7
What makes good governance? An interview with Richard Lapthorne, Chairman, Cable and Wireless plc Nicholas O’Regan and Mairi Maclean Bristol Business School, UWE, Bristol, UK Abstract Purpose – The purpose of this paper is to interview Richard Lapthorne, Chairman, Cable and Wireless plc. Design/methodology/approach – The paper takes the form of an interview. Findings – Richard Lapthorne gives his thoughts on corporate governance. Originality/value – Provides valuable insights from the Chairman of a notable plc. Keywords Corporate governance, Telecommunications industry, Chairmen, Boards of directors, Chief executives Paper type Viewpoint What makes good governance? Clearly, greater transparency in annual reports and accounts, greater openness regarding the remuneration of senior executives, a more widespread separation of functions at the top, and greater stress on the independence of non-executive directors all play a critical role. The jury is still out, however, on whether a link exists between good governance and corporate performance (Heracleous, 2001; Maclean et al., 2006). Common sense tells us that there ought to be such a link (Gillies and Morra, 1997); but, like searching for a unicorn, as Johnson et al. (1996) put it, it can be difficult to locate. In the interview that follows, Richard Lapthorne, Chairman of Cable and Wireless, acknowledges that many of the strictures of corporate governance reform introduced in the UK over the past two decades have been welcome, in that they have enabled good practice to spread. Nevertheless, he questions whether it does British business any good to be constantly subjected to ever more demanding governance strictures, which he compares to the ever more exacting regulations forever emanating from Brussels, such that “we’re focusing so much on input, on the ingredients of this corporate governance, that you miss the meal”. As Maclean et al. confirm (2006, p. 259), “A boardroom is more than a place where the agents of shareholders take decisions within a carefully specified set of rules and regulations... it is not form, but substance, which matters most”. Richard Lapthorne has enjoyed a long and distinguished career at the helm of British business. He trained as an accountant, serving first as Finance Director, then Vice-Chairman and Chairman of a number of leading companies. From the perspective of Finance Director, he regards his mission in life as having “a balance sheet ... suitable to allow a general manager or chief executive to make choices”. His achievements include turning around and subsequently expanding companies formerly on the brink of bankruptcy. After joining British Aerospace in 1992, he went on to play a critical role in transforming the company into Europe’s foremost The current issue and full text archive of this journal is available at www.emeraldinsight.com/1755-425X.htm JSMA 1,2 218 Journal of Strategy and Management Vol. 1 No. 2, 2008 pp. 218-224 q Emerald Group Publishing Limited 1755-425X DOI 10.1108/17554250810926384

What makes good governance?

  • Upload
    mairi

  • View
    216

  • Download
    0

Embed Size (px)

Citation preview

Page 1: What makes good governance?

What makes good governance?An interview with Richard Lapthorne,

Chairman, Cable and Wireless plc

Nicholas O’Regan and Mairi MacleanBristol Business School, UWE, Bristol, UK

Abstract

Purpose – The purpose of this paper is to interview Richard Lapthorne, Chairman, Cable andWireless plc.

Design/methodology/approach – The paper takes the form of an interview.

Findings – Richard Lapthorne gives his thoughts on corporate governance.

Originality/value – Provides valuable insights from the Chairman of a notable plc.

Keywords Corporate governance, Telecommunications industry, Chairmen, Boards of directors,Chief executives

Paper type Viewpoint

What makes good governance? Clearly, greater transparency in annual reports andaccounts, greater openness regarding the remuneration of senior executives, a morewidespread separation of functions at the top, and greater stress on the independenceof non-executive directors all play a critical role. The jury is still out, however, onwhether a link exists between good governance and corporate performance(Heracleous, 2001; Maclean et al., 2006). Common sense tells us that there ought tobe such a link (Gillies and Morra, 1997); but, like searching for a unicorn, as Johnsonet al. (1996) put it, it can be difficult to locate.

In the interview that follows, Richard Lapthorne, Chairman of Cable and Wireless,acknowledges that many of the strictures of corporate governance reform introduced inthe UK over the past two decades have been welcome, in that they have enabled goodpractice to spread. Nevertheless, he questions whether it does British business anygood to be constantly subjected to ever more demanding governance strictures, whichhe compares to the ever more exacting regulations forever emanating from Brussels,such that “we’re focusing so much on input, on the ingredients of this corporategovernance, that you miss the meal”. As Maclean et al. confirm (2006, p. 259), “Aboardroom is more than a place where the agents of shareholders take decisions withina carefully specified set of rules and regulations. . . it is not form, but substance, whichmatters most”.

