It was a good week to be out of the office. Sir Stuart Rose, chief executive
of Marks & Spencer, was on holiday. His boardroom colleague, deputy
chairman Sir David Michels, was also taking a break. Mark Burgess, head of
equities for the investment giant Legal & General, one of the retailer’s
largest shareholders with a 4.3% stake, was skiing.
All three were well away from their desks, just as the City was witnessing one
of its biggest rows for years over the way large companies are run - a
dispute in which the trio of holidaying executives play the pivotal roles.
It is a dispute that throws into stark relief the debate over a fundamental
principle at the heart of rules on good corporate governance and it marks
an icy standoff between the most famous name of British retail and some of
the City’s most powerful investment institutions.
But last week, none of this was sufficiently pressing to interfere with the
holiday plans of its three key participants.
M&S has upset the City. Three weeks ago, the company tacitly admitted that
it - and, in particular, its outgoing chairman Lord (Terry) Burns - had
failed in its attempt to find someone to take over from Rose as chief
executive.
Instead, said the company, Rose would step up to chairman - and still hold on
to the chief executive role. Michels would become the board’s senior
nonexecutive.
As soon as the idea was unveiled, Legal & General objected. One of the
core principles of good corporate governance - principles embodied in the
so-called “combined code” - is that, unless there is very good reason to do
otherwise, quoted companies should split the chairman and chief executive
roles; the two positions should not be occupied by the same person.
And there the matter might have rested, leaving in its wake no more than the
fading echoes of a few grumbles.
As in politics, a week is a long time in arguments over corporate governance.
The row was bound to subside.
Then last Wednesday, L&G - not a fund manager noted for its outspokenness
- reignited the dispute. The fund manager issued a second statement.
Yes, it said, it had held a meeting with Burns and Michels. It had listened to
the arguments they had put forward for allowing Rose to occupy the dual
executive chairman role.
Burns and Michels had pushed the line that the proposed arrangement would give
enough breathing space for a new chief executive to be identified from
within the company.
But, said L&G: “We do not agree that this is a necessary structure to
allow for the successful appointment of a successor to the current chief
executive.
“We do not support the dilution of corporate governance standards,
particularly in leading UK companies.”
This, it was now clear, was a row that was not going to go away. Neither side
would give way. EVEN with L&G’s Burgess on the ski slopes, the fund
manager is showing no signs of going quiet over M&S’s failure to comply
with the combined code.
The Wednesday statement wasn’t the end of L&G’s opposition. This
weekend, Peter Chambers, chief executive of L&G Investment Management
(LGIM), told The Sunday Times: “We believe we have a moral responsibility to
uphold corporate ethics in the UK and believe bellwether companies in the UK
share this responsibility . . . We don’t think they [M&S]should be
explaining why they are not complying - they should be complying.
He went on: “A fundamental principle of the combined code is that the roles of
chairman and chief executive should be separated. Every FTSE company has
succession issues and it is not necessary for the CEO to step up to be
executive chairman to sort out succession policy.
“If M&S are going to go ahead with this change, they need to give
some assurances to shareholders that this is a temporary measure, that they
intend to revert back to separating the roles as quickly as is possible and
to give greater clarity as to how they are going to manage the conflicts of
interest.”
Now, with L&G having taken the lead, other fund managers are now publicly
voicing their concerns.
Richard Buxton, head of UK Equities at Schroders, which holds about 2% of M&S,
said: “For such a household name to do this sets an appalling precedent.
They should reverse the decision and appoint an independent chairman.
“Rose is sufficiently arrogant to say that if you don’t want me to take this
role, I will leave.
“I would actually face up to that. The company is bigger than any individual.”
Iain Richards, head of European governance at Morley Fund Management,
complained that companies seem increasingly willing to stretch principles
for the sake of their own convenience.
He said: “What you have got is an acceleration of precedents. If someone else
is doing it, then why can’t we?
