It was a little like a slow-motion train wreck – you can see it happening, but it seems as though no single action by investors is likely to stop the carnage. Several profit warnings, write-offs, defaults and firings later, investors have lost more than £1bn in just 12 months.
Governance is an essential but under-used risk management tool. Sadly, many more companies have displayed warning signs long before any problems materialised – Toshiba (where an accounting scandal forced chief executive Hisao Tanaka to quit), ENRC, Essar Energy, Olympus and even Tesco come to mind.
Investors need to remain diligent about monitoring these issues across FTSE 100 companies. The biggest red flags are ineffective chairmen, poor relations with shareholders, dominant chief executives, complex corporate structures with limited board oversight, use of creative accounting, and a toxic corporate culture. The symptoms are not hard to spot, but investors are sometimes hesitant to act on them.
Of course, not all companies will have gold-plated governance; there must be room for differentiation in the market. For example, governance at an entrepreneurial start-up will look very different from that at a FTSE 100 company. Investors will account for each company’s unique circumstances when they vote their proxies and engage with the directors.
But the lesson from Afren is clear: consistently poor governance and executive largesse is often the tip of the iceberg and a sign of scandal to come.
Ashley Hamilton Claxton is corporate governance manager at Royal London Asset Management
