Directors will face new challenges from shareholders…

Company Profiles, Conferences, Seminars, Forums, Person Profiles — By on December 17, 2015 at 8:45 PM
John Walmsley

John Walmsley

Directors will face new challenges from shareholders, London lawyer John Walmsley predicts in talk on UK corporate governance

By James Brewer

The future of corporate governance in the UK will see shareholders keenly holding board directors to account for their actions. Directors will have to get used to the fact that risk assessment is going to fall squarely on their shoulders, solicitor John Walmsley of JKW Law told a London audience.

“Regardless of what actions Government or regulators take, the power remains vested in shareholders, ” he said. There was an inextricable link between risk assessment, corporate governance, and financial stability and reporting.

He warned that a single issue – exemplified in a major way by the Volkswagen deception over car emissions tests – could evolve very quickly, “with potentially catastrophic consequences.”

He was speaking to a packed meeting of members, mostly working for private sector businesses, of south London branch of the Chartered Institute of Management Accountants. The venue was the Southwark headquarters of the UK Chamber of Shipping.

Section of the audience

Section of the audience

Highlighting the sometimes vast repercussions of corporate wrongdoing, his talk was entitled: UK Corporate Governance; Enron to VW – It’s Not about the Car.

Mr Walmsley spent much of his account on the impact of the latest version of the UK Corporate Governance Code, published by the Financial Reporting Council in September 2014, with its revisions designed to strengthen the focus of companies and investors on the longer term and identifying risks. There are penalties for listed companies which ignore the Code.

Mr Walmsley said: “The Code is about the responsibility to anticipate the risks in the business, but to work out all the mitigation required such that the action does not prove fatal for a company.”

Firms needed to monitor internal risks and controls over 12 months and comment on that in their annual report. Directors should state whether they had a reasonable expectation that the company would be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.

John Walmsley’s first slide for his talk

John Walmsley’s first slide for his talk

Mr Walmsley said that “shareholders and other companies would run a mile, if it were disclosed that a company might suffer financial difficulties in the medium term, but the Code said that there has to be identification of any material circumstances that might lead to it going bust.”

The Code includes a statement that “the directors should confirm in the annual report that they have carried out a robust assessment of the principal risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity.”

Auditors are asked to pay close attention to directors’ statements in the accounts. Mr Walmsley said that the question of audit was important, particularly given what happened to the one-time top accountancy firm Arthur Andersen, which in the fall-out from Enron was found guilty of obstructing justice, and its licence to audit public companies was voided.

Remuneration was another area of focus in the Code, following the 2008-09 financial crisis, and in the light of concerns about take-home pay in the City. There had to be a performance-related element, “and this needs to be rigorously applied, ” said Mr Walmsley.

Further revisions to the Code were expected in 2016.

The Enron and Volkswagen scandals were in many ways the Ground Zero of corporate governance, he said. For the UK, notable cases of serious misconduct involved the publisher Robert Maxwell, theft from the former FTSE 100 group Poly Peck by its boss Asil Nadir, and money laundering and other crimes related to the private bank BCCI.

There is not a single acceptable definition of corporate governance, said the legal expert, but “it is about customer trust, it is about shareholder trust.”

The VW scandal brought intense scrutiny of corporate governance principles at a multinational company and the consequences appeared to be substantial. The manufacturer suffered a huge decline in share price and reputation. (Latest data shows that VW market share has fallen in Europe, although sales numerically are holding up.)

The Germany-based firm admitted in September 2015 to installing software in 11m vehicles to distort the results of emissions tests. There will be a huge vehicles recall in January 2016, and shareholders in Germany are preparing to sue the company for Euro4bn for withholding information from the market, while actions loom in the US and elsewhere

More broadly, the motor industry faces questions as to how many firms have been manipulating data.

Mr Walmsley looked at Volkswagen’s corporate governance statements before the scandal broke, as expressed on its website.  It promised to “foster trust through transparent and responsible corporate governance which takes the highest priority in our daily work.”  After the scandal, “it looked exactly the same, ” said Mr Walmsley.

Did the supervisory board exercise sufficient control over former chief executive Martin Winterkorn, who had been variously described as a titan or a tyrant?

Mr Winterkorn was replaced by Matthias Müller who said Volkswagen would “do everything it can to develop and implement the most stringent compliance and governance standards in our industry.”

The situation was a little like the banking crisis and the ratings agencies, with people being wise after the event. The VW picture had not been entirely rosy: it was in the 28th percentile in terms of corporate governance, meaning that it scored lower than 72% of companies globally. Its corporate governance score had been falling since 2004. As recently as September 2015, though, it was the group leader in the Dow Jones sustainability index.

Enron was able to hide billions of dollars in debt from failed deals and projects, and its implosion led to the US Congress passing the Sarbanes-Oxley Act 2002 (known sometimes as SOX) which increased the accountability of auditing firms, and set out to improve the accuracy of corporate disclosures.

The UK meanwhile since 1993 had a series of inquiries resulting in the Cadbury, Greenbury, Higgs and Hampel reports, which led to the current Corporate Governance Code.

In answer to a question from a member of the audience, Mr Walmsley said that UK governance responsibilities were the same for executive and on-executive directors.  “That has put off a lot of people from accepting positions on boards.”

He was asked whether boards might have to take the blame for failing to guard against cyber-attacks.  The reply was that there could be shareholder actions if procedures were deemed to be insufficient.

Mr Walmsley concluded his presentation with a quote from US mega-investor Warren Buffett: “Risk comes from not knowing what you are doing.”

“This encapsulates the VW scandal and trying to keep up with a fast-moving world, ” said Mr Walmsley.

Mr Walmsley in 2006 set up his own firm, JKW Law, to offer legal advice in commercial disputes, corporate and commercial, banking, insolvency, property, employment and tax.

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