Nobody emerges with any great credit from the saga of Eurasian Natural Resources Corporation (ENRC), the Kazakhstan-based mining conglomerate that has been dogged by controversy ever since it listed its shares in London. The non-executives look weak and confused, the management arrogant, and the bankers who listed the business short-sighted and self-interested. If you deliberately set out to make the financial markets look bad, it would be hard to do a better job.
Last week former GlaxoSmithKline chief executive Sir Richard Sykes and his fellow non-executive director, Ken Olisa, were both voted off the board after they lost the confidence of the controlling shareholders. That in itself is a rare event. It is the first time in a decade that directors have been voted off a FTSE-100 company board at an annual general meeting. Since Sykes was appointed at the time of the initial public offering to make sure the shareholders were properly protected, that was hardly reassuring news for investors. Now it looks as if the best hope for the London markets is that Glencore, itself hardly a paragon of corporate governance, makes a bid for ENRC, and so removes what is increasingly an embarrassing company from the main market.
It is hardly a great advertisement for a London listing as a brand. Global investors who looked at the company and assumed that because it was in the FTSE it was run properly will have looked on with horror. They could certainly be forgiven for wondering if a London listing really meant anything any more.
ENRC was always going to be a controversial company. Only 18% of the shares are floated freely on the market. The remaining shares are divided between Kazakhmys, another FTSE 100 miner, which owns 26%; the Kazakh government, with 12%; and the founding Kazakh oligarchs. With that kind of structure, it was always going to be hard to believe it would be run in the interests of all its shareholders. And yet, because it was a FTSE company, every tracker fund was going to be obliged to buy shares in it, and its sheer size meant most mainstream unit trusts and pension funds would too. That was why the grandees were important. They were drafted in to reassure everyone that this was a business they could trust.
In truth, companies such as ENRC pose some tricky choices for the City. It is absolutely right that London should host companies from all around the world. The City has always prospered by being a bridge between the developing world and the global capital markets. The last thing it should start doing is turning away Kazakh mining companies – or companies from any of the emerging markets.
Against that, the City needs to stand for something. It is a brand – and one of the secrets of successful brand management is quality control. If Volkswagen sells you a rubbish car, you won’t buy another one. Likewise, if the FTSE is home to a lot of companies that probably have no place on a public market, investors will stay away – and if there are no investors, there soon won’t be any market either.
The solution is to make sure standards are upheld, and the quality maintained. But it is no good simply expecting a few grandees to ensure that this happens. There are three obvious steps of getting the structure right – and one novel one.
First, the auditors need to be absolutely independent. There have been promises of reform ever since the Enron scandal broke almost a decade ago, but the suspicion remains that the accountants are mainly there to put a rubber stamp on whatever the finance director says the figures are. If investors can have faith in the numbers, they can make their own decision about whether to invest or not.
Next, make sure the business is transparent. Publish as much detailed data about the company as possible. While most investors might not read it all, at least it means they can check what is going on.
Third, make sure the non-executives know the business. The board doesn’t have to be packed with big names. It would be far better to have someone lesser known, who knew the industry inside out, and had the time to make sure he or she was looking at the business closely, rather than someone who hardly knows it.
There are more radical changes that could be considered. How about a rule stipulating that companies should aim to pay out around 2% of sales in dividends? The worry with companies such as ENRC is always that they will be run for a few big shareholders rather than for everyone who buys into the business. But you can’t fiddle the dividend. It is either paid or it isn’t paid. And you can’t really fiddle the turnover figure either. If the company were obliged to pay out a dividend fixed to its total sales, investors could relax. They’d still earn a decent return on their investment regardless of what the majority of shareholders decided to do.
Any option would be better than simply relying on a handful of grandees. Even Sir Richard Sykes would surely agree that by now they are hardly able to guarantee a company is being well run.