Moral compass

Corporate governance in the UK appears to be less than stringent if Tesco’s, BP, BT and Rolls Royce are any example. What is even more amazing is those four companies are probably as well-known English brands as any across the world, they almost define the expression “blue-chip”. Partly for this reason these four companies often make up the bedrock of many a pension scheme.

The UK is supposed to be one of the best regulated economies in the world, this is partly why we are the financial capital of the world. Tesco’s problems stemmed from managers over estimating possible supplier rebates. BT have taken write-downs due to accounting errors of £500m, from a subsidiary that contributes about 1% of the profits to the group. BP was a lapse in management standards, and according to the judge “were profit driven decisions”. Rolls Royce have been fined over £600m for bribery, which has led to their credit rating being downgraded to junk by Standard and Poor’s. The effect on shareholder value has been swift and dramatic, the damage to reputation and fall out can last for years.

There have been scandals across the pond, Enron and Worldcom spring to mind. The difference with those two scandals, they came from the top. The leaders of the companies apparently went out deliberately to defraud shareholders, for gain. The slight difference from the four mentioned above was that these failings were probably due to managers feeling under pressure to meet unrealistic performance targets, one assumes on the basis that if they did the rewards would be that much greater, for all.

Bankers have taken a lot of flak for their part in the 2007 financial crash, and rightly so. However, this too was a result of employees in a results driven culture under pressure to perform in the hope of getting well rewarded.

Where has the world’s moral compass gone? The Tesco’s executives could be facing ten years in jail if found guilty, what bonus could be worth that risk?

The regulators have been at pains over the past few years to add layers of compliance officers and risk managers, specifically to monitor the performance of employees. Company accounts are supposed to be thoroughly audited every year. However, all this appears to have done is ensure the senior executives no longer feel responsible to correctly monitor the company they are responsible for.

The other factor to blame may lay at the door of managers and leaders feeling under pressure to meet short term targets. Companies now give pre-close statements, trading updates with AGM statements, as well as quarterly reporting. This must lead to managers feeling under pressure to meet short term targets, at the expense of long term gain . 

Posted on January 26, 2017 .