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13 March 2012

A Boardroom Conversation with Sir Martin Jacomb

Facilitated by James Bagge, Director of Bvalco Ltd


Sir Martin Jacomb is Chairman of Share plc. He was Chairman of Canary Wharf Group plc from 2003 until 2011 and Chairman of Prudential plc from 1995 to 2000 in which year he also retired from the boards of RioTinto plc and Marks & Spencer plc. Among other past directorships, Sir Martin has been Chairman of Barclays de Zoete Wedd from 1986 to 1991; Deputy Chairman of Barclays Bank plc from 1985 to 1993 and a Director of the Bank of England from 1986 to 1995. Sir Martin is a graduate of Worcester College, Oxford. He qualified as a barrister and practised law until 1968 when he joined Kleinwort Benson Ltd, becoming Vice Chairman in 1976, a post he held until 1985.

The conversation with invited guest speaker Sir Martin Jacomb was hosted by Bvalco as part of the ‘Boardroom Conversations’ series of targeted discussions with experienced Chairmen enabling them to share their insights and learning experiences of boards and corporate governance.

The following paper is a summary of the conversation including questions from the floor.


Sir Martin, over the last 20 years there has been a continuing focus on seeking to improve corporate governance and its effectiveness. We have witnessed a series of reviews from Cadbury through to Walker and consequential amendments to the Code. There has been a shift in emphasis from a focus on structures and procedures to behavioural issues. Yet it is still not working. Why?

I don’t share the view that it is not working. One of the difficulties about assessment of governance at board level is that it is very hard to measure changes in effectiveness. Measurement is elusive. Added to this, there have been many changes to the whole system of capitalism. The background has changed so much that there is no firm yardstick against which to measure this.  One of the most significant changes is that so many listed companies are no longer directly owned by beneficial owners. Boards are accountable predominantly to those who hold shares, and those are now mostly agents, ‘middlemen’, whose interests are often served by the shorter term views. Responding to the demands of the shorter term view makes the lives of directors more difficult than if they were doing the job for beneficial owners with longer term expectations. The origins of the shorter term perspective can be traced partly to the removal in the 1950s of tax incentives for family-owned companies to reinvest profits.

How then can one persuade those who exercise authority on behalf shareholders to take a longer term view?

Not much is achieved through legislation.

The way people behave is interesting. Take for example, Rolls Royce. The chairman, Sir Ralph Robins (1992 to 2002) had a very clear view of where Rolls Royce was. He knew he couldn’t deliver the best results for the shareholders in the form of increased dividends except over the long term. The analysts said that was no good – they were looking for more immediate benefits. That point was always made. In the long run he has been proved abundantly right, but the demands of shareholders for profits in the short term are very difficult to battle against.

More recent examples are evident in the behaviour of the banks to deliver short term gains. No one who owned their own bank would have behaved like the big US and UK banks.  To run a bank in order to deliver short-term profits is a mad way to run a bank in the view of an old fashioned banker.

How can one persuade boards to take a longer term view?

To take an example, years ago I had a long tenure as a non-executive at Oxford University Press which is a very substantial business.  It was having a troubled time when I arrived; we needed a strategy to deliver steady profit growth.  The board comprised high powered academics who understood and empathised with the idea that the world wanted to speak English. They were prepared to take a long term view, so we were able to make a substantial investment in the international English language tuition market, a strategy which paid off handsomely.

But the shareholders own the show and if they want short term stock market performance it is difficult for the board to go against it.

Moving away from the shareholder relationship, the key dynamic in a boardroom is that between the executive and non executive. From a chairman’s perspective how is that best managed? How do you deal with the dominant chief executive? How do you best achieve the right balance when it comes to defining and allocating responsibilities as between the executives and the full board for defining strategies, creating culture, and defining risk appetite?

I’m going to give a vague reply. There is no template. So much depends on personalities. I don’t believe in big boards. I think if there are few people on the board then everyone is more conscious of their individual responsibility. Then there can be no dilution of responsibility. The larger the size of the board the more the dilution of responsibility.  It is a common phrase that the chairman runs the board and the CEO runs the company, but this is rubbish. However assertive the CEO may choose to be, the chairman must ensure that he or she has respect for the board as a whole and for the contribution the non executives can make, and in return the non-executives must be sure that they are “up to the mark”.

