.


Corporate Governance is not some strange, academic matter – and if it is still treated in this way, that causes me real concern.


A comment in the Times newspaper last year stated:


“The commercial banks enjoyed big rewards while the markets were going up and have imposed huge public costs when their financial bets turned sour. …the causes of the chaos are much debated. But the agents are known. They are banks. Believing that they were engaged in sophisticated financial engineering, they took on risks about which they were perfectly clueless. They all but took the entire western financial system down with them…and the greatest irony of the fiasco is that the banking system was undermined not, as expected, by unregulated hedge funds, but by the most regulated parts of the financial system: the commercial banks.”


Responsibility for Governance and Risk Management


Responsibility for governance and risk management in the first instance is with the board and senior management. They must take into account their duties both to their shareholders and in respect of the regulatory requirements to which they are subject. In discharging these obligations, boards are expected to provide strong independent oversight of executive management. It is clear that many non-executive directors (NED) appointed to the boards of financial services companies struggled to provide such oversight. In particular, they failed to identify and put limits on excessive risk taking. The fact that the regulators (for example in the UK, the Financial Services Authority) approved a particular financial risk model which was prepared by a financial institution such as a bank, should not discharge the board of directors from their duties.


The financial crisis has also highlighted weaknesses in relation to the control of remuneration within financial services companies and also the exercise of ownership rights by shareholders in these companies. Think about this next point. Apparently in the US now a very significant number of shares which are traded by complex computer driven programmes are held by the “owner” for less than one minute.


As Sir David Walker, whose report I will deal with later on suggested, if the British taxpayer has pumped something over £500 billion into the UK financial system, by way of loans, guarantees, insurance and direct equity, then politicians and taxpayers are not going to accept processes which lead, among other things, to the current remuneration structure. I think this may be a polite way of saying that a lot of things have to change…but will they? My view is “probably and eventually but not as much as many would like”.


As I have noted, one role of corporate governance is to protect and advance the interests of shareholders through setting the strategic direction of a company and appointing and monitoring capable management to achieve this. As we have also seen, this statutory corporate governance responsibility, under the Companies Act 2006, is complemented by the “comply or explain” principles of the Combined Code, which is overseen and maintained by the Financial Reporting Council and by financial regulation under the Financial Services and Markets Act 2000.

Just so you are clear about the Combined Code, which has been updated very recently, this sets out standards of good practice on matters such as the composition of the board, directors’ remuneration, accountability and audit and relations with shareholders. The Code contains broad principles and more specific provisions. Listed companies are required to report on how they have applied the main principles of the Code and either to confirm they have complied with the Combined Code’s provisions or – where they have not – to explain both how and why these principles are not in the best interests of the company. This is a key idea behind the Code.


The result is that arrangements for corporate governance in the UK reflect a mixture of primary legislation, prescriptive rules, “comply or explain” codes of best practice, custom and market rules. One question which is now being considered is whether this mixture of arrangements for corporate governance in the UK should, at least in respect of Banks and other Financial Institutions (BoFIs) be replaced by a more clearly statute-based structure. It would be designed to deliver a result closer to the ideal form of corporate governance. This would certainly be a massive departure from the way in which governance has worked in the past. I suggest it would also be remarkable if it actually happens.

Before we go any further, it is perhaps important to ask whether any stronger form of formal statutory provision in relation to governance could have prevented the major collapses in the UK banking and financial sector. For some of the reasons discussed below, I doubt it.


The Turner Review and A Regulatory Response to the Global Banking Crisis


The first review was set up by Alistair Darling, then UK Chancellor of the Exchequer. He asked Lord Turner in his role of Chairman of the Financial Services Authority to review and make recommendations for reforming UK and international approaches to the way banks are regulated. In March 2009, the FSA published its recommendations in the document known as the Turner Review, together with a detailed discussion paper entitled “A Regulatory Response to the Global Banking Crisis”. Among other things, these two documents outlined the FSA’s policy approach to financial services firms’ corporate governance policies and arrangements, emphasising that high standards of risk management and governance in all banks are essential. We should perhaps ask why this needed to be emphasised – is it not obvious? This is a point to which I will return later. We might also wonder what the FSA has (or perhaps has not) been doing about these matters over the previous few years. Turner identified a number of key areas where changes are likely to be required. Turner also asked whether appropriate governance arrangements for banks are different from those which apply to other companies because banks are so fundamental to the whole economic system. Therefore, should codes and rules which might be applicable to banks go further than the general Combined Code?


