About a year ago I wrote a short paper entitled
"Problems with the law-how much is too much"? In brief, I asked four questions which, depending on how readers took them, were either too simplistic, too complicated, or indeed both. What they turned out to be were wholly relevant in the light of the financial and business crisis, which culminated after the Lehman collapse and which, despite what many say, continues and will continue for years to come. I thought I should put together a short follow up note one year on from the original. Can I also mention at the outset that all of the views ,comments and observations in this note are entirely personal.
My paper suggested we had:
Too much law;
Too much bad (although I now feel a better word may be " complex ") law;
Laws which are unenforceable; and
Laws which are unenforced.
That paper arose originally from my trying to make sense of the Companies Act 2006 which, with its 1300 sections and now more than 60 statutory instruments, picked up points one and two above. Digging a little deeper we started looking, in particular, at the various sections dealing with directors' duties. These produced a vast amount of commentary and were to my mind one of the key parts of that Act. I discussed this area of the legislation with many people, both academics and, more importantly, those for whom the legislation had a specific impact -- directors themselves. We concentrated our discussions with directors of SMEs. We noted that originally, after implementation of the Act, few directors seemed to have any real knowledge of the new rules. We thought however, that by now matters might have improved but we have seen, certainly for numerous private companies, no real evidence of any change. We suggest too many directors are struggling to keep their companies alive in these harsh economic times rather than worrying about the minutiae of rules contained within the mass of legislation.
What about larger companies, including those financial institutions deemed by some as " too big to fail". I am not sure, at least taking a current overview, what use much of this new legislation is. To date I am not aware of any cases being brought successfully against directors of any UK major financial institution using the mass of new sections relating to directors' duties and possible shareholders' claims. If we take Northern Rock plc as an example, a case was started by two hedge funds to try and ensure that compensation was received by shareholders after the bank was nationalised in 2007. But neither company law nor insolvency law seemed to be of use. The plaintiffs therefore tried to use an aspect of human rights legislation. They claimed that they had been deprived of compensation after the state acquired their property, that is, shares in the bank. However, the Court of Appeal dismissed their claim. One assumes that even if claims are brought in due course against the ex-board of this, or indeed any other of the BoFi's, which we should remind ourselves, required just over £1 trillion of taxpayers' funds to bail them out, there appears to be little real likelihood of success. Unless either the shareholders of these, or any other companies decide finally to accept some responsibilities as part of their ownership rights or they are able to use the Courts to assist, directors seem to be fairly well entrenched and relatively unchecked , outside insolvency proceedings or a change of board (perhaps after a take-over). This has been noted by a number of interested parties particularly those based overseas. Perhaps this is a good example of laws which are unenforceable, or indeed unenforced? Or do we just have to accept, to use a well known phrase, that the legislature after 10 years lead time produced “the wrong sort of law”.
I did want to try and find something positive to say about institutional responsibility particularly as several institutions have been admitting numerous failings on the governance front. The only positive point on institutional responsibilities I have found recently relates to deal fees on the proposed Kraft/Cadbury takeover. I have read, at three per cent of deal value, this could net the financial advisors as much (according to the press) as £600 million. Institutional shareholders appear to have had enough and have asked to discuss this matter! Is this the start of a more aggressive/responsible attitude by the pension funds/insurance companies and similar, or just a flash in the pan?
Moving to a different but still related issue to is useful to note that we have as much law as many other countries and, as I recall from a recent survey, more tax law than any other country in the world. I am often told when I raise these issues, that matters are no better and indeed are often worse in other countries -- but I am not sure that is the point. I am trying to advise many new and existing businesses here in the UK. What happens elsewhere is somewhat irrelevant to most companies who can't get up and move to Geneva if they don't like the business regime here. We and our clients have to work under the ever increasing burden of tax, company, pension, employment and health and safety law, to mention just a few. I fail to see how this genuinely benefits those it is meant to protect and/or assist. Our SME's don't have the time, money or knowhow to deal with much of this legislation. So, from my research, I believe most of them just ignore it.
Where are we a year after Lehman? Well it has been a year of reports, reviews, consultations and so on. But what has actually happened to start fixing the system and plan so that the same thing (or a variation on it) is not repeated? Not much, I think. Some have suggested that the regulations we had, to deal with many of the problems which arose were mostly “fit for purpose”. I disagree. If fit for purpose why such a massive crisis? We have had numerous proposals which tinker around at the edges of the current system but no fundamental rethink. One of the age old problems is the more detailed the regulations, the easier it is to get round them. Many think we need to get back to broad principles and not books of minutiae. The box-ticking syndrome, which the Chairman of the FSA agreed did not work, ought now to be a thing of the past. At least there should be more of a balance in the regulatory process.
Others have suggested that nothing really needs fixing - the financial crisis was just one of those things that happen from time to time; it seems to have been resolved (I would hope so with a trillion pounds of taxpayers money!), and we can move on as before. If only this were so. Despite the criticisms heaped on him by many, at least one key point in Lloyd Blankfein's interview with the Sunday Times late in 2009 deserves serious debate; is the creation of wealth, by and of itself, a good thing?
Of particular note, to my mind, is an appendix (written by the Tavistock Institute on Human Relations) to the Walker Review on Corporate Governance. What is important is the very fact it is there. Perhaps a key change to the established thought process. Are we finally getting (back) to the view that people are more important than process? We used to know this but somewhere it got lost along the way. The overambitious and egotistical CEO or CFO won't (can't) be restrained by processes, rules or similar. We now know that for certain, even if we didn't before. What we need to look at are those old fashioned ideas, such as ethics, morality and professionalism which are still scoffed at by many. Will we -- who knows?
Why is all this important in the context of my original four questions? Partly because the plethora of rules and regulations, in the end, did nothing to stop the financial meltdown in the UK. That led, whether directly or not, to increased unemployment, higher taxes and the collapse and government (taxpayers') bailout of two of the largest banks in Europe. As was noted earlier this year, it wasn't the unregulated hedge funds which almost brought down the system, but the most regulated part of the system - the commercial banks.