MONEY AND THE CITY
Company (and directors') reform
Nicholas Davenport
For the City the most pregnant sentence in the Queen's speech was " The creation of a prosperous, fair and orderly society through policies that combine conscience with capitalism." It could have been the motto of the Stock Exchange! But alas! the week's trading had not ended before the press had headlines: 'City Fraud Sensation '. Dealings had been suspended in the shares and bonds of Sime Darby Holdings, which owns Clive Discount and is one of the rapidly growing companies trading from Singapore. The announcement of the suspension stated that the chairman Mr Pinder, and the previous chairman, Mr Angus Scott, had been dismissed, that Mr Pinder had been arrested, that the board were convinced that Mr Pinder had misapplied group funds of £500,000, that £300,000 had been recovered and that proceedings for the recovery of the balance had been instituted against both Mr Pinder and Mr Scott. As Mr Pinder had owned, it is said, some 550,000 shares worth £700,000, and must have other large assets, recovery is not impossible. The deficiencies came to light when the auditors were dissatisfied with Mr Pinder's answers to certain queries and the senior auditor mysteriously died.
Nothing appears to be wrong with Sime Darby's trading. Profits are reported to be more than doubled at £10.8 million on sales up from £38 million to £155 million. But I would suspect that it has been expanding too fast by take-overs in the insurance and financial fields. After the suspension the shares dropped by 23p to 105p, knocking some £30 million off the market valuation which is around £158 million. It seems to be the old familiar story of human weakness and the office till. But I have never understood why people want to get so very rich so very quickly unless they are suffering from some incurable disease, which no doubt they are.
This sad story emphasises the importance of my argument last week — that the face of the City must not be confused with the face of Capitalism which from time, to time may look ugly and greedy and over-fed. Why should the press come out with a headline City Fraud Sensation '? It has nothing to do with the City. It is not a City fraud. It has to do with the frailties of human nature in Singapore. The Stock Exchange as I have said, merely provides the free capital market where savings can be converted into investment, a function which is the key to a healthy capitalist system. It suspended dealings in Sime Darby when asked and it restored dealings within twenty-four hours. It is vital that shares can be turned into cash at a moment's notice, so that investors need not be frightened to invest. It is in the public interest to keep a share market free even when ' insiders ' are suspected to be dealing.
The Queen's speech referred to the coming Companies Bill which is due to be published in December. There was no suggestion of any divergence from the white paper on Company Law Reform which was published last July but the general feeling is that it ought to be tougher or much stricter on disclosure of directors' interests. The Bill must define more clearly the 'acceptable face' of capitalism and the Council of the Stock Exchange no doubt hopes that when directors have all , been made more responsible citizens by law they will not try to abuse the machinery of the capital market as much as they may have done in the past:
Sir Geoffrey Howe, the Minister for Trade and Consumer Affairs, speaking at a recent conference on company law in London, gave the Government's view of the new. face of a company director. The modern company, he said, must now operate in ways that are socially acceptable and higher standards of conduct are now ex pected of company directors. It was not practicable, he added, for the government ,to exercise an "inquisitorial surveillance over the activities of all companies so
as to protect the individual
shareholder from every imprudent judgement or bad luck," but what the Government intended to do was to strengthen a company's legal obligations and to increase penalties, introducing the sanc tions of the criminal law. They would also, he said, make it easier for the Department to investigate and pursue its investigations, which seemed to have reference to the case of Mr Robert Maxwell who is suing the Board of Trade inspectors on their Pergamon report and seeking to get it suppressed.
On the vexed question of 'insider dealings' Sir Geoffrey said that they had dropped the idea of including major shareholders as insiders '. Some investment institutions who acquire inside information and use it to improve managerial performance — and not to make a windfall profit — are doing a good service. So insider dealing' will remain vaguely defined. As the Deputy Chairman of the Stock Exchange Mr Hamilton, so aptly said recently on television, a man who is in receipt of confidential information about a company and uses it to make a quick profit in the market should obviously be made guilty of an actionable offence. But some information may not be very confidential; yet may be extremely price-sensitive. Is that actionable if acted upon in the market? There will have to be a test case in, the courts sometime to make the definition clearer.
The revision of the Companies Act will inevitably bring up the vital question of worker participation. The Liberals seem to have a bee in their bonnet about worker participation on boards of directors. The additional supervisory board looking after worker interests — the system adopted in Germany — does not seem to have won great popularity. I cannot believe that a two-tier company structure will make for efficiency in management. For workers to elect members to the normal board of directors is not regarded with any great favour by all trade unionists. Lunches with wine and cigars in the board room are regarded, rightly I think, as a corrupting influence on the honest working man. Most workers do not want a foot in both camps — management and managed. Works councils are also not favoured by the trade unions, for they interfere with the existing trade union arrangements at plant level and might even supplant them. Yet works councils are obligatory in all EEC countries except the UK and Eire.
The question of industrial democracy can be endlessly debated and should be kept out of the present company law reform unless there is definite agreerm on all sides on a two-tier system of boards which is unlikely. Obviously there must be consultation between management and workers on the lay-out of work but someone must be the boss and take the decision. What most men are concerned about is the pay and job satisfaction. The production line in a motor car factory must obviously drive men round the bend and make them strike-prone. The Swedes are trying out a new idea of car assembly by select gangs. A co-operative factory has yet to be tried and even Mr Benn's idea of the workers hiring the management, Why does he not try this out in the Meriden factory of BSA which is to be closed down? He has rich socialist friends who might put up
the finance and I could introduce him to an absolutely top class manager.
Another question which may be debated in this company law reform is the proposal for workers shares. There are many sharesavings schemes. for employees, but it is clearly risky for a worker to invest in the individual company which employs him for the simple reason that it may go bust. The ideal solution is, of course, a public unit trust holding equity shares in all industries and in all regions. Profit-sharing may seem attractive but it is indefensible to create a privileged class of workers who can share in company profits while vast masses are engaged in public utilities where there are no profits to share.
Themain object of the new Companies Bill should be to tighten up on the disclosure of directors' interests and dealings and the disclosure of " warehousing " of shares by conniving directors. All directors can be made honest and socially responsible. Mr Heath will not have to talk again of the "unacceptable face of capitalism."
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