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Institutional Activism
Discussion
This is an edited version of the conference
transcript. The editors apologise for any possible
misinterpretations.
Dr Paul
Flather
Iwould like to invite Professor
Dan Prentice to join us, to
help kick off the discussion by
serving as discussant. In case you
are relaxing and you think that two “knights of
the realm” in this world of corporate governance
are beginning to agree, I sense actually quite a
fundamental difference emerging. Alastair, in a
way, is arguing that there is a net good from
institutional activism and involvement, and (perhaps
I am going too far with this) there is even a
net benefit to economic performance. I think
Ronnie is pointing out that there are huge risks
to jumping into the fray and that managers have
to be allowed to get on with their job. Dan – what
have you to say
Professor Dan
Prentice
Allen & Overy
Professor of
Corporate Law,
Saïd Business
School,
University of Oxford
Icame across the word
“governance” a considerable
period of time
ago, when I first married
my beautiful wife and she
said to me: “Dan, we have
to organise the governance
of the family. You will deal
with the important questions:
should China be admitted to the United
Nations, should we have nuclear disarmament…
questions of that magnitude are for you. I will
deal with the trivial questions: where should we
live, what car should we drive, where will we take
our holiday, should we privately educate the children…
small matters like that.” This is part of
the problem with executive and non-executive
directors. Who decides what
Now let us look at some points. One of the
things that come out in both speeches is the relationship
between board structure and performance.
Alastair did not go into that in considerable
detail, but it seems to be an important question.
Perhaps the unitary board presents difficulties in
allowing for a non-executive performance within
the board. The second point that comes out is the
question of how to deal with a board that is
under-performing. We can say to them, “these
are our suggestions and, by the way, if you don’t
implement them we are going to remove you.”
That is not much of an option and it seems to be
a very crude instrument indeed. It is the workings
of the interaction process which most interests
me – the option of death or suicide does not
seem to me to be a sensitive regulatory device.
The third point that comes out is the question
of resources for institutional involvement in the
corporate governance issue. It is quite clear that a
lot more needs to be done, but the ultimate result
may be that we simply have shadow boards, and I
do not know how the shadow boards run by the
investors will interact with the board itself. We
know about the exit problem, the free-rider problem
and problems of expertise, but another point
that came out for both – and as a practicing
lawyer I have noticed it is a considerable issue –
is disclosure of inside information. However, I
think its menace has been exaggerated. If it is a
barrier, and we are always told it is a barrier, we
can get round disclosure by simply altering the
relevant legislation. There would be no difficulty
whatsoever in drafting a piece of legislation stating
that, in certain circumstances, it is proper to
disclose confidential information. With fuller disclosure,
the board can receive fuller investor confidence
and well-performing boards can be left to
get on with business.
The last point is this problem of board structure.
There are two aspects to it: one is the duties
of the directors, and other is the structure of the
board. There is a piece of legislation called the
Company Directors Disqualification Act. It is the
most active piece of regulatory legislation used by
the Department of Trade and Industry. It is used
predominately by small companies which have
been run in a highly improper manner, but has
also been used against one or two major players.
The Barings litigation is one, and if you look at
that legislation and the case law under it, this is a
region in which directors’ duties are being actively
developed by the Court. The model they put
forward is not a model of active participation in
the management of company; it is a supervisory
model. What the directors must do is ensure that
they have in place systems (which were not in
place at Barings) to provide adequate supervision
of what is going on.
Moving on to Sir Ronnie’s point about unitary
boards, with the Combined Code, I think you get
very close to a two-tier board system. You have
supervision and internal board structure, which
are the two important ingredients. Its best point
is that it manages (partly) to avoid one of the
problems with two-tier boards which, all the continentals
will tell you, is information flow: what is
going up to the supervisor board and what is
coming down.
This information-flow problem was highlighted
by the most brilliant student I have ever
taught: I said to him, “what does management
mean to you,” and he said, “one over arching
principle, Dan: no surprises.” The combined
code model overcomes many of the two-tier
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