Corporate Governance and Accountability

Lord Stoneham of Droxford Excerpts

Tuesday 5th July 2011 Lords Chamber

[Lord Stoneham of Droxford]

My Lords, I want to address two issues in the context of this debate. I believe that there is too much emphasis on short-termism in companies and there is often a danger of arrogance, particularly in dominant market positions.

Too many companies are pressed by the short-term-profit instincts of the stock market and investment banks and cannot think long term. I worked for a local newspaper company with strong family ownership traditions. It believed in investing long term for the next generation and for its local communities. We worried constantly about the dangers of overgearing in a very cyclical industry. It was taken over in 1999 by an executive team committed to a business model of borrowing, cutting costs and assuming that the boom would go on for ever. Ten years later, that company came to the brink of bankruptcy, and shareholder value today is 2.5 per cent of what it was in 2007. It simply never thought long term.

Successful companies can get introverted and arrogant. They can become oblivious to their communities and markets, particularly if they are too dominant in their markets. I believe the high-paying bankers got remote and out of touch with reality for those reasons. Even Tesco seriously contemplated unacceptable tax-avoidance schemes despite its prime dependence on British consumers, and News International, which I worked for at the time of the current phone-tapping scandal, but not as a journalist, perhaps will find that it became too arrogant with its success and out of touch in its pursuit of competitive advantage. Some of its executives lacked a hinterland that would have warned them against the consequences of their actions. It is frightening that a risk taken nine years earlier can finally catch up with that company.

We need counters to short-termism and arrogance. Principal shareholders are now largely pension funds, which should be primarily interested in the long term. Wider social responsibilities need instilling in directors to keep them in touch with their communities and markets. The key for the Government—and I am pleased that the coalition is reviewing this—is to clarify the requirements for company reporting, to improve identification of risks and to force directors to address their social and environmental concerns and risks. Greater concern for social and corporate responsibility should help counter company arrogance and complacency, and we should encourage the accountability of pension fund managers to their savers, so social and environmental risk is at the forefront of their responsibility as shareholders.