“Chief executives becoming chairmen is one example of something that is
starting to become quite a concern for shareholders. We are seeing far more
cases than circumstances justify.”
Robert Talbut of Royal London Asset Management added: “We want the company to
compromise by putting forward other suggestions to placate shareholders.”
He suggested that Burns should be pressed to give a better justification of
the succession plan; Rose should be put up for annual reelection; and there
should be a new, independent deputy chairman.
The issue of the deputy chairmanship is a thorny one.
Under M&S’s proposals, the role will continue to be held by Michels. But
with Rose in the chair, Michel’s position will become pivotal: he will have
to demonstrate real independence in representing the interests of
shareholders.
Talbut went on: “There is increasing concern that it is being seen as a
natural course of events for the chief executive to become chairman. We are
uncomfortable with it.”
Other shareholders are voicing concerns but are not prepared to be identified.
One said: “Support is really quite widespread for L&G’s views. We
are somewhat flabbergasted by the way the whole thing has been handled.
“We are willing to be pragmatic and flexible where there is a good case for
it. There is not in the M&S case. It is simply Stuart Rose laying down
the law in the way that he wants.
“There are rumours that he will walk away. If that is the way he wants to play
it, is he really still committed to the job?”
George Dallas, director of corporate governance at F&C Asset Management,
said: “It is not something we see as a progressive step in the company’s
governance.”
The Association of British Insurers (ABI) is tiptoeing round the M&S
dispute. It doesn’t like a “box-ticking” approach, and the combined code’s
strength “is the flexibility of the comply-or-explain regime”, said Michael
McKersie, the ABI’s assistant director for capital markets.
Sir Derek Higgs, author of the combined code on corporate governance, refused
to comment on M&S specifically. But on the broad issue of companies
failing to follow the letter of the code, he said: “I am a supporter of
sensible exceptions. Am I concerned some companies are choosing to explain
rather than comply? No, provided that the explanation is given and it is
assessed by the people who need to decide - the shareholders.”
M&S received a rare vote of confidence from Sarah Wilson, chief executive
of Manifest, the proxy-voting agency.
She said: “It is not a breach of the rules - it is important for there to be
flexibility. Not everybody shares L&G’s views and it is easy to
criticise, but would L&G have wanted to lose Rose? To lose his expertise
would be a rash thing to do.”
Wilson also said that there were more pressing current issues in corporate
governance - such as auditors’ liability for accounts after the Northern
Rock affair.
DESPITE the furore, M&S seems prepared to tough things out.
The company is showing no signs of giving way on the central point – that Rose
should become executive chairman.
And although some shareholders are known to have asked that at the very least,
Rose should be put up for annual reelection – he was last reelected in 2006
– M&S seems to be giving no ground. In private meetings, it has
certainly indicated that it has no inclination to give an inch.
On one point, the company may make a gesture: Rose may get no pay rise for
moving into the M&S chair.
The board’s remuneration committee has yet to meet to discuss the matter, but
Rose’s pay is thought to be subject of a continuing discussion.
Last week, M&S was keeping conspicuously quiet. The company merely
reiterated its assertion that despite all the apparent fuss, most
shareholders back its views. (Not everyone agrees with this reading of the
situation. Schroders’ Richard Buxton said: “I find it hard to believe it
when they say that most shareholders are broadly supportive. We haven’t been
able to find any shareholders who are supportive of this.”) M&S
has told investors it will write to them spelling out exactly why it thinks
its plan makes sense. An explanation will also be given in the company’s
annual report.
The row has put Rose himself under enormous pressure to show that his strategy
for pushing M&S ahead is working and will continue to work.
Rose was parachuted into the chief executive’s position in May 2004 just as
Sir Philip Green, boss of Arcadia and BHS, was threatening to bid for M&S.
Since 2005, there has been real evidence of recovery, and for the financial
year now drawing to a close, M&S should record its first profit of more
than £1 billion since its heyday in the late 1990s.