Richard Lapthorne has enjoyed a long and distinguished career at the helm ofBritish business. He trained as an accountant, serving first as Finance Director, thenVice-Chairman and Chairman of a number of leading companies. From the perspectiveof Finance Director, he regards his mission in life as having “a balance sheet . . .suitable to allow a general manager or chief executive to make choices”. Hisachievements include turning around and subsequently expanding companiesformerly on the brink of bankruptcy. After joining British Aerospace in 1992, hewent on to play a critical role in transforming the company into Europe’s foremost

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1755-425X.htm

JSMA1,2

218

Journal of Strategy and ManagementVol. 1 No. 2, 2008pp. 218-224q Emerald Group Publishing Limited1755-425XDOI 10.1108/17554250810926384

Page 2: What makes good governance?

aerospace and defence corporation, and holds a CBE for services to the aerospaceindustry. More latterly, he became renowned for rescuing the ailing telecoms companyCable and Wireless – despite, as he freely admits, knowing little about the telecomsbusiness – and turning it into a successful international enterprise.

It is noteworthy that Richard Lapthorne has never held the job of Chief ExecutiveOfficer (CEO), which distinguishes him from the majority of chairmen of large plcs. Hereflects upon this, on board relations and the role of shareholders, and speaks candidlyabout what he regards as good governance. Worryingly, he suggests that working in apublic corporation has become a “thankless” task. Finally, he emphasises theimportance of always having the courage to change one’s mind.

Previous leadership positions:. Finance Director, Courtaulds plc.. Finance Director, then Vice Chairman, British Aerospace plc.. Chairman, Amersham International plc.. Chairman, Morse plc.. Chairman of Avecia.. Chairman of TI Automotive.. Chairman of Arlington Securities.. Chairman, New Look.. Non Executive Director, Robert Fleming.. Non Executive Director Oasis International Leasing.

JSM: What was Cable and Wireless like in 2003 when you joined thecompany?The company was broken. It had produced a set of accounts for the previous yearwhere the heading of the then Chairman’s statement was: “We have the balance sheetstrength to succeed” or something similar to that. Yet the company had insufficientcash resources to deal properly with its problems.

The company had a difficult tax issue over-hanging it. It had bought US businessesin Chapter 11 for cash without properly taking into account that they had no positivecashflow prospects for years to come. It had taken very big gambles in withdrawingfrom highly cash generative businesses like Hong Kong Telecom and One-2-One and inbelieving that IT was the future, not telecommunications.

Withdrawing from Hong Kong Telecom coincided with the time when China wasopening up. In my view, it was a strategic error to withdraw from that market and inmoving away from basic telecommunications.

Furthermore, governance issues overshadowed the company with potential classactions in the US and reporting questions from the FSA [Financial Services Authority].Added to all this was the fact that the board had run out of credibility and needed aradical overhaul.

An interviewwith Richard

Lapthorne

219

Page 3: What makes good governance?

JSM: What was your vision for change? How long did it take you to developand start articulating a strategy for change?I think that grand strategies are quite difficult to implement, so I preferred to set out alist of smaller, achievable goals. Just as when I was a Finance Director, my first goalwas to create a balance sheet which would allow a general manager or Chief Executiveto make choices.

JSM: How did you go about rescuing Cable and Wireless from bankruptcy?With the US business burning cash, we had to be able to exit the US but with a stableenough balance sheet. Exiting the US market was forecast to cost £1.6 billion, worstcase. Equally the worst case for the tax issue, albeit less likely, was for a similar sum.At this stage it was important to have a Chief Executive on board who thoroughlyunderstood the telecom industry and to have someone in charge of the legal andfinance functions that I could have total confidence in.

My first task was to discharge our tax liability. I was personally involved inagreeing the final tax liability with the Revenue authorities – as you can imagine, theRevenue authorities rarely see the Chairman of the Board getting stuck in with a taxissue! We opened our books to them – and they could see exactly the position we werein. We agreed the final tax liability at £380 million, leaving the way open for us to planour exit from the US.

Operationally, there were some issues to be resolved first. To overcome these, weinvested in a new US hub network to cater for our UK customers and the remainder ofthe US business was placed in Chapter 11. We finally exited the US market for £220million – a lot less than the forecast worst case scenario of £1.6 billion – anddramatically reduced the level of uncertainty hanging over the business. This thengave us the scope and flexibility to focus on the UK business – and the capacity to buyEnergis.

JSM: What about shareholders’ involvement?First of all, we could not have achieved what we have without the support of our majorshareholders. Although navigating their world is not as straightforward as it could beif there was more complete alignment between shareholders and companies’ agendas.Each shareholder also comprises a minimum of three layers: the chief investmentofficer is the top one, and is the general manager responsible for the performance of thebusiness. Next, you have the fund manager – the person who liaises with the fund’scustomers, many of whom are heavily influenced by the media and its reaction to thelatest stories. Finally, you have the corporate governance officials.

