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Financial Times, February 3, 2007 commentary



What US Inc can learn from the Square Mile

By Francesco Guerrera

Published: February 3 2007 02:00 | Last updated: February 3 2007 02:00


The hot new show on Wall Street is called "Everybody Loves London". Not a week goes by without a US grandee pointing to the UK capital as the model New York should copy to stave off its demise as the premier global financial centre. Regulation, it seems, is the best received British export since the Beatles packed 55,000 fans into Shea Stadium in 1965.

This new strain of Anglophilia does, however, have an absurd side effect. The "London argument" is used by different interest groups to further their own, conflicting, aims. On one side are the New York cheerleaders (led by Michael Bloomberg, the mayor, and John Thain, stock exchange supremo). Their relationship with the Square Mile is akin to the attitude displayed by men towards the actor Jude Law when talking to their wives/girlfriends - they profess to hate him for his looks but, secretly, they would love to be him.

If you substitute Mr Law's handsome features with London's "less burdensome" regulatory system, the pronouncements of Michael, John and co are remarkably similar to those post-cinema conversations. Except that New York's supporters exploit London's good-looking regulation to get rules loosened in the US. As their latest recruit, one George W. Bush, told Wall Street this week: "Excessive litigation and over-regulation threaten to make our financial markets less attractive to investors."

US business leaders dig the City because of its allegedly less demanding regulation - from "Swinging London" to "Winging It London", perhaps?

But another group has hailed the UK regime for the opposite reason. Step forward the activist fund managers who last week filed motions with 44 big US companies, such as Coca-Cola and ExxonMobil, to demand an annual non-binding vote on executive compensation.

Their main argument, backed by European investors, is that in the UK the vote has given shareholders a louder voice on "fat cat" salaries. These US union and state pension funds want to turn the compensation vote into the centrepiece of this year's shareholder meetings season. To them, this is a long-overdue move towards "shareholder democracy" - the next step being demands for investors to nominate board candidates.

I am not sure this is the right way to go. Companies are not supposed to be democracies but, at best, benign dictatorships. Chief executives must have leeway to set strategic imperatives and follow them through, aided by board and management. Investors should keep an eye - and have a say - on how their leaders are performing and being rewarded. But shareholder democracy should not interfere with chief executives running a company on a day-to-day basis. Not to mention the risk that hedge funds and other raiders may exploit investors' greater powers to hold companies to ransom until

they produce short-term share price fillips.

Don't get me wrong. Given the recent examples of scandals, Beckhamesque pay awards and disregard for shareholders, investors should subject companies to greater scrutiny. And there is nothing wrong with expressing an advisory view on executive pay. But to make that the main battle on the corporate governance front is misguided.

Executive pay awards may well be ludicrous but what matters is whether executives do their job. To ensure that, investors should focus on overlooked issues such as the composition of the board and the powerful vested interests that envelop many US companies. Fat pay packages are but a symptom of a malaise stemming from the fact that boards remain far too prone to management whims. Or, worse, they share some chief executives' vested interests in poor governance.

Take the example of a board stuffed with CEOs of other companies - a fairly common occurrence. Are they really going to oppose a big pay rise for the CEO, knowing that they will have the same discussion in their boardroom? And how robust are they in challenging strategic mistakes when they have to face the same music in their company?

If they want to copy features of the UK system, US investors could do worse than import the rule that splits the roles of chairman and chief executive. And instead of clamouring for a utopian "shareholder democracy", they should focus on becoming better shareholders.




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