Hampel criticised

Sir Ronald Hampel, chairman of the City committee reviewing corporate governance, met with opposition from accountants and internal auditors following his refusal to insist companies establish internal audit committees.

There was also frustration that he shied away from asking directors to report on the risks faced by their organisation.

Harold Izzard, spokesman for the Institute of Internal Auditors, said Hampel should have considered the creation of an internal audit department as ‘best practice’ rather than leaving it as a recommendation.

He argued it was not enough for external auditors to have a discussion with the audit committee in private, which Hampel has decided to allow. He said information needed to come from the bottom of the organisation if the audit committee and non-executive directors were to receive independent advice.

‘But if you look at the committee they haven’t been at the bottom of an organisation for a long time. I bet they don’t get in the kitchen to do their own washing up very often,’ he said.

ACCA agreed Hampel failed to force directors to identify major risks faced by their organisation. David Harvey, ACCA’s corporate governance secretary, said: ‘Boards oversee risk but can only evaluate it effectively from year to year, or evaluate high risk issues, if effective internal control and communication structures exist to draw key issues to the board’s attention.’

Hampel maintained his ‘fine tuning’ of the Cadbury and Greenbury reports (a ‘supercode’ comprising all three reports is now being compiled by the Stock Exchange) was based on the belief that active shareholders keep itinerant board directors in check.

If they are paying themselves too much or not investing enough in their company, he said last week following the publication of his long-awaited report, then it is the power wielded by shareholders that really counts rather than books of corporate governance rules.

‘The evidence from the US is that when a company performs poorly, shareholder activism leading to a change of management, and not improved governance, is what has improved results,’ he commented.

Shareholder groups, however, have been some of the most vociferous in their criticism of the latest review. The Guild of Shareholders in particular wanted Hampel to look more closely at the powers afforded individual shareholders at annual general meetings and the ease with which they can demand financial information during the year.

Tom Benyon, the guild’s chairman, agreed shareholders held the key to good governance, but argued for a greater balance of power between shareholders and directors.

Instead, the debate on the Hampel committee centred on the role of institutional shareholders and whether they should be dragooned into voting on key areas of company policy. Even here, however, Hampel said there was little point in forcing the issue.

‘Compulsory voting by shareholders will not guarantee anything other than box ticking,’ he said. He recognised corporate governance will evolve, but unexpectedly asked the Financial Reporting Panel to keep the issue under review.

Hampel’s recommendations:

Accountability – The audit committee should keep the overall financial relationship between a company and its auditors to ensure that objectivity and value for money are maintained.

Directors – Most non executive directors should be independent, and should be identified as such in the annual report; directors should be appropriately trained; chairman and chief executive should be separate roles; a senior non-executive director, identified in the annual report, should be there to deal with shareholders’ concerns; and a director leaving before his time should give an explanation.

Directors’ pay – There is nothing against paying non-executive directors in company shares, but the practice is not recommended; Directors should be on contracts lasting one year or less; there should be a remuneration committee made up of independent non-executive directors; these committees should handle decisions on executive directors’ pay packages and the framework of executive pay; and shareholders should approve all long-term incentive plans.

Companies – Companies should include a narrative account of how they apply broad principles, and should explain their policies, justifying anything which could be seen as a departure from best practice.

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