Ftse 100 Companies (Governance)

– in the House of Commons at 9:59 pm on 23rd May 2011.

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Motion made, and Question proposed, That this House do now adjourn.—(Mr Goodwill.)

Photo of Eric Joyce Eric Joyce Labour, Falkirk 10:16 pm, 23rd May 2011

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?

Photo of David Willetts David Willetts Minister of State (Universities and Science) 10:31 pm, 23rd May 2011

I congratulate Eric Joyce on securing this debate. The title on the Order Paper is “Standards of governance amongst FTSE 100 companies”, which is a very important subject, and it is clear from his remarks that he has a particular company and set of circumstances in mind. It will be hard for me to comment on that, but I realise that he is using the case to make some wider points about the City of London. He also rightly referred to the role of professional bodies before turning to the specific case of the ENRC.

The coalition Government believe that the UK’s corporate governance framework plays an important role in enabling investors to hold the boards of companies to account for their performance, facilitating efficient allocation of resources in the economy and creating the accountability and transparency that encourage responsible business behaviour in line with internationally agreed standards. As such, it is vital to achieving our goal of sustainable economic growth.

There are various ways in which we deliver the strong corporate governance framework we have in the UK. One is our listing rules, which might help the hon. Gentleman and me to confront the question he asked towards the end of his speech. The listing rules that must be fulfilled before a company can be quoted on the London stock exchange are a matter for the Financial Services Authority as the UK listing authority. The UK regime is one of the strongest in the world and UK listed companies are expected to comply with high standards of corporate governance through compliance with the Financial Reporting Council’s corporate governance code. The short answer to the hon. Gentleman’s question is that the listing rules are crucial.

We are not complacent. We recognise that we need to ensure that our overall corporate governance regime is fit for the future and we need to make sure that the governance of our top companies continues to improve. The governance landscape is constantly changing, both domestically and internationally. We need to adapt to that to stay in line with our competitors and we are trying to do that with corporate governance reform, the stewardship code, narrative reporting and guidance on directors’ remuneration and bankers’ pay. That is all part of the Government’s commitment to a wider corporate social responsibility agenda, encouraging businesses to minimise the negative social and environmental impact of their activity and maximise the positive impact they can make while benefiting commercially in the process.

Our action to support and encourage responsible business focuses on helping businesses to understand how they can deliver on corporate social responsibility, including by facilitating the exchange of good practice and supporting a range of international frameworks such as the OECD guidelines for multinationals and the UN global compact, which might be relevant to the case that the hon. Gentleman has raised. The Government are pressing for the EU to adopt rules providing for greater transparency in the information provided by multinational companies in extractive industries about, for example, their tax payments in host countries, based on the United States’ Dodd-Frank principles. This will allow citizens to have the information to hold their Governments to account for the revenues they receive from resource wealth, including some of the tax payments the hon. Gentleman mentioned. However, I am not able to make any comment on or judgment about that specific account.

The US Dodd-Frank Act also requires companies reporting to the Securities and Exchange Commission to report their use of conflict minerals originating in the Democratic Republic of the Congo or neighbouring countries. We are interested to see how the US Government will implement their new legislation and we will closely monitor its implementation. In the meantime, we have been supporting the work of the OECD and the UN group of experts to develop due-diligence guidelines for the minerals supply chain in eastern DRC and to encourage adherence by companies looking to trade in cassiterite, wolframite, coltan and gold originating from the DRC. We are strong supporters, including financially through PROMINES, of DRC efforts fully to implement the extractive industry transparency initiative.

As we are talking about that country and businesses located in it, let me touch briefly on the hon. Gentleman’s comments, but I hope he will understand that it is very difficult for me to comment on an individual case and that it would not be right for me to do so from the Dispatch Box. He asked about non-executive directors: let me make it clear that under UK law all directors need to comply with the same general duties, including the duty to promote the success of the company both in the long term and the short term and the duty to exercise reasonable care, skill and diligence.

I did not know that the hon. Gentleman had intended to refer to the company he mentioned or to Sir Richard Sykes, and I am not able to comment on those specific points. What I can say is that I have had dealings with Sir Richard Sykes over the years in relation to his position with the NHS and Imperial college, and we all know his record as the chief executive at GlaxoSmithKline. He is a well-respected business man who has also made a considerable contribution to the NHS and our higher education system. I am sure that the hon. Gentleman will recognise the seriousness of some of the things he said about the company. I am not able to comment on that case but I think we should all, on both sides of the House, recognise the significant contribution that Sir Richard Sykes has made to the commercial life of our country and to public service, in which I am sure he has always behaved with great integrity.

Outside the specific case that the hon. Gentleman has raised, there are wider issues. We have launched a new agenda called “Every Business Commits”, in partnership with business in the community, to help all UK businesses understand how they can act responsibly. It gives them clear examples of how they can make a difference in priority areas such as supporting communities, improving quality of life, improving skills and creating jobs, protecting the environment and supporting small and medium-sized enterprises. “Every Business Commits” aims to shape business’s contribution to the Government’s broader agenda to empower communities and encourage social action. We believe it will provide the platform for business to play an important role alongside Government in helping to resolve some of society’s most important challenges.

So my response to the hon. Gentleman is that the Government believe that the UK already has a robust corporate governance framework. We are not complacent and recognise that it always needs to be reviewed and updated, and we realise that there will always be individual cases that test those guidelines and that framework. I hope the hon. Gentleman will understand that it is hard for me to go further into the specific case that he raised. Nevertheless, our principles on which we will approach this and all cases are clear—that it is in the long-term interests of British companies to support the work we are doing to bolster corporate governance, and we encourage every company to meet the standards of the best.

We have specific powers, including the powers relating to the listing rules, which are for the Financial Services Authority. As we work through the issues of the correct structure of corporate governance in the UK, our conclusions will be based on the principles that motivate our desire to have a world-class corporate governance framework. However, we are not in the business of weighing companies and investors down with more regulation and higher costs. We believe in improving accountability and transparency. Those are important principles which we expect all companies, large or small, multinational or solely domestic, to live up to. We believe that following those principles is essential for securing long-term, sustainable economic growth for Britain.

I am grateful to the hon. Gentleman for raising these important issues. Although it is not possible for me to comment in any detail on the specific case, I hope he will accept that the coalition Government take very seriously indeed the overall framework of corporate governance, the powers that Governments and other regulatory bodies have, and our commitment specifically to tackling the problems with regard to the DRC and making sure that we have the highest standards of compliance when it comes to some of the extractive industries there.

Question put and agreed to.

House adjourned.