Governance – Escondido Framework

Governance failure at Countess of Chester Hospital and the British Museum

British Museum - stolen antiquities — British Museum – stolen antiquities

Countess of Chester - baby deaths — Countess of Chester – baby deaths

On 16^th August, the British Museum issued a statement that it had identified that “items from the collection were found to be missing” (subsequently disclosed to be more than 2,000). A member of staff (although apparently not the thief) had been dismissed and a criminal investigation was underway.

The director of the museum, Hartwig Fischer, said “This is a highly unusual incident. I know I speak for all colleagues when I say that we take the safeguarding of all the items in our care extremely seriously. The Museum apologises for what has happened, but we have now brought an end to this – and we are