Conduct almost unbecoming

Monsoon is the business that sailed through the retail slump, delivering a 13% increase in underlying sales and currently enjoys a record share price.

But it is also the business with a chairman who watched his company claim the high street retail crown after brushing aside serious corporate governance requirements.

Monsoon’s chairman, Peter Simon, speaks, shall we say, quite frankly on the issue. When unveiling the company’s impressive results last week he simply called the UK combined code on corporate governance ‘a load of bollocks’.

Simon was referring directly to demands in the code that listed companies appoint a minimum number of independent non-executive directors (NEDs) to a company’s board.

He was quoted as saying that Monsoon’s recent results were ‘about getting rid of non-executive directors and not worrying about corporate procedures. The company has performed better in both periods when we did not have non-executives; it performed worse when we were complying with (the corporate code)’.

A Monsoon spokesman points out that Simon has a ‘direct’ way of speaking and that the company is 75% owned by the Simon family. Because of this, NEDs would struggle to get their voices heard, even if they were on the board. The only NED Monsoon has among its executives is the chairman’s brother Anton Simon.

Anton answers the requirement of the code that boards have at least one NED with a financial qualification or experience. Monsoon says that Anton Simon has a ‘great deal’ of financial experience because he worked as a fund manager. ‘If he wasn’t a member of the family, he would be ideal.’

Monsoon does concede that shareholders have complained about the corporate governance situation in the past, ‘but at the moment minority shareholders are more than happy with the company’s performance’, says a spokesman. There are roughly 400 minority shareholders.

Oddly, the spokesman denies any direct link between offloading NEDs and improving company performance, however. ‘The reason it has produced this kind of performance is down to the CEO.’

One of the issues with the corporate code for Monsoon, according to the spokesman, is the time it takes to communicate the requirements of the code to the markets. At Monsoon, remuneration and audit committee work is undertaken by the entire board. ‘The code does say that you have to either got to comply or explain – and we have explained,’ says the spokesman.

The Monsoon take on corporate governance, given that it delivered such impressive results, raises interesting questions on the topic for businesses in general. Could other businessmen be wondering if the combined code is eating into their bottom line too?

David Somerlinck, policy manager at the Pension Investment Research Council, believes that business should not dismiss corporate governance too easily and says investors need to consider explanations for diverging from the code ‘very carefully’.

‘There have been companies that seemed to be doing very well, only to collapse. It does take a lot of work to implement corporate governance, and it can be cumbersome. But it is better to have robust, internal controls than to enjoy short-term gains and suffer a shock later,’ he says.

The CBI, meanwhile, does acknowledge that some of its members have expressed ‘concerns about best practice’ and ‘regulatory creep’. Nevertheless, it fully supports the code and is satisfied with the ‘comply or explain’ approach monitoring corporate governance.

The CBI adds that the code is an important guideline for helping boards fulfil their responsibilities of ‘supervising the management of the business’ and ‘reporting to shareholders on their stewardship’.

Somerlinck says that although the corporate governance guidelines that pilot boards can be challenging to introduce, they do not make it impossible to deliver good results.

‘You can’t say that corporate governance will always hinder profits. It is quite possible to comply with corporate governance and still put out good results,’ Somerlinck says.

That said, research by Financial Executives International reveals that corporate governance could be a costly exercise.

In a report released in 2004, FEI found that companies in the US with a turnover exceeding $5.5bn (£2.9bn) expected to spend an initial $4.7m on implementing corporate governance and a further $1.5m annually to maintain compliance.

In the US, compliance is strictly prescribed by the Sarbanes-Oxley Act, which is why implementation is so financially onerous. In the UK, the flexible, non-legislated combined code regulates corporate governance, making it much cheaper to introduce.

Simon Lowe, head of risk management services at Grant Thornton, says this is why it was in the best interests of UK companies to take the combined code seriously.

‘The success of the code now lies in the hands of UK plc. If companies do not approach corporate governance seriously, then the powers that be are going to say: “We gave you a chance to regulate yourselves” and go the legislative route, which is proving very expensive for their US counterparts,’ Lowe says.