So do I think the shareholder activist has a role? First of all, I don’t know what anactivist shareholder feels qualified to do and I worry that their agenda is all toofrequently whipped up by the press. I have grave concerns regarding the way the presspicks up the slightest murmur, prints it as if it’s factual and then creates momentumwith stories that bear no resemblance to the real world – this can be very damaging. Italso means that it’s difficult to have a strategy of change without changing topmanagement. Critics end up saying “let’s get the CEO”, which is why you’ve got thisthree-year cycle of Chief Executives moving on, and you can’t do anything in threeyears, other than stop a company going bust. You can’t develop a business in three

JSMA1,2

220

Page 4: What makes good governance?

years, it’s not possible. Equally mistakes are inevitable when you take too many risks.Time alone shows if the overall approach was right.

JSM: What do you see as the role of the board? And how should it manageits relationship with the top management team?The board makes judgements on the basis of the information given to it. Not manyboards can be far-sighted on their own. The board is there as a check and balance onthe Chief Executive, it is not really there as an initiator of original thought, becausethat’s really quite a dangerous threat to the authority of the CEO who is responsible forrunning the company.

But then the non-executive board members can find themselves in exactly the sameposition as shareholder fund managers. They read the financial and popular press andcan be influenced in a similar fashion.

Non-executive directors are in a difficult position – they are inevitably heldresponsible for any failures but are rarely recognised for having contributed to thesuccesses.

JSM: Do you see British business and in particular board relations andcorporate governance having changed significantly over the past ten years?Twenty years ago, before the Cadbury Report, many companies already had excellentcorporate governance with non-executives fully involved in board processes [pensionfund investment managers exercised personal judgement on the checks and balanceswithin company management teams].

What you’ve seen since then is a series of reports and guidance on corporategovernance. I don’t take issue with those that promote good practice, for exampleI agree that the roles of Chairman and Chief Executive should not be combined. Butthe degree of regulation has multiplied and things are moving so frequently it feels likea “ratcheting” approach is being applied.

The big issue for corporations today is providing management with incentives forchange – particularly given the recent stock market downturn. Managers arefrightened to be seen to change their minds. They make decisions on incompleteinformation, but of course, the governance use of hindsight doesn’t accept this.

Personally I think we are focusing so much on input, i.e. on the ingredients ofcorporate governance, that we miss the meal. So at Cable and Wireless we have fouroutput questions which we answer every year. Many high-profile failures would nothave happened if they had similar corporate governance output requirements. Anycompany where the Chief Executive dominates the board, where there are no checksand balances, and where the degree of openness with the board is non-existent is likelyto face failure. Yet none of these infringes the letter of the Combined Code of CorporateGovernance.

JSM: What do you regard as good governance? What are your “fourquestions”?Firstly, what is the quality of the relationship between the Chairman and the ChiefExecutive? Secondly, how open is the Chief Executive with the board? Thirdly, what’sthe visibility of checks and balances between the executive directors? And finally areall the questions asked by the non-executives in a board or committee meeting

An interviewwith Richard

Lapthorne

221

Page 5: What makes good governance?

appropriately addressed? There’s no hiding place from these questions. I feel verystrongly about this and to me these four questions represent corporate governance. It’scutting edge and everybody’s frightened to copy it. I think that’s where corporategovernance is adrift.

JSM: What do you think of the principle “comply or explain”?I think yes, it’s good that we’ve got some rules, which we have to comply with orexplain – although, by the way, Derek [Higgs] said that he wished he’d not expressed itthat way[1]. Derek said he wished he’d said “apply or explain”, because then it wouldhave been a more active, organic process.

So I think we should get away from compliance to appliance, and drastically reducethe number of rules. Let go a bit, and have confidence in boards. As applied by some,corporate governance assumes the board is at best incompetent. It says – here are therules for having the board in place and, by the way, we don’t trust you, so althoughyou’ve got a first-class board, we think you will be influenced by executive directors todo the wrong thing, so here’s how you do it as well.

JSM: Do you think it is possible to have non-executive directors who aretruly independent of the Chairman and CEO?Independence is all about a frame of mind. I was with Unilever for 18 years and one dayyou work for company A that supplies company B, and the following day, you’ve beenmoved and promoted to company B buying off company A, and you role play. Unlessyou can role play as a director, you’re useless. If you can’t role play independence ofthought and independence of action, then it doesn’t matter what your credentials say.You can be independent according to the rules and weak at the same time, in whichcase you are of no value.