Some key areas of change identified in the Turner Review (many of which are also to be found in the Walker Review) are as follows:


1.         Risk management considerations must be included in remuneration policies to avoid there being incentives for undue risk taking. This has implications for the role of the remuneration committees and for the time commitment required of non-executive directors.


  1. Shareholder influence seems to have been relatively ineffective in holding back the
    risky corporate strategies pursued by some financial services firms.


3.         There may be ways of improving the effectiveness with which shareholder views are communicated to the Board. This has been another high-profile debate over the last year or so. We can consider this and indeed the previous comment in the light of the failed bid by the Pru for AIA.


4.         Turner recommended that all financial services firms should have an effective risk
management function. In his view, this would include:


(a)                Clear, independent and unconflicted reporting lines across the firm including to a firm’s Risk Committee;


(b)        Proper resourcing of risk committees which should have clear mandates and memberships. They should not be mixed with other responsibilities, for example, audit or compliance. There should be technically competent risk managers with strong communication skills. Risk managers should have a sufficient position in the organisation to provide a genuine challenge to business managers. The FSA will in future play a more active role in assessing the technical competence of senior risk managers.

5.      Improvement in the skill level and time commitment of NEDs. This is a really interesting point. The crisis revealed that NEDs have, in many cases, been unable to provide adequate levels of oversight. Most importantly, they failed to provide non-executive challenges to dominant powerful chief executives pursuing aggressive growth strategies. I think we need look no further than the relationship between non-executive directors at the Royal Bank of Scotland and its previous Chief Executive, Sir Fred Goodwin, to have a clear example of this point. Again the board dynamics in respect of the Chairman and CEO of the Pru are also worth mentioning.


There has already been much discussion on NEDs, which is linked to directors’ duties under the Companies Act 2006. Let me mention just two points. Lord Turner’s view was that NEDs must have appropriate technical expertise to understand the nature of the risks being taken and they must devote sufficient time to enable them to properly oversee complex business. This, of course, has all sorts of further implications for that very small group of people who tend to be non-executive directors of major financial institutions, while perhaps having other jobs as non-executive chairmen or non-executive directors of other major corporate groups in the UK.

The Turner Report produced several pages of complex and not so complex recommendations both for the UK and more widely and was followed by………………………………. .


The Walker Review


This was set up to provide an independent review of corporate governance in banks and other financial institutions. As the Chancellor said in 2009: “It is clear that corporate governance should have been far more effective in holding bank executives to account”. Peter Mandelson, the then Secretary of State for Business, stated that the review was needed to ensure that “we have competent well run and transparent boards, which are engaged with their shareholders and capable of understanding and managing risk effectively”.


Sir David Walker chaired this review and the final report was published on 26 November. Many thought, bearing in mind his position as former Chairman of Morgan Stanley International and a Director of Lloyds-TSB Bank, he might have been soft on the banks. I think we can say that we were proved wrong to some considerable degree. If you do not read anything else, I would suggest, if you have any interest in this topic, you read his summary and recommendations. I would like to look at some of his key recommendations (there are 39 altogether) proposed as best practice. I am particularly interested in the nature of directorships as well; the way companies are run and managed, so I would like to focus on those. Walker stated:


“It is clear that governance failures contributed materially to excessive risk taking in the lead up to the financial crisis. Weaknesses in risk management, board quality and practice, control for remuneration, and in the exercise of ownership rights need to be addressed in the UK and internationally to minimise the risk of a recurrence. Better governance will not guarantee that there will be no repetition of the recent highly negative experience for the economy and for society as a whole but will make a rerun of these events materially less likely”.


