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» Interview

governance
Peter Montagnon, corporate governance heavyweight and former Financial Times journalist, speaks to David Anderson to discuss the need to go beyond corporate governance and instead look towards retaining values in order to regain trust in business.
You took an unusual path to the senior ranks of financial regulation and corporate governance in the UK, dedicating much of your professional life to journalism. Was there purpose in this path? It has been an accidental path. My professional life in journalism started with Reuters before I went on to spend 20 years with the Financial Times (FT). At the FT, I was fortunate enough to hold a number of different jobs: Head of the LEX column, then Asia Editor, writing editorials, visiting the field and doing set piece interviews. This background proved instrumental. As a journalist I learned to write and communicate; I was also able to bring together an understanding of policymaking and a broad knowledge of global markets. What I needed to develop subsequently was greater attention to precision and detail. Your first step out of the world of journalism was to join the Association of British Insurers (ABI). How did that come about? It wasn’t until I was 50 that I decided to do something different. An unexpected opportunity came in the form of an advert by the ABI for a new Head of Investment Affairs. Insurers are major providers of capital. A key objective of the ABI was to help build efficient markets in which it could invest and an important part of that was developing the core relationship between ABI members as investors and the companies in which they hold stakes. It’s important for long-term sustainability that companies are well governed – that they make good decisions, manage risks and be accountable to shareholders on whom they rely when more money is needed. Before joining the ABI, I hadn’t given a lot of thought to corporate governance. Once there, I realised that it was not only a question of challenge, but also, for the ABI, of helping to resolve differences between shareholders and companies in a way that preserved and deepened the relationship between the two. This was by far the most rewarding part of the work. Toward the end of your ABI tenure, you chaired the board of the International Corporate Governance Network (ICGN). Were you able to affect change in the quality of corporate governance? The work of the ICGN provides a useful means for dialogue among global institutional investors. Most institutional investors deploy their capital well beyond their home countries, so it is very much in our shared interest to raise general awareness of the importance of good governance. That is not to say that all jurisdictions should think and act alike; the business, cultural, legal and regulatory environments differ meaningfully and we have to respect that. Nonetheless, there are certain basic principles and the ICGN is the recognised investor forum for promoting them and working for investor rights. So the ICGN had to engage with a wide range of international stakeholders: company directors and executives, market regulators and the stock How did your ten years of experience at ABI on the buy side prepare you for your next step into the world of market regulation and reporting at the FRC? My time at the ABI culminated in the banking crisis, which brought into question a lot of things we all took for granted. It was a tough time for investors dealing with serious issues in both equity and bond markets. At the ABI, members were concerned about ownership rights of both equity and bonds, as they were themselves owners of equity and debt in the banks – one of the hardest hit sectors. Yet with tensions multiplying elsewhere in the market, such as hedge funds coming under pressure from the regulators in Brussels, the policy debate became very emotional and the results often rather poorly thought through. The Financial Reporting Council (FRC) gave me an opportunity to focus on a critical part of the agenda: governance and investor stewardship. The approach to capitalism in the UK differs in important ways from that of continental Europe. What did you see in the reaction to the financial crisis in Brussels? There was a big reaction in Brussels; a number of policymakers viewed the financial crisis as evidence of a failure of Anglo-Saxon

The quality of

Ethics is the missing link in the response to the financial crisis.
exchanges. Its sphere of interest covered a range of issues and initiatives, such as director independence, executive remuneration, listing standards and corrupt practices; but none of this works if investors themselves don’t deliver. That’s why stewardship has become such an important theme. capitalism. Our approach to markets was seen as thoroughly discredited and the cause of considerable damage to their own economies. The predominant view in Brussels was that a step change was needed in the level of regulation, and in particular that the days of light-touch regulation were over.

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Ethics

Did you find any merit in this view? I agreed that the crisis was a signal that we needed to review regulation to make it more effective, but not necessarily to increase it. We needed better quality regulation and supervision, not necessarily more regulation. The epicentre of the crisis was the banking sector and the clear failure was in the supervision of banks. Supervision and regulation are not synonymous; you can’t improve supervision by rewriting regulation. Beyond a deficit in the state supervision of financial institutions, was there also a failure in their corporate governance as provided by the boards of directors? Yes, the quality of governance generally needs to improve. I agree with the proposition the banking crisis was an egregious failure of corporate governance, but it’s not quite fair to say corporate governance was the cause of