But more recently, the company has faltered: its performance over Christmas
was poor, with underlying sales down 2.2%.
Now, Rose has to demonstrate that M&S can recover its momentum. Otherwise,
the company’s essential underpinning for its argument that he should be
allowed to occupy the role of executive chairman will begin to look rather
stretched.
M&S argues that Rose should stay at the top while giving extra
responsibilities to three up-and-coming executives – Steve Esom, head of
food, Kate Bostock, who is head of clothing, and Ian Dyson who is earmarked
to become head of group finance and operations.
But the stark fact is that Rose will, for the time being, remain the man in
charge. If M&S fails to get back into its stride, shareholders will ask
whether it really is worth bending the corporate governance rules to keep
him on board.
M&S may well get its way. Rose may well secure his executive chairmanship.
But the high-profile nature of the dispute is bound to make boards
increasingly reluctant to try to follow suit.
The ABI says it approves of the “comply-or-explain” approach - allowing
companies to break the strict rules as long as they give a good-enough
justification for doing so. As M&S’s experience has shown, complying in
the first place is likely to cause far less fuss than trying to dig up
reasons for failing to comply.
Certainly, there have been protests before about things becoming too cosy at
the top of the large companies. Some shareholders objected when Sir John
Sunder-land slipped from the chief executive’s position at Cadbury-Schweppes
straight into the chair at the group. There were similar criticisms when
Matt Barrett made the equivalent move at Barclays and Mervyn Davies did the
same at Standard Chartered.
But the row now engulfing Rose isn’t just any old row, it’s an M&S
row: in the world of corporate governance, the idea of combining the
chairmanship and chief executive’s roles is seen as far more heinous a crime
than simply having someone segue from one position to the other.
It will give Rose, Michels and their principal tormentor, Burgess, plenty to
think about when they return from holiday.
MARKS & SPENCER’S LONG TRADITION OF BUNGLING SUCCESSION
WHEN it comes to making a mess of planning succession at the top, Marks &
Spencer has plenty of form.
Almost a decade ago, in November 1998, there was a spectacular boardroom
bust-up as rivals vied to succeed Sir Richard Greenbury, the company’s
famously irascible executive chairman.
M&S let it be known that Greenbury would remain as chairman for a further
three years, but he would give up his role as chief executive much sooner,
in 1999. It was clear that Greenbury favoured M&S stalwart Peter
Salsbury to succeed him in the executive role.
This triggered a very public campaign by Greenbury’s deputy chairman, Keith
Oates, who had coveted the job of chief executive. He wrote to directors
saying he wanted to be considered. He was – but was rejected in favour
of Salsbury.
Greenbury was initially pleased with the outcome. However, he soon began to
despair of what Salsbury was doing.
Greenbury departed. In spring 2000, and Luc Vandevelde, a Belgian whose main
experience had been in food retailing, took the chair.
Within a few months, there were signs that Salsbury was on the way out. And by
the following year, he had gone – leaving Vandevelde in sole charge.
In the meantime, M&S had recruited Roger Holmes, a former management
consultant, from Kingfisher to take control of M&S’s British operations.
(Even that move was bungled: he was signed up by M&S, but for months
Kingfisher refused to let him go.)
Holmes was promoted to become overall chief executive.
In May 2004, a new struggle erupted - this time over who should replace
Vandevelde as chairman.
Stuart Rose wanted the job. Some on the M&S board opposed the idea.
The catalyst for change was an outline bid by Philip Green, boss of BHS and
the Arcadia. Over a frantic weekend, Green signalled that he wanted to bid.
Rose was recruited as chief executive.
There were more upheavals to come in the boardroom. Paul Myners, who chaired M&S
while recruiting Rose and seeing off Green, indicated two years ago that he
would like to stay on in the post. The board had other ideas. Lord (Terry)
Burns was given the job and Myners left.
