REVIEW OF FINANCIAL MARKETS


CORPORATE EGO: FAILURES OF CORPORATE GOVERNANCE IN SCOTLAND AND BEYOND


SIR EWAN BROWN, DOYEN OF SCOTTISH BANKERS, AND WHO HAS SERVED ON THE BOARDS OF MUCH OF SCOTLAND PLC, SET THE CAT AMONGST THE PIGEONS IN DECEMBER 2021 WITH HIS BOOK CORPORATE EGO


Using seven once-prominent Scottish listed companies as examples, Corporate Ego postulates that the prime culprit for each company’s fall from grace was the development of a


collective mindset in the boardroom. Ten recommendations are offered to improve the workings of listed company boards and, thereby, reduce the risk of future corporate accidents. That all seven companies were Scottish


is incidental. The weaknesses that led to the failures of Burmah Oil, Lilley, Ivory and Sime, HBOS, RBS, Standard Life, and Johnston Press are generic. The equally dramatic collapses of Barings, Carillion, Patisserie Valerie, and Thomas Cook provide compelling evidence of this. I received many constructive


comments on the recommendations; and these were reflected in a supplement published in May 2022.


The modified recommendations are:


Since it is within the boardroom that the role and influence of the chair is most discernible, but at the same time is not well understood, there should be an independent review initiated by the London Stock Exchange and the Financial Reporting Council into the role and effectiveness of the chairs of UK listed companies.


Since the roles of chair and chief executive require very different skill sets, and to avert potential boardroom dominance, it should require shareholder approval for the chief executive of a UK listed company to become the chair.


Directors must read and analyse the company’s cash flow statement over time to determine the relationships between operating cash flow, borrowing, investment and dividends. Do this before looking at the profit and loss account and, where possible, convert operating cash flow into a rolling average to eliminate inevitable fluctuation and to determine a trend.


Before the annual accounts of a UK listed company are finalised, the board should be required to approve a working capital statement prepared to


CISI.ORG/REVIEW


the same standards as are required for a prospectus – and this should be reported on by the company’s auditor.


On each occasion that a UK listed company issues a statement or makes an announcement, including changes to board membership, the board should state there are no issues of which shareholders should be made aware that are not already in the market.


To ensure that the views of employees are heard and taken account of in the boardroom, there should be at least two meetings each year between the non-executive directors and employee forums.


The number of non-executive positions one person can hold in listed companies, wherever registered, should be no more than three. In evaluating board candidates, nomination committees should ask how much time they think it will take to do the job effectively.


It should be a listing requirement that there is, at minimum, an annual meeting between the board of a UK listed company and the trustees of the company’s defined benefits pension scheme.


The criteria for recruitment of non-executives to the board of a UK listed company should be made public.


Non-executive directors should ensure that where they have challenged or disagreed with a decision at a board meeting, there is a proper record of this in the minutes of the meeting.


I had thought that Corporate Ego and its recommendations would generate comments and suggestions from the chairs of Scotland’s then 15 (now fewer) listed companies [excluding investment trusts]. However, there was no response from Abrdn, AG Barr, Aggreko, Cairn Energy, Devro, FirstGroup, John Menzies, Macfarlane Group, J Smart, SSE, STV, Weir Group, or Wood Group. Although any change to corporate


governance is a UK issue, a strong, coordinated voice from respected professional bodies and influential stakeholders might just resonate with policymakers and regulators. More than 30 listed companies have been lost to Scotland over the past four decades. They include Bells, Christian Salvesen, Dawson International, Distillers, General Accident, and United Biscuits. More recently, John Menzies and Stagecoach


have been taken over and others are under threat.


It was put to me that:


A contributory factor has been insularity, with Scottish boards and directors lacking experience of living and working outside Scotland and not having the breadth of perspective required to compete in ever evolving global markets. Too often, the same faces appeared on multiple Scottish boards and attended the same awards dinners and knew each other socially. This insularity and possible unwillingness to upset the apple cart may have induced an unconscious complacency into Scotland PLC over the years and a lack of non-executive knowledge and experience to challenge, for example, unwise


international expansion.


Scotland can ill afford to lose so many substantial companies, some of international importance and all contributing strongly to local and regional communities. The fact that they disappeared, or were taken over, one at a time may explain why so little public concern about corporate decline has been expressed over the years. In proportion to the rest of the UK, they represent a cataclysmic loss of head office and corporate influence. Over the same timescale, more than a dozen prestigious mutual life assurance companies, headquartered in Scotland, also disappeared. What will it take to get key


stakeholders to engage, collectively, in strengthening board effectiveness and achieving better decision-taking across the private sector?


Sir Ewan Brown was an executive director of Noble Grossart, merchant bankers, for over 35 years, then became a non-executive director of Stagecoach Group, chair of James Walker (Leith), a board member of Entrepreneurial Scotland, and a trustee of the Royal Scottish Academy Foundation. Past directorships have also included Scottish Financial Enterprise (chair), Lloyds TSB Scotland (chair), Lloyds TSB Group, Wood Group, Scottish Widows Bank, Pict Petroleum, Scottish Transport Group and Scottish Development Finance.


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