the crisis, or that it could have been prevented by better governance alone; that said, better governance might have limited the damage. The pressure for regulation arises from the public’s distrust of business. What alternatives to regulation do you see? It is true that the public perceives a system of self-interested and self-sustaining dealings that privileges and protects the well-off few. By corollary, that system is stacked against the ‘common man’. In my view, regulation is not the only answer. The banking crisis was not only a failure of regulation, supervision and governance; it was also a failure of values. That’s where ethics come in. Most people know ethics are important, but many fail to apply them when they see disadvantage in the short term. It’s tempting to fall back on the concept that if it’s not illegal it’s okay. The trouble is, especially after the banking crisis,

this has led to a dangerous erosion of trust in business generally. In your work at the FRC, what stands out for you as areas where you made progress in improving corporate governance? Two initiatives are particularly worth mentioning. One was the Stewardship Code. Regulators had for years focused on company boards and management teams. It was clear that owners themselves needed to raise their game. The FRC promoted the development of committed investors in equities prepared to act as owners to address problems with companies and hold informed discussion on strategy and risk management in addition to the financials. Companies need the support of a critical mass of such investors, enabling boards and management to adopt a business model that will develop sustainable returns. The Stewardship

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» Interview
The quality of governance
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Code provides a framework for institutional investors and companies to better understand these obligations and responsibilities of ownership. The second area was the debate in the EU, which is the policy originator for the UK and other member states, where we had a big battle to preserve the concept of comply-or-explain against the advancing tide of regulation. You’ve noted with concern that Britain and other countries are facing a serious problem in erosion of public trust in business, extending well beyond banks. What’s the antidote to distrust? This is serious. We must not lose sight of the need to have a system in which entrepreneurs can be financed and investors can be rewarded for the risks they take and companies can grow, generate jobs and wealth for investors and society as a whole. We must also recognise that several issues have resonated with the public: corruption, mistreatment of labour and customers, and most prominently, executive remuneration. On top of the banking crisis, these are causing us to rethink what the corporation is there for. The old idea that companies are there to deliver short-term shareholder value is widely discredited. While the knee jerk reaction to the financial crisis was predictable, it hasn’t really helped. We need to find a way to restore trust that doesn’t involve massive regulatory prescriptions or approaches that stultify the entrepreneurial spirit. Ethics is the missing link in the response to the financial crisis. We’ve done a lot of work on regulation and governance. But ethics isn’t being discussed, and that’s partly because it’s the hardest issue. Do you see a threat to the social license of business to operate? The regulatory mood has swung; there are questions about the right of some companies to do business. I think much of the distrust we see – and the real threat to a business’s social license – is the view that it is engaged trend of shrinking public equity markets. A robust public equity market offers long-term capital par excellence; it is the bedrock of everything as capital in perpetuity and a place where savers can invest and make a good return. Of course, not every shareholder will behave the same way. Indeed, it’s helpful to have different kinds of investors for the benefit each offers the market; traders bring liquidity, activists move the agenda forward and long-term owners provide stability.

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Regulation is not the only answer.
in fundamentally unfair or predatory behaviour. I think it’s useful as a thought experiment to divide banks up into those that make money out of providing or helping to create value for their customers and those that extract value from their customers. Some parts of investment banking, in the run up to the crisis and since, have been a significant extractor of value, bringing the whole industry and beyond into disrepute. The public has come to distrust the integrity of business decision makers, believing they are eager to extract value whenever they can get away with it. Careful discussion of business models is critical for boards. In most businesses, there’s an element of both extraction and provision of value. A good question to start with would be ‘Where do we stand on this spectrum?’ As public equity markets face the headwinds of regulation, compliance and scrutiny, are you concerned that some companies may delist and others contemplating public ownership may remain private? Yes, I’m worried about the long-term Will corporate governance remain central to the next stage in your career, and if so, what will you make your priority? Capitalism is still the best approach we have got, but the banking crisis shows that we need to make it work better. We need to go beyond regulation and think carefully about what companies are there for. We can’t lose sight of the paramount requirement on them to be entrepreneurial so that they can contribute to our economic development. Everything is in flux: the role of companies, time horizons for investment, the duties and rights of capital providers and the position of values. In some areas there is a disconcerting tendency to what I call mob-rule. We need a measured and rational debate, so that we can build a viable consensus for the future in which trust is restored, companies can be entrepreneurial and the rights of those who provide their capital are respected. I’m lucky that my new role at the Institute of Business Ethics in the UK will allow me to contribute, as well as my positions on the board of the Hawkamah Institute in the Middle East and as a member of the corporate governance advisory board, established by the Norwegian Sovereign Wealth Fund.

» About the authors
Peter Montagnon is currently Director of Investment Affairs at the Association of British Insurers and Associate Director at the Institute of Business Ethics. David Anderson is the president of The Anderson Governance Group, based in London and Toronto. He can be reached at david. anderson@taggra.com.
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