He asked several key questions about the role and constitution of the Board. He suggested that there needs to be an environment in which effective challenge of the board executive is expected and achieved in the boardroom before decisions are taken on major risk and strategic issues. Therefore, he recommended that close attention to board composition is needed in order to ensure the right mix of both financial industry capability and critical perspective drawn from high level experience in other major businesses. Non-executive directors should increase the time committed to their roles perhaps to about 35 days each year, and have more training and support. They should have a combination of experience in the financial industry and, as he put it, “an independence of mind”. The FSA’s ongoing supervisory process should give closer attention to the overall balance of the board in relation to the risk strategy of the business.


Key questions to be addressed are the relative weight to be attached respectively to the experience and qualities of individual members of the board, to its composition and to the process and style of the overall functioning of the board. Specifically his Review considered:


i.        whether to extend the current statutory statement of the responsibility of the board at least in the case of BoFIs to include an explicit responsibility to depositors and policyholders or to a still wider external group, such as the society as a whole;


  1.   whether, in the light of recent experience with unitary boards, some form of two-tier board structure (which would not be excluded under current UK statutory provisions) might have merit as an alternative option;


  1.   whether the respective responsibilities of executive and non-executive directors should be separated in statute;


  1. whether, similarly in the light of recent experience of BoFIs, the long- established conventional wisdom and practice that NEDs make an essential contribution to governance continues to be as realistic as previously envisaged;


  1. whether a forced breakup of major global banks would significantly diminish the relevance and difficulty of the corporate governance challenge; and


  1. whether reliance on the Combined Code and the “comply or explain” basis for ensuring conformity with best practice standards is still adequate in the case of BoFIs.


So far as the function of the board and review of performance are concerned, he suggested that NEDs should be ready, able and encouraged to challenge and test proposals one strategy  put forward by the executives. One obvious failure here involved the NEDs of RBS in respect of its disastrous takeover of ABN-Amro. Another was the takeover of Halifax/Bank of Scotland by Lloyds-TSB.


The chairman of the board should be expected to give a substantial proportion of his time to the business of that company with a clear understanding that if necessary the chairmanship takes priority over any other business commitments. I have always wondered how at this level someone can chair a major bank and still have time for three or four other directorships. The answer seems to be, they cannot. The chairman should have a track record of successful leadership capability in a significant board position and have relevant financial industry experience. It seems to me that if a review of the structure of boards of financial companies has to make this sort of statement, then something has gone wrong in the past. Again, think about these comments in the light of the way in which the chairman of BP, a non-financial company, has (or rather has not) been fulfilling his role.


One of the other key points was the role of the institutional shareholders. He said:


“There is need for fund managers and other major shareholders to engage more productively with their investee companies with the aim of supporting long-term improvement in performance. Boards, in turn, should be more receptive to such initiative. The Institutional Shareholders’ Committee (ISC), the FRC and the FSA should play a larger role in promoting such enhanced engagement by owners on the basis of principles of stewardship with which fund managers should be expected to conform on a “comply or explain” basis. The recommended disclosure should ensure that clients know whether a fund manager in pitching for their business operates a model that includes engagement with a view to long-term performance improvement.”


Walker believes there should be more attention at board level in the high-level risk process particularly to the monitoring of risk and discussion leading to decisions on the company’s risk appetite and tolerance for risk. This will need a dedicated NED focus on risk issues, in addition to and separate from the executive risk committee process. He is keen to ensure that there should be an independent chief risk officer who would participate in risk management and oversight at the highest level, have total independence from individual business units, report to the Board Risk Committee and have direct access to the chairman of that committee if necessary. This is a critical point.


If you have an extremely powerful CEO of a bank or financial institution, I wonder if it is possible for the relevant NEDs or chief risk officer actually to stand up to that individual. We have heard stories about UK chief executives and US combined chairman and chief executives of some of the major banks, forcing their views on the rest of their board, who put up little in the way of resistance. Clearly, this cannot be correct, but how and whether this point can ever be resolved is crucial to the success of corporate governance. It is the subject of much current discussion – indeed it seems to be a key point.


