FTSE 100 Companies (Governance)

Eric Joyce Excerpts

Monday 23rd May 2011 Commons Chamber

[Eric Joyce (Falkirk) (Lab)]

I want to speak about corporate governance in the City of London’s largest companies, the FTSE 100 companies. We all have an interest in them, because all our pensions are invested in them. In particular, I want to speak about what I consider to be a serious failure of corporate governance on the part of one company and the non-executive directors who sit on its board. When preparing my speech, I spoke to a number of FTSE 100 executives and non-executives who were both professional and frank, except those at the single entity which I fear may be the bad apple that infects the rest of the barrel.

The City of London is a world leader. Billions of pounds pass through it every week and every month. An average of 600,000 transactions a day have taken place over the last five days, with a turnover ranging from £4.5 billion to £7.4 billion. The United Kingdom Exchequer derives an enormous revenue from the City. It is a huge source of employment and prestige for the UK, and it affects all our constituents in the most profound ways.

The City of London is successful because it attracts many of the world’s best at all levels, be they traders, managers or back-room staff. I think it best, on the whole, to let the wheels of commerce turn and, as a nation, to extract the benefits through corporate taxation, wherever it is levelled and whatever the levy. However, as we have seen recently with the banking crisis, things can go awry. For that reason, the system requires integrity so that people can trust it. Of course no system is perfect and flaws will always exist, but most agree that that essential integrity is best assured by, on one hand, regulatory bodies alongside the professional bodies that regulate the various professions involved in the City, and on the other hand the governance and structures of the individual companies themselves.

My aim this evening is not to raise the technicalities and structures of City regulation, but to ask the Minister more broadly whether he is concerned about the governance oversight of firms that are controlled by specific individuals from abroad and have no operations in the UK. I do not suggest that it is impossible for such companies to operate with complete dignity, and many do, but I do suggest that when there is good cause to suspect that the standards of governance of a listed company are below those that the public have a right to expect, that should become a matter of deep public concern which should be reflected in the Government’s stance on such failure.

I have a bad apple in mind. At the core of my concern—because it illustrates perfectly the case that I am making—is the Eurasian Natural Resources Corporation. I have raised the subject of the company and what I consider to be its ill-advised dealings in the House before, but things have moved on and I think that it is worth raising it again. The commercial entity that is now the ENRC arose from the denationalisation of a Kazakhstan Government asset, or series of assets. It is now dominated by three Kazakhstani billionaires. The Kazakhstan Government retain a substantial share, as does Kazakhmys, another Kazak mining company which is also a member of the FTSE 100.

The ENRC was listed in London in 2007 and, given the importance of the mining sector in terms of general values on the exchange, it is a key member of the FTSE 100. It has extensive operations in Kazakhstan, of course, and its regional neighbours Russia and China. Significantly, it has now extended its operations into Brazil, Mali and, last year, the Democratic Republic of the Congo. Before the ENRC’s entry into the DRC, the company had been the subject of as much speculation as any other FTSE 100 company—many companies are the subject of speculation, which is up to them and their public affairs people to deal with, and most of them do that perfectly professionally. The ENRC had not generated much general public interest, but that changed when it procured a number of assets in the DRC which had been expropriated by the Government from what I think the markets agree is a perfectly reputable company.

That company operated in the DRC and was the largest taxpayer in that country. It had invested about £700 million in a couple of mines, but one in particular. I have mentioned this topic before in this place, so I do not need to keep repeating the details. What assets it invested in is well known. It invested £700 million and employed many thousands of people, and it was a huge taxpayer in the DRC, but, for no good reason, the DRC expropriated its assets. A close friend of the President of the DRC bought the assets at a knock-down price—about $20 million, which is a bit of a joke. The markets were very sceptical about the legitimacy of bidding for them. The key assets were the licences to operate a couple of mines, but one in particular at a place called Kolwezi. The only company that was really interested in procuring that was the ENRC, and that was its entrée into the DRC.

Many people had concerns, but not, it seems, the executives at the ENRC. I do not think that it is necessarily for the executives to answer every question that people and politicians might have, but I do think that non-executive directors should have sensible oversight and give people confidence that the operations of their company are legitimate. Many questions were raised about where an overnight profit of £160 million went. There were patterns; other deals had been operated in the same way by the same guy, Dan Gertler. He is an Israeli, and apparently a legitimate business man, who flies across to the Congo to do his business. Many people asked where that £160 million of profit on that one deal had gone. We can be as transparent as we want in respect of international aid, but our Government give £140 million or £150 million to the Congo in a single deal, and that can be wiped out—it can go anywhere, and we simply do not know. That does rather throw into question the effectiveness of development aid, and scepticism has recently been expressed in certain quarters about such money simply being displaced by “dodgy deals” so it does not go where it is intended to go. There are certainly concerns about this particular deal; I and many others who are interested in the region—and in the City—were deeply concerned.

It is a testament to the integrity of the governance of other FTSE 100 companies that many showed deep concern. Several withdrew their investments, and several reputable investment funds took out their money. One major merchant bank made a public statement that it was very concerned and reluctant to deal with this FTSE 100 company again. The non-executive directors, who I would have expected to be keen to make sure everything was entirely legitimate, were completely unconcerned. Their public statements were completely blasé; they had no concerns whatever. That was remarkable because most people who knew about the market, the company and the deal were very concerned about the circumstances, which was why they had not touched the asset and the ENRC got it at a knock-down price.

