In an article the other day in the Evening Standard Anthony Hilton made some extremely interesting comments on governance in the light of the proposed acquisition by the Pru of the business of AIG in Asia. Other commentators have suggested that ultimately the Pru could dispose of its UK businesses entirely, and even go as far as moving its primary listing, perhaps to Hong Kong. There are so many issues raised by this potential deal, but here are a couple which relate to corporate governance.
Firstly, Mr Hilton noted that "No acquisition should need a 1,000 page prospectus to explain it." I couldn't agree more. Although of course we haven't seen it, the first question which comes to mind is who really benefits from such a weighty tome, from a governance point of view. Is it the analysts, the shareholders or the Board? Is it prepared ultimately to inform or to protect? Will the prospectus be read by any more than a couple of hundred analysts. It is hard enough for most shareholders to struggle through a normal set of report and accounts. This is something in an entirely different league.
Secondly, Mr Hilton states "There is the wider issue of governance bound up in all this. Do boards elect the chief executives to be good stewards of the existing business; to run it well, to evolve it as its markets evolve and to hand it on in good shape to a successor; or do they appoint a chief executive to change the business out of all recognition in a matter of months and in effect walk away from everything it has done and built up over the last 150 years? Given that the performance was satisfactory and the future fairly secure, is it right that shareholders should be asked to cut loose everything they know and buy into a relatively recent appointed chief executive's vision of the future? Is "trust me it is the right thing to do", even when translated into a 1,000 page prospectus, enough of a reason to jump off a cliff with him? "
This raises a number of questions which go to the core of governance and are perhaps made even more relevant because of the very nature and stature of the company itself. We were not of course parties to the internal discussions, but as outsiders with a particular interest in stewardship of companies it would be good to know how the board looked at these issues, not only in the light of the mass of recent papers on corporate governance but also in the light of the relevant sections of the Companies Act 2006 which deal with directors' duties.
Looking at governance first, perhaps some of the relevant key concepts so far as the non-executive directors were concerned in looking at this deal might have included objectivity, detachment and independence of thought--indeed this could almost be a case study for some of the ideas set out in the Walker Report and follow up debate from a wide range of commentators. What and indeed who were the real drivers of this transaction?
Turning to the Companies Act and the sections dealing with directors' duties, section 172 sets out six, non exhaustive, matters to which the directors are required to have regard, amongst other things. These include the following which I suggest ought to have been, and perhaps were, high up on the board's debating sheet:-
The interests of employees
The need to foster the company's business relationships with suppliers, customers and others; and
The likely consequence of any decision in the long term.
Although these words appear fairly straightforward, they have already attracted a vast amount of academic comment. Even if we look at the rather more practical side, how are they to be interpreted by the board? There is no "ranking" in their application and, as I understand it, all have to carry the same weight when being considered. Again the status of the Pru requires perhaps even more difficult balancing acts when considering these and other points on the section 172 list.
Finally, with or without the benefit of a massive prospectus, how do the vast majority of shareholders try and work out whether this is a good deal for the company ( whatever that actually means to those shareholders) or not. Another big decision for the month of May