Walker recommended the role of the Board Remuneration Committee should be extended, where necessary, to cover all aspects of remuneration policy on a firm wide basis with particular emphasis on the areas of risk; not less than half of expected variable remuneration should be on a long-term incentive basis, with vesting subject to performance conditions, deferred for up to five years and there should be increased public disclosure about the remuneration of highly-paid executives.


Four matters were given priority throughout his report. First, the aim has been to develop proposals for best practice which, when adopted, would be likely to add value over time to the benefit of shareholders, other stakeholders and for society more widely. The principal emphasis is in many areas on behaviour and culture, and the aim has been to avoid proposals that are really just “box-ticking” as a distraction from and alternative to much more important (though often much more difficult) substantive behavioural change. Could my idea of common sense be relevant here?


Second, he looked at the weight that has increasingly been given by many shareholders and boards to short-term horizons and objectives – a view that does not appear to have been lessened by lower inflation and lower interest rates. He looked wherever possible at ways of lengthening time horizons, for example in communication and engagement between major shareholders and boards and in setting long-term incentives in remuneration schemes for executives. Remember my point earlier about some groups only being shareholder for a couple of minutes. Will those organisations have the same view of a company as a pension fund? How will sovereign wealth funds or hedge funds consider these issues?


Third, there is emphasis throughout the review on the importance of safeguarding the flexibility provided in the Combined Code through the “comply or explain” approach. Few matters, if any, in corporate governance (for example, precise board composition and criteria for independence in a NED) required hard and fast rules. Circumstances and situations vary, and a theme throughout his Review is that boards should be readier than previously to adopt a non-compliant position where they believe this to be substantially justified and give an adequate explanation for it.


The fourth criterion and a challenge throughout his review was to identify improvements in governance that are both proportionate but also capable of being implemented without putting UK BoFIs at a competitive disadvantage as against their non UK-domiciled competitors. The recommendations throughout the Review are made with this point in mind. He hopes the recommendations made, with appropriate and necessary adaptation to regulatory and other structures elsewhere, will come to be seen as relevant for developing governance practices elsewhere.


So Walker’s Report to my mind is a very useful document. If you read some or all of it, you will see he has said what needed saying —a refreshing change.

A few comments now on the Combined Code:


(a)           The Code and its predecessors have contributed to clear improvements in governance standards since it was first introduced in 1992. The flexibility allowed by the Code remains preferable to a more prescriptive framework.


(b)           There is a recognition that the quality of corporate governance depends ultimately on behaviour not process, with the result that there is a limit to the extent to which any regulatory framework can deliver good governance. I believe we can rephrase this by saying boardroom behaviour is probably more important than board structure. This to my mind is absolutely key. Pages and pages of rules and regulations continue to be produced. However, as I have previously written, if people are not going to work on the basis that they want good governance then those rules and regulations can never work effectively.


(c)     Market participants have apparently expressed a strong preference for keeping the current approach of “soft law” underpinned by some regulation rather than moving to a system that is more reliant on legislation and regulation. I suggest this will only work if the regulation itself has some “teeth”, so it can be enforced.


The FRC shares the above view concerning “soft law” but this depends on there being agreement that the contents of the Code will lead to best practice and on companies and investors acting in the spirit and not just the letter of the Code. This has always been suggested as one of the benefits of UK regulations in the past. A good example is, perhaps, the City Code on Take-Overs and Mergers.


The final comment which the FRC has made, which I think is extremely important and should not be forgotten, is that it is of critical importance that there are sufficient institutional investors willing and able to engage actively with the companies in which they invest. We should note that those who invest in listed companies have rights as shareholders but they also have, or I should say ought perhaps to have, responsibilities, particularly the investing institutions. We therefore await with interest the new Stewardship Code being prepared by the FRC.


One debate during the last year or so has been on why institutional shareholders have not been so heavily involved in the companies in which they invest as they should (or might), and to what extent this has accelerated the crisis over the last couple of years. I think many of those institutions agree with this concern. However as one manager of a major fund has said: “If I am told by the executives, the NEDs, the investment bankers and others that the acquisition of XXX is a good one, it is hard for me to disagree, particularly with the limited information I have”.

