It’s not clear whether the years have mellowed Baroness Hogg. This is a woman who, as former head of prime minister John Major’s policy unit, was described as “bossy and imperious”; who, fresh out of Oxford, joined The Economist and went on to write for The Times; who has sat on the board of nine FTSE-100 companies and was the first female to chair one. By any measure she is an intimidating figure.
None of this is apparent upon meeting her ladyship. Polite, measured, direct, even humble – Baroness Hogg seems part sage, part intellectual; a woman untroubled by the grand challenges ahead and not prone to rash decisions. Where some might thump tables, she appears as if she would display restraint.
On May 1, 2010, she began her chairmanship of the Financial Reporting Council (FRC), bringing with her more than 20 years of contacts drawn from newsrooms and boardrooms across the City.
And she may need to draw on all of them in the days ahead as she implements a reform agenda that could fundamentally reshape the UK’s financial reporting regime.
Her first year has so far been defined by others, her predecessors, whose own reform agendas she is now implementing. As she sits in the FRC’s Aldwych House headquarters, the future shape of the organisation she has come to govern remains uncertain. The Conservative-Lib Dem coalition is making good on its promise to break up the Financial Services Authority (FSA) and plans to place the UK Listing Authority (UKLA) under the FRC’s umbrella.
When questioned on the subject, Lady Hogg is conscious of the political dimension of her views. She is positive about the move, but is keen to point out it has not been suggested by her or the FRC. She sees synergies between the work of the UKLA and the Financial Reporting Review Panel (FRRP), which sits under the FRC umbrella, but cautions that the ultimate decision will not be hers.
“The FRRP is looking at accounts and, in a way, what companies put to markets in their prospectuses, the follow on is what happens in their accounts a year or two later,” she says.
“You have to remember that the UKLA only went into the FSA not that long ago and at that stage there was great concern that it would come further away from the market through that process. So, if you like, moving back to us would be a bit of a journey back to where it came from, but perhaps not all the way.”
But then there’s the cost. The FRC likes to boast about its ability to effect change across the markets using very limited resources. The body spent only £19m last year. In the tight FRC budget, is there any money for another authority?
“I’m always cautious about arguing that there will be cost synergies from bringing things together. Nonetheless you ought to be able to have types of support that spread across two organisations quite effectively,” she says.
Events have moved quickly since she began. Just weeks after she started, she was heralding the release of a new corporate governance code.
The UK has a hard earned reputation for being at the forefront of thinking on corporate governance. Concepts, including the “comply or explain” approach, have stamped the UK’s influence on corporate culture across the world.
The new code, however, proved unpopular, not least because it forced adhering companies to put their boards and chairmen up for re-election each year. Companies and trade bodies railed against the proposal. “We believe such a step is unnecessary and may fuel short-term behaviour,” the influential but reclusive Hundred Group of Finance Directors said in March.
The code was released but the criticism did not subside. Investors Hermes, Railpen and the Universities Superannuation Scheme even said they would back companies who chose not to implement the standard. Lady Hogg is unapologetic about the rule. She believes the ‘comply or explain’ system, or as critics call it comply or else, provides companies with enough flexibility to accept or discard corporate governance provisions.
“If people don’t want to do it, and their shareholders agree, well that’s the beauty of our system,” she says.
“The code is not handed down from on high, out of the clouds, it is an articulation based on consultation on what people believe to be best practice… No one has a monopoly of wisdom on best practice – it should be a debate.”
Her comments offer a peek inside the bedrock of principles, which underlie her views. In Lady Hogg’s post-crisis world, the shareholder is king. She points out that it was shareholders who rescued companies in the crisis, a point large corporates often overlook.
“This was a time when credit markets had dried up and governments had run out of money, so who stumped up? It was equity markets and therefore I think the protection of shareholder rights is an enormously important policy issue,” she says.
“If the FRC didn’t listen to their views on issues like annual election it would not have been appropriate.”
Lady Hogg has spent her career at the feet of corporate governance pioneers including Sir Adrian Cadbury, Sir Bryan Nicholson and her predecessor Sir Christopher Hogg – all individuals who have championed shareholder rights.
“They’ve all been people I’ve known and had great respect for and are great to engage and think with,” she says.
She knows, significant corporate governance reform rarely runs along a smooth rail, a lesson she learned from her predecessor and during her time on the FRC’s corporate governance committee.