A story that illustrates how it should not work.  Once I was on the board of a big nationalised industry. There was a very dominant industrial baron as chairman who was shortly due to retire.  One day the chairman came in and said “I’ve appointed X to be the new CEO” and a strong non-executive colleague said “that should be a decision for the board”. The Chairman said he’d done it and that was how it was to be done. My non-exec colleague said “what then do you think NEDs are for?” and the Chairman said “I’m ………ed if I know.”

Individual directors on the boards of companies that fail will likely all have excellent CVs, great credentials and bundles of experience but collectively they will be viewed as having failed in their job. As Chair how can you ensure the group as a whole performs to its optimum level? 

If you look at the really big corporate disasters, there is no doubt the board failed utterly to supervise the businesses properly. That can most often be put down to the dominating personality of the chief executive.  Even an experienced chairman can easily be led by the CEO particularly if he is not well grounded in that business sector. He may be “supported” by apparently eminent and well qualified NEDs.  But whether because of the size of the board they do not feel sufficiently exposed individually or for other reasons they may not have been prepared to register the appropriate challenge at the right time.

Individually it may be tough to be the one who challenges the executive’s proposal. How does the chairman ensure that the individual NEDs on the board support one another and work as a team?

The chairman must know a lot about the business. It is really difficult for a chairman to do a good job if you know nothing about the particular business sector. To be effective, you have to know about the sector and how the business really should be operating.

Do you encourage NEDs to meet separately from executives?

Yes, especially when you sense disquiet. In that situation the need arises for the non-execs to talk amongst themselves. I wouldn’t do it myself as a regular thing, more on a when needed basis.

There are increasing pressures, in the financial services industry in particular, to have directors who know and understand the business. How do you align that with the perceived advantages of having a diversity of skills and experiences represented on the board?

Diversity is very valuable in that sense. Personally, apart from honesty and integrity, I look for commercial judgment. I don’t want anybody without it but different experiences can be very valuable.  It is a bad board meeting when everybody habitually agrees with the CEO and the Chair.

What do you do when that happens?

Either change the board or tell them they’re not doing their job properly.

The board as a whole are accountable for the performance of the company. Non executives are increasingly being held to account for the poor performance of the company. There is a view they need to spend more time to get to master the necessary detail to do a proper job and protect their own reputations. They expect appropriate compensation for doing so. Might this undermine their independence and how do you balance these consequences of greater accountability with the need for non-executives to remain independent?

This is an interesting and difficult conundrum. If an NED expects to be paid sufficient to support a fair portion of their standard of living costs, i.e. if there is a resulting level of dependency, you lose something crucial, which is genuine independence.  But non-executives are incredibly exposed which is why they deserve to be paid highly.  They should be more accountable. Non executives and executives should sometimes be sued for some of the failures like those we have recently witnessed and that may come in time.  But how to compensate people without jeopardising their independence?  This is very difficult.  I think there should be a fairly nominal, or should I say traditional, cash fee, but with also a heavy allocation of shares cashable in, say, 10 years time, with no current benefit whatsoever.

Questions from the floor

Returning to the changing and ever more divorced relationship between the underlying beneficial shareholders and management, i.e. one which is now increasingly managed through agents who demand short term performance or ‘out’. …he referred to an article in the FT reporting that in fact the percentage share of UK equities held by the big domestic investment institutions had dropped to levels last seen in the 1963 and remarked that it seemed  reasonable for shareholders to look at the level of dividends payable etc. He asked how in the Pru for example, did you deal with the question of long-termism and short-termism?

In my day the predominant ethos was:  “we’re here for the long term”. We wanted to back management on a long term basis; so if we had, say, 3% of a listed company we would stick to it. In my day we bought M&G.  This introduced Unit trusts or mutual funds which are much more exposed to short-term pressures than a life insurance fund.  I like to think we behaved in a responsible way.

Should an executive be allowed to become the chairman?