The revised Code (renamed the UK Corporate Governance Code) becomes effective at the end of June.



In the final version of the Code, the FRC has maintained the approach set out in its consultation and focused, I think on the whole, on changing the Code’s “tone” by making what some consider limited, but significant, changes including:

  • A new introduction which focuses on what a board does, how it sets the values of the company and that it needs to take responsibility for ensuring good governance and determining how it should operate in accordance with the Code.
  • A new section at the start of the Code setting out the revised main principles, which are designed to guide board behaviours.
  • To “increase accountability”, requiring all directors of FTSE 350 companies to be proposed for annual re-election.
  • To “promote proper debate”, new principles on the leadership of the chairman, the responsibility of non-executive directors to provide constructive challenge and time commitment expected of all directors.
  • To “enhance the board’s performance”, requiring the chairman to regularly review directors’ development needs and that board evaluation of FTSE 350 companies should be externally facilitated every three years.
  • To encourage boards to be “well balanced”, a new principle on board appointments to
    be made with due regard for the benefits of diversity on the board, including gender.
  • To improve “risk management”, providing that the board should be responsible for determining the nature and extent of the significant risks it is willing to take and that the company’s business model should be explained in the annual report.
  • Performance-related pay should be designed to promote the long-term success of the company.


The annual re-election of board of FTSE 350 members is the most controversial aspect of the revised Code. Many critics have said it will encourage short termism and be disruptive. Those in favour have said it will make boards more accountable to shareholders. Companies have also criticised the Code’s new specification that the search for candidates should be made “with due regard for the benefits of diversity on the board, including gender”. This apparently is aimed at encouraging boards to be “well balanced” and avoid “group think”. Apparently, according to recent research, only about 12% of directors of FTSE 100 Companies are women.


As part of the changes aimed at boosting board performance, the Code recommends a board chairman should hold regular development reviews with each director. FTSE 350 companies should each have “externally facilitated board effectiveness reviews”, whatever that means, at least every three years. By who exactly; surely not the same firms who have advised the boards until now?


Risk management remains the board’s responsibility. “The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives” it recommends. It adds that once a year boards should conduct a review of the effectiveness of their company’s risk management and internal control systems and report to shareholders that these checks have been carried out. The Code also recommends companies spell out more clearly the links between performance and pay.


There are a couple of interesting changes but will they really progress this debate – I don’t think so. Much playing around with words, but I believe no real change in a lot of the substance nor dealing with many of the points I noted earlier.


We now await the second part of this initiative which is the FRC’s new Stewardship Code, out later on this Summer which will, for the first time and formally outline the role and responsibilities of investors as owners of companies.


The FRC’s policy objectives for the stewardship code are that it should:

  • Set standards of stewardship to which mainstream institutional investors should aspire.
  • Promote a sense of ownership among institutional investors in order to encourage UK and foreign shareholders to apply and report against it.
  • Ensure that engagement is closely linked to the investment process within the investment firm.
  • Contribute towards improved communication between shareholders and the boards of the companies in which they invest.
  • Secure sufficient disclosure to enable institutional shareholders’ prospective clients to assess how those managers are acting in relation to the stewardship code so that this can be taken into account when awarding and monitoring fund management mandates.


On the issue of shareholder engagement, the FSA states it will consult on a disclosure rule that will require investment firms to disclose publicly the extent to which they comply with the stewardship code and explain, where relevant, their reasons for non-compliance. It also states that planned EU legislation may affect their work in this area. But at the moment we have gentle pressure, rather than anything stronger.

In 2009 we had the Turner Report and the Walker Report. We also had a major Treasury paper on the origins of the financial crisis, which picked up a number of the matters I have discussed. We have had the FSA making changes to improve corporate governance and risk oversight and accountability in financial services firms; we have had the EU preparing a report on corporate governance practices to be ready by the end of the year; we have had the Committee of European Banking Supervisors preparing their own report; and of course, we have had the G7 and the G20 putting forward their own proposals.