“The whole development of a corporate governance code has been challenging. There’s always been resistance to the setting of standards in this area, which I perfectly understand,” she says.
“I remember the first round table I went to to discuss the issue of board evaluations, this might have been ten years ago, and a number of the chairman around the table were totally dismissive of the idea that boards needed to evaluate themselves – now it’s a given.”
In July, barely a month after the release of the corporate governance code, she oversaw the release of another landmark document – the stewardship code. Unlike the corporate governance code, this was aimed at institutional investors and is an attempt to shine the light on an often overlooked ingredient to the crisis – investors and their poor engagement with their investments.
Under the code, institutional investors are encouraged to draw up a list of escalating steps to take if they disagree with the decisions or the direction of the companies they invest in, including taking concerns public prior to an annual general meeting or requisitioning an emergency meeting to oust board members, if they feel important issues are not being addressed.
The code was a first for regulators and a novel response to a part of the crisis often treated as a sideline issue. Success or failure of the code has not been defined, but it’s hoped that, at the very least, it will provide some measure of clarity in the murky world of company-investor relations.
Corporate engagement with institutional investors is an unstructured area. The problem is companies aren’t clear on the views of their large investors – how will they treat confidential information, how often and on what terms do they want to talk, or what specific information are they after?
“There was a great deal of fuzziness,” Lady Hogg says.
The stewardship code aims to add some structure where previously there was just confusion. But complicating the matter is the issue of sovereign wealth funds. These megaliths are foreign state-owned investment funds which invest in foreign markets. The funds are often wary about criticising a foreign company for fear of being seen to be meddling in another country’s business.
In these circumstances, Lady Hogg believes the code may offer them some measure of protection. “Perhaps they will find the code as a way of engaging in a ‘non-political’ way because they will engage in line with the code, which is what you would expect a shareholder to do, rather than some foreign government playing games,” she says.
“The code has got lots of rough edges and bits we will need to think further about, it’s going to be an exercise in learning by doing.”
This is not the only international issue where Lady Hogg hopes to leave her thumbprint. On European financial policy issues, the UK has displayed considerably less clout than its French cousins and Lady Hogg has grown increasingly concerned about the rhetoric coming from Europe, where more regulation and government intervention seem to be the answers to some of the lingering questions left over from the crisis.
Policy which imposes more regulation is antithetical to Lady Hogg’s emphasis on the shareholder. “Some of the language we get coming out of Europe worries me a bit,” she says. “There is a strain of argument that says ‘shareholders, if you don’t use your rights effectively we, government, are going to apply more legislation and rules’.”
Lady Hogg believes the approach runs counter to the dynamics of equity markets. It’s a point she seems to return to – the importance of equity markets and, at their heart, the shareholder. “If you damage shareholder rights, you damage equity markets,” she says, emphatically. “If you don’t give full recognition to shareholder rights, that great source of capital will dry up.”
If her first year is dominated by issues which preceded her, then the second will be her time to shine. Top of her list is the brewing reform debate surrounding the audit industry. The provision of audit services has been called into question since the crisis, not least of all by the profession itself.
KPMG’s UK chairman John Griffith-Jones said in March: “What is the point… of doing extensive and increasingly elaborate audits of the financial accounts of our banks, when audits failed to identify the huge and systemic risks which led to the near collapse of the global banking system in the autumn of 2008?”
It’s this question the Lady Hogg hopes to explore in coming months. She is wary of seeming reactionary and opposes calls for the audit report, in its current form, to be scrapped. “We mustn’t throw the baby out with the bath water. It is easy, in this sense of frustration as to how do we enhance the value, to ascribe no value to the audit process and that would obviously be foolish,” she says. “We mustn’t lurch to the other extreme and say it has no value at all.”
But change is needed. She mischievously refers to her upcoming testimony before the Economic Affairs Committee, which she once sat on. But the case for change has been made to Lady Hogg, the remaining question is the form.
“I had one audit firm tell me, ‘the shareholders didn’t even seem to notice when we resigned from the accounts’,” she says.
Debate on audit, corporate governance, stewardship and regulation will likely dominate her early time at the FRC, and rumble along throughout her tenure. That she will leave her mark is not in doubt. She has picked up the baton from giants and, if their experience has taught her anything, it’s that, to the big dilemmas, there are no quick fixes.
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