Of course, there’s been an improvement in independence, but again, you’ve got to bevery, very, careful that the extension of the “gene pool” of non-executives doesn’tsuddenly mean that for the sake of ticking off the independence criteria, you actuallyget people who don’t contribute much[2]. Or worse, some pools, like those ofgovernment or academia, can even be downright dangerous. They can take on a rolewith no experience of business and how managers work in the real world as opposed toa theoretical one. A board is about facilitating the creation of sustainable value forshareholders, not about adopting every short-term fashion.

JSM: You have had numerous leadership roles, but not that of CEO. Do youregret never having been a CEO?A CEO always has to be available – he/she is in continuous “on” mode. I hate being incontinuous “on” mode; I have to admit to being slightly lazy. A great boss in Unileveronce said: “You’ve got to have a slightly lazy streak, otherwise you’ll end up doingthings you don’t want to do”. I enjoyed the role of Finance director – where the role is abatch production one – moving from year end accounts to budgets, to five year plansto special projects.

I’ve never missed being a CEO, never wanted to do it, never been tempted to do it.There are others who like the buzz.

JSMA1,2

222

Page 6: What makes good governance?

JSM: Where do you go from here? What lies ahead?I have to say though, that many senior managers I work with, given a choice, would nolonger work in a public corporation. Working in a public corporation has become athankless task. I enjoy being Chairman of Cable and Wireless and the team works welltogether. That’s fabulous, but the sheer effort of selling what we do to the media, aswell as responding to some of the external corporate governance processes is becomingtedious.

Business issues are exciting, because there’s movement, and you’re doing thingsand you’re battling and fighting. That’s great, and you feel you’ve got control over that,even if you’ve got to be competitive. But when it comes to dealing with the bureaucraticend of shareholder bodies you find that no matter how hard you try you get no realengagement. That is actually what saps my energy.

JSM: Where do you feel you have made your most significant contribution?British Aerospace. The country’s biggest exporter had totally lost its way, had got realbalance sheet problems. It did not have the balance sheet to realise its potential and thefinancial markets had some concerns about the company and the way it had been run.

Today, it is a very successful and secure company with an enviable position in theworld. The Marconi deal was pivotal in achieving success for British Aerospace – asmy last job there, using war gaming consultants from the United States, I took on theresponsibility of convincing the government to support us. They were brilliant.

BAE is easily my most important achievement, and I wouldn’t have wanted to missthat. BAE was a real challenge.

JSM: What advice would give to today’s young captains of industry?Develop your expertise in one area as soon as possible, like accountancy or law, butaccounting is probably better. Your ability to influence is only possible when yourglasshouse is secure from those who may throw stones. For example, as a FinanceDirector, the first thing you’ve got to do when you go into the business is get the financefunction working well, get the treasury function, the control and the information spoton. Once you do that and it’s running properly, you can then start to look beyond yourown boundaries, and you’ve earned the right to start lobbing the odd pebble ateverybody else. So don’t be a generalist.

The second thing is try and get great bosses. I’ve been very lucky in that regardwith great bosses throughout my career.

Thirdly, never exaggerate and never bluff. Fourthly, employ good people and givethem the space in which to perform. Above all, the way to learn is to share problems asthey emerge, go and ask for help, because the more senior you become, the less it isexpected that you will ask.

Finally, have the courage to change your mind. Circumstances change, thereliability and completeness of information change, why be a prisoner of a previouslytaken decision when a better quality one can be taken now?

Notes

1. Author of The Higgs Review (2003).

2. Higgs had argued that the “gene pool” of non-executive directors had to be widened.

An interviewwith Richard

Lapthorne

223

Page 7: What makes good governance?

References

Gillies, J. and Morra, D. (1997), “Does corporate governance matter?”, Business Quarterly, Spring,pp. 71-7.

Heracleous, L. (2001), “What is the impact of corporate governance on organisationalperformance?”, Corporate Governance: An International Journal, Vol. 9 No. 3, pp. 165-73.

Higgs, D. (2003), Review of the Role and Effectiveness of Non-Executive Directors (The HiggsReview) Department of Trade and Industry, London, January.

Johnson, J.L., Dailly, C.M. and Ellstrand, A.E. (1996), “Boards of directors: a review and researchagenda”, Journal of Management, Vol. 22 No. 3, pp. 409-38.

Maclean, M., Harvey, C. and Press, J. (2006), Business Elites and Corporate Governance in Franceand the UK, Palgrave Macmillan, Basingstoke.

Corresponding authorNicholas O’Regan can be contacted at: nicholas.o’[email protected]

JSMA1,2

224

To purchase reprints of this article please e-mail: [email protected] visit our web site for further details: www.emeraldinsight.com/reprints