A couple of comments. The collapse of Lehman Brothers took place almost two years ago. I am not sure from a pure corporate governance point of view very much has really changed, although we can, of course, say that there are a lot of reports in progress and a lot of paper has been produced and many conferences and discussions are being held. We can, however, I think, take the view that eventually matters will change to some small degree at the very least – they have to.

The Jenner & Block report on Lehman’s collapse came out a few months ago – all 2,200 pages. It is an “interesting” commentary of Lehman’s last few years of complex financial engineering. If you have time, I suggest you read the summary in the first part of that report.


So where are we after all this? As you now know, we have a lot of law. This includes the new rules regarding directors as set out in Sections 170-177 of the Companies Act 2006 – one of my favourite areas, but not one that we have time to look at today! Indeed, some see these sections as an entirely new area of UK company law. We have the rules set out in detail by the FRC, the key one being the Combined Code. We have the FSA rule book which, if any of you have ever had to look at it, is massive and – I know many would say – incomprehensible document. We also have other codes of practice and reports to which I have referred.


In simple terms, one of the most important points seems to me (and I have written about this in the past and it has become one of my concerns about UK Company Law / Business Law), is that we now perhaps have too much law; too much complex law; laws which are unenforceable; and laws which are unenforced. If we cannot solve these issues, I am not convinced that matters will improve. I was pleased to see the Institute of Directors agreed with this view when it published its updated directors’ handbook earlier this month.


Consider the following example in report of some of my concerns, although I should note that recently (and certainly since I originally gave this paper in October 2009), the FSA has become significantly more aggressive in its role as enforcer. I am using this particular example because, as I have suggested, despite the mass of regulations which we have in the UK, we are going to need either a more ethical and moral system (not likely I think, although certainly these are the new “buzz” words) or a lot more enforcement by a much better group of enforcers if the brave new world of Turner and Walker, among others, is ever going to become a reality.


In Autumn 2009, two traders from Dresdner Kleinwort were found to have committed market abuse by selling $65 million of Barclays Bank bonds based on inside information. As one newspaper noted:


“The punishment for this serious offence, which the FSA has pledged to stamp out was not a permanent ban from the City, or a hefty fine, it was a jolly strict ticking off. The decision merely to censor the traders was decided not by the FSA itself but by its Regulatory Decision Committee. Not only is this a very embarrassing position for the FSA, it sends precisely the wrong message about the City’s ethics and regulation at precisely the wrong time. With the City under attack from all sides and the FSA threatened with extinction by the Tory Party, the last thing they need is to provide more ammunition to those who say they learned nothing from the financial crisis and are determined to return to business as usual. As it happens, business as usual seems to have been exactly the defence the two traders used. They were just doing what everybody else did. Those who thought it was acceptable practice included Dresdner’s Compliance Department. An embarrassed FSA said that the decision only to censor the pair of traders reflects the fact that some participants may, in the past, “not have paid sufficient attention to their obligations in this area”. It further stated: “This is like letting someone off a dangerous driving charge because they were not paying sufficient attention. They should have been. That is the whole point.”


[Two very current governance issues at the time were .] As I am sure you know, Prudential plc, based in the UK, intended to acquire AIA the business of AIG in Asia. Some commentators suggested that ultimately the Pru (as it is known) might dispose of its UK businesses entirely and even go as far as moving its primary listing, perhaps to Hong Kong. This deal raised a number of key corporate governance issues. The first is why Boards elect Chief Executives (the Pru appointed a new one about six months ago). Are they chosen to be good stewards of the existing business; to run it well, to evolve it as its markets evolve and to hand it all in good shape to a successor, or do they appoint a Chief Executive to change the business out of all recognition in a matter of months and in effect walk away from everything it has done and built up over the last 150 years? Big questions but good questions I think. We could never know of course, but it would be fascinating to ask some of the non-executive directors how they looked at the above comments in the light of corporate governance, as well as the stewardship of companies. We know that somewhere before the deal’s final collapse, the massive (US$ 21 billion plus) rights issue had to be delayed because the FSA had concerns about solvency issues. That in itself was not a “good thing” on such a high-profile financial deal. Who was watching the governance issues? The Pru did have five sets of financial advisors, after all. One assumes they had high profile PR companies around to assist. We could also wonder about the abortive deal fees – in excess of £450 million. A huge, and ultimately wasted, sum. I wonder who and indeed what were the real drivers of this transaction. I maybe should balance these comments a little by saying if the deal had gone through, the deal doers would now be heroes.


