Crisis of authority in the City FINANCE '68: A SPECIAL
SURVEY
CHRISTOPHER FILDES
The City finds itself in a crisis of authority. That the crisis could have been avoided, and was largely brought on by panic and misjudg- ment within the City, does not make it any the less real now. And the whole City, not just the stock market and the professionals around it, are affected, because what has been chal- lenged is the authority of the Bank of Eng- land as supreme arbiter of the City's affairs.
It was the direct personal initiative of the Governor, Sir Leslie O'Brien, that brought the Bank into the business of supervising takeovers and mergers. Until a year ago, this was the preserve of the Stock Exchange Council, which had had prepared the 'Revised notes' (com- monly called the Yellow Peril) in which the rules were set out. Whether or not those rules were adequate, it began to be doubted whether the Council was capable of enforcing them. First, in takeover situations, stockbrokers are in the position of agents; and their principals, the merchant banks, are not answerable to the Council. Secondly (it was argued) the Council, though well able to punish miscreants of no consequence, would scarcely flex its muscles against the market's great names—perhaps against its own members. To that its severe and far-reaching actions in the 'bond-washing' affair might seem answer enough. But, with one fierce battle succeeding another—Metal Industries, mv—the City that summer certainly looked anarchic. There is no evidence to sup- port the view that government regulation and control—a Securities Exchange Commission— was then an imminent or even a serious threat. But it was widely enough believed—and with a fervour that smacked of hysteria—for the Governor's intervention to be greeted by a general sense of relief.
The significance of this lay less in the new code of conduct for takeovers—after all, a new code could have been prepared at any time if the will had been there—but in the backing that the Governor gave it. By taking the initia- tive, by nominating a former Deputy Governor as bead of the supervisory panel, and by lend- ing the services of the Discount Office, Sir Leslie made it clear that a challenge to the new code of conduct was a challenge to the Bank itself.
Quarrelling with the Bank is not unheard-of. It is dangerous, for the Bank has a long memory, but it is a risk that is sometimes deliberately taken. But because a takeover, unlike so much of the City's business, takes place -where everybody can see, a breach of the code was bound to be a public defiance of the Bank. As such, it would require public retribution, if the code were not to seem, to the ordinary observer, a dead letter. If X and Company bent the rules, it would certainly find itself in the Bank's black books, but the books could scarcely be brought out and shown around. As the Gallaher affair made clear, this produced a most awkward situation; for the publicly demonstrable punishments at the Bank's disposal are few. Morgan Grenfell could have been told that their acceptances would no longer be eligible for rediscount at the Bank.
But would that have been appropriate? Would it have made a suitable impression either in the City or among the newspaper readers who were being treated to minute-by-minute accounts as though of a rough FA Cup semi-final?
In the event, discipline was left to be en- forced by the Issuing Houses Association (for Morgan Grenfell) and the Stock Exchange Council (for Cazenoves)—which would have been the state of affairs before Sir Leslie in- tervened. The Council ruled that although Cazenoves had broken the code, that was the code's fault. The Association, more subtly, re- buked Morgan Grenfell not so much for break- ing the code as for subsequently cocking a snook at it in public. It had the benefit of a letter from Sir Leslie, tot-kited off by the Council's ruling: he was disappointed with the effectiveness of the code, it must be obeyed both in the letter and in thepirit; and if it were not the Government could certainly be expec- ted both to make rules and to enforce them.
Sir Leslie should know. But there has been no hint from Whitehall or Westminster that the Government wanted to include the regula- tion of the City among its burdens. Indeed, the Board of Trade, whose responsibility this would presumably be, has always had a strong streak of the Manchester school, and under the presidency of Mr Crosland has been even less disposed than usual to interference in the details of business affairs. The great merger boom has roared onwards: the Board's pro- mised statement of policy on mergers is still nowhere in sight, and we are left to deduce the Board's policy from its actions. It forbade the Barclays-Lloyds-Martins merger, following the majority of the Monopolies Commission. But it has allowed the Commission's advice on Courtaulds—that its rayon monopoly works against the public interest, and that its take- overs in the textile industry should be rationed —to lapse. If this advice had not been rejected, Sir Frank Kearton could scarcely have com- bined the chairs of Courtaulds and of the In- dustrial Reorganisation Corporation, which the Board has allowed a specially privileged posi- tion on the takeover scene. Since GEC-AEI, it has become established as case law that a merger sponsored or blessed by the IRC will not be so much as referred to the Monopolies Commis- sion.
The Board's real opportunity for making an impact on the City has been lost. The Com- panies Act, 1967, seems in retrospect a finicky and small-minded piece of legislation; Com- panies Acts, unlike grief and Finance Acts, do not return with the revolving year. The last full-scale Companies Act became law in 1948. The next one should deal with many of the points which now give the takeover panel such trouble. An obvious example is the profit fore- cast, used as a weapon of attack or defence. The code requires these forecasts to be made with the same care as is demanded for a prospectus. But what sets the standard for a prospectus? The Companies Act. If the purpose of the panel and code is to protect the small or non-professional shareholder, why should not his safeguards be built into the law, and a remedy made available to him in the courts? And if the code is, as can be argued, over- protective to the minority shareholder, that would be a fault on the right side for our com- pany law as it now stands.
An effective code of company law would make a Securities and Exchange Commission needless. And an SEC would in any case need to have the authority of the law behind its rulings. It is the need for authority that the Bank of England attempted to meet—as it now seems, damaging its own position and achieving little.
Previous page