I’m not in favour of it because you take your baggage with you and make it difficult for the new chief executive to develop. There can sometimes be something of “I’ve done a good job and am entitled to a more restful life but with still high remuneration…”  This is obviously not good;  but there are cases where it works really well. There is no template.  Take Steve Jobs and Apple. When they tried to introduce corporate governance Apple got into difficulties they had to get him back.

Ian Plenderleith asked about the danger of compromising the advantages to be derived from having non executive directors with an independence of mind by focusing too much on requiring non executives who had the relevant industry experience?

It is not a perfect world and you can’t overcome all these dangers. Take mining for example, the chairman has to know something about the industry, how you build a mine, employment practices, the politics of the countries where the mines are, safety, many other risks, etc.  But if you have someone who comes on the board from the pharmaceutical industry and says “have you thought about this particular disease which might affect miners in the long term?”, this can be valuable.  Non executives from different backgrounds with different experiences can be enormously valuable.

Sir David Walker had three observations on Sir Martin’s answers. He commented that it is hard to exaggerate the intensity of short term pressures. e.g. 70% of trading in the US is high frequency. In Europe it is less than 58%. Given the volatility of turnover, to expect to be able to identify who are your shareholders at any given moment is becoming unreal. Not many beneficial owners manage their own money. The agency gap is wide. Fund management is focused on very short term performance enhanced by the imposition of copious corporate reporting. It raises the question as to whether a broadly based corporate governance model applying to all listed companies can be relied upon. It is important against this background to encourage the development of a longer term investment in the company. That some significant part of the distribution of profits should be deferred is compelling.

His second point was to be wary when the board say yes to everything: their job is to challenge and if they don’t there is something seriously defective. His final observation concerned the point made about the occasions on which non-execs might meet on their own.  If they only take place when there’s disquiet or a problem, there is a danger that you’ll fuel suspicion, but if everybody knows that the non-execs meet regularly then that is better than only meeting exceptionally with the chairman.

As to the latter point, to avoid suspicion you may easily be right.  Secondly, I think you have a real point about the dangers of the changes in the capitalist system which have occurred over recent decades and excessive short-termism.  If the capital market system does not yield the optimum result of people’s labour it is a very serious thing.  Maybe in this country we are too preoccupied with listing every company however small or big.  In the German economy, which everyone thinks is wonderful, it is not encouraged to distribute profits at all. Masses of money is put into reinvestment and research and development.  In the UK by contrast, as long ago as the Callaghan administration, governments have forced family-controlled companies to distribute profits to avoid incurring massive tax liabilities.  This led us in precisely the wrong direction. I refer back to my example of Rolls Royce which should have been concentrating on investing rather than distributing its profits.

Who drives the solution? It is political or for the board?

Political – I am a great believer in tax driving behavioural change.  With the right tax incentives you can achieve results, e.g. in forestry, a tax advantage got the result.  Canary Wharf would never have been built without enterprise zone allowances.  Lloyd’s of London pre the tax changes introduced by Nigel Lawson, had tax advantages which preserved its pre-eminent global status.  Now there are tax breaks on patents.  This approach could have a profound effect enabling and encouraging people to develop inventions.

Boardrooms don’t have enough challenge.

I’m worried about the word “challenge”.  It is capable of misinterpretation and misapplication. It remains enormously desirable for the chairman to make the CEO see the advantages of good relationships with NEDs; to convince CEOs there is something in it for them and that they can gain something from the relationship with non-executives.  Non-executives must be ready to reciprocate with frank views and readiness to question the CEO.

Is now the time for change in a structural approach to the board?

That is extremely difficult.  Structures don’t respond to templates.  I am more negative than positive.  For instance I think risk committees do harm.  Foreseeable risks are not the problem, but rather it is the unforeseeable ones that create the serious problems.  The danger of having a risk committee is that it gives a board the impression that it has found all the risks and this makes the rest of the NEDs think they need not bother about considering other risks.  This can disorient a board from doing its job.  More generally as far as structures are concerned, I wouldn’t go for the German way of having a supervisory board, etc.  Well qualified, well run unitary boards are miles better than supervisory boards.  Germany has had its own governance disasters.

Our chairman Brain Quinn summed up by saying what had struck him from all that had been said was the strong feeling that there are no templates for governance; one size does not fit all and it ultimately comes down to judgement and having the ability to assess.



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