Tied into these points are relevant sections in the Companies Act 2006 dealing with directors’ duties. In any transaction the directors are required to have regard to, amongst other things, the interests of employees, the need to foster the company’s business relationships with suppliers, customers and others, and the likely consequence of any decision in the long term. The prospect of moving a mature business from one side of the world to another must have given the Board some difficult issues to consider.


Finally, despite the fact that the prospectus for the rights issue was nearly 1,000 pages long, how would the vast majority of shareholders have decided whether this was a good deal (whatever that actually means to those shareholders) for the company? Sadly, we will never know.


We do, however, know that the future of both the CEO and Chairman is being considered by several large institutional shareholders. Perhaps this will become a classic corporate governance case study. It certainly shows us that so-called “mega-deals”, even if sanctioned by the board, may not get such an easy ride from the shareholders as in the past.


Finally, I will mention BP, but only in the context of governance. I have already looked in some detail at the role of a company chairman. I scanned 10 days of newspaper reports around the beginning of June looking for some references to the chairman of BP. In this particular scenario I would have assumed he would have been “out there” to support his CEO and indeed to take a prominent “PR” role. Quite the opposite appears to have been the case. He has been almost invisible. I believe there were almost no references to him in the newspapers during the period. The media dealt with the question of whether he would be the “best” member of the board to resign. This point is now becoming the focus of the media debate – surely that can’t be right.


It strikes me as surprising that in the light of the current debate on corporate governance, and particularly the Walker Report’s consideration of the role of the chairman, he has been such a background figure. It would be interesting to understand why he took this position of almost total invisibility until his meeting in the White House last week. Although at the least he should now hire some new PR advisors following that meeting. The whole weight of response seems to have been left to the CEO. To my mind the CEO’s job should be on the practicalities of getting the oil flow stopped. The rest should be the responsibility of the chairman—if he chooses to delegate to, or work with, others, fine, but he ought to be showing some real signs of visibility and leadership. In addition the CEO really can’t deal with the practicalities of the clean up on the Gulf as well as with the politicians in Washington. BP‘s board behaviour may well be another case study in corporate governance.


I ask again, do all these rules I have just discussed really work in practice? This is a case in point. To go back to my initial focus – is it “common sense” for the Chairman to have taken such a low profile in such a high-profile matter?


What we can say, finally, is that at the moment the whole area of corporate governance seems to be in a state of tremendous volatility. We only have to look at the last two examples – the Pru and BP to see that governance is getting a much higher profile than in the past and that I believe is a welcome change.



Postscript August , 2014

The more I reflect on all this, which I do, the more I wonder whether to some degree so many of the issues raised are to do, no more and no less, with human nature and the capitalist system in which we live and work. There may be nothing wrong with that as I believe the alternatives would be a lot worse.

I worry about the tidal waves of rules, proposals, laws, consultation papers, policies and so on which appear all too often. I think I am convinced ( because I can’t find much else to help me and  as a  company lawyer, it’s all I have to look at ) that the rules and laws are there and we probably don’t need ever more in most cases. We “just”need the existing ones to be enforced ( see #gouldsmantra).

The fiasco at the SFO under its previous leadership was just that. The new team seems to making real efforts to improve matters, although whether the SFO can survive in its current form in the present circumstances must be a debatable point. It needs government and political support, in all senses. Real leadership in this area needs to be more than just polite words and if government can’t deliver , we might as well pack up and go home …. and on that note …I’m off.