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How Sir Victor put state ownership in its place

Letter to the Financial Times

5 November 2008

Letter to the Financial Times

Sir, Your report (November 4) on the reactions of Sir Victor Blank, chairman of Lloyds TSB, to the impact of state participation in the ownership of Lloyds/HBOS reveals a gravely important truth. 

It is that the British government, as a shareholder in the new entity, will simply fail in its efforts to foster stronger corporate oversight. Sir Victor informs us that the state, as a shareholder, has the power to veto but not to nominate potential non-executive directors. The new entity’s board will settle that matter. The fact that the government has invested taxpayers’ money in that business in reality changes nothing.

The common law position as he states it is true. His comments have the merit of warning the public that the idea of thoroughgoing shareholder oversight of board actions is all but illusory. Shareholders – whether they happen to be the state, institutional investors or the ordinary man in the street – have limited leverage over boards (and management) of publicly quoted corporations, including banks. His comments reveal explicitly the true value of shareholder oversight. We should take heed.

More widely, “shareholder democracy” – under arrangements in Anglo-American capital markets, dominated by dispersed institutional shareholders, unitary board structures and reliant on board-selected and appointed independent directors to keep the ring – scores low on the credibility scale.

The idea that board-appointed, part-time independent directors can exercise the required degree of constructive influence over full-time executive directors is, mostly, make-believe. This must prompt the question: where does that leave the state (and the taxpayers) as shareholders in the new entity. The honest answer has to be quite some distance away from the position indicated by both the prime minister and the chancellor in their various public statements.

Unitary board structures, supported by Britain’s much-vaunted Combined Code, offer few credible checks where corporate power is concerned. The “gene pool” alchemy, on which the late Sir Derek Higgs relied in his post-Enron assessment of how to improve the Combined Code, will never bear fruit. Lipstick on the pig, as the Americans say, only changes the appearance of things. A pig is, after all, a pig.

Time now for an honest and fundamental public debate about these matters.

Richard Tudway


The Centre for International Economics

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