I am reluctant to bang on about personalities, and I am especially cautious about that given what is happening in other current news stories. However, I shall mention one person who is publicly known to be the senior independent non-executive director of the ENRC: Sir Richard Sykes. I will mention a couple of technicalities about the purpose of governors and non-executive directors in a few moments, but I think it is pertinent to mention him now because he is a good example of a very successful chief executive officer.

Sir Richard Sykes was CEO of GlaxoSmithKline for many years, and he was enormously successful and highly regarded. Subsequently he had a bit of a hiccup as principal of Imperial college, London, concerning what some considered to be a slightly ropey back-door deal to try to acquire the land of Wye agricultural college in Kent, which eventually fell through. That may have tainted him a little and perhaps that is why he has taken up this particular non-executive position. It was widely reported in the financial press that he was being paid about three times the normal rate—about £250,000—to be a non-executive director at the ENRC. He expressed little concern, as he thought that the deal was entirely legitimate. Indeed, he thought that if the case went to international arbitration and some fault was found, the Government of the DRC would have to pay the money. The case is in international arbitration; the company that previously owned the asset that I am referring to as Kolwezi has taken the case up. To that degree, it is difficult for us to comment on what might happen in future, but what is clear is that the senior independent non-executive director of the ENRC thinks it is perfectly legitimate and fair that the DRC, which is one of the poorest countries in the world, should pick up a bill of £700 million, £800 million or perhaps more—the case is being spoken about in terms of billions. This seems to be something of a failure of corporate governance.

That made me reflect on the purpose of corporate governance. I am not an expert in this area—many hon. Members have much more expertise on what the defined legal roles of directors, executive directors and non-executive directors are—but I have done a little reading and I thought that I would just reflect on what corporate governance is supposed to achieve. It is commonly defined—this is a little dry, but it is perfectly right to mention it—as the system by which companies are directed and controlled. The board of directors is entrusted with that function, and each member is appointed to uphold all appropriate governance standards.

The role of non-executive directors—this is my primary concern—within a company’s governance structure is less clearly defined and, apparently, varies among companies. Non-executive directors are often seen as the guardians of the corporate good and act as buffers between the executive director and the company’s outside shareholders. They act as chairman, monitoring executive actions and questioning executive decisions. It seems to me that they have a dual role. They clearly have a primary responsibility to the shareholder, but more broadly they have a responsibility to the broad City of London and the whole corporate governance structures of the UK to ensure that people are confident that if our pensions are being invested in FTSE 100 companies, as they are, the non-executives are doing the job that they are supposed to be doing. That job is to have in mind not only the profitability of the company, but the reputation of the company and the brand, and to keep a good eye on what hard-pressed executives are doing to maximise their profits. Those guys are being pushed very hard and are being handsomely rewarded but if, from time to time, someone chooses to cut a corner, it is the job of the corporate governance of the non-executive directors to pick it up.

As far as I can see, we trust non-executive directors to a large degree, despite the fact that many people fire lots of, perhaps unfair, criticism at them, saying that they are placemen and so on. Broadly speaking, there is a quite a lot of confidence in corporate governance, as is seen in the case of Glencore, which had an initial public offer—partial flotation—last week. There has been enormous discussion about the make-up of its board, and whether or not the board can do its job properly because many of the non-execs are so powerful and wealthy. That is for time to tell, as was said in an excellent column by Miss Sunderland in the Daily Mail a few weeks ago. I have no great concerns about any other immediate companies at the moment, because I do not really know enough about them, but I do know enough about the ENRC to see that non-executive directors do not appear to have done their job. Other significant figures in the City of London have been very clear and open about that.

It is also worth mentioning that when politicians approach these companies, whether or not they like it—they are pretty neutral—they usually have a pretty professional operation. I found the ENRC to be completely invisible and unapproachable. It has one public relations guy and a spaniel sitting in an office somewhere in London. Its ownership is abroad, as are its operations. As I say, it is owned by people who are largely unaccountable. That is not to say that there has to be wide public ownership of a company for the board to have accountability from the chief executive officers, because there are many cases where families control public companies but the governance is still fine.

In this case, it looks as though there is about to be a fight between the Kazakhstani Government and a few billionaires who were beneficiaries when the Kazakhstani Government largely privatised the company, or took it out of nationalisation, who want to take control. The non-executive directors, who I believe have been completely ineffectual, have found lately that their reputation has been badly affected, so they are now trying to argue that there should be greater corporate oversight at the ENRC. The response from the billionaires who sit behind the ENRC has been to try to get enough shares to take overall control, to sack all the non-exec directors in about two weeks’ time at the annual general meeting and effectively to leave the company without any meaningful corporate governance. The company has also been unable to recruit a new CEO after the former CEO left at very short notice a couple of months ago in opaque circumstances.

In conclusion, do the Government have a plan for what happens when a corporate entity, which affects everyone’s pensions, is sitting in the City of London, potentially infecting the barrel? I am not saying all the other companies are naive fools, but we have a corporate entity in London that has foreign ownership, no effective meaningful shareholder control, operations that are entirely abroad and billionaires who are bragging about how they will take over the company and sack all the non-execs. How will the Government ensure some degree of confidence in the markets that a company like the ENRC will not do the same thing it did with Kolwezi and damage the good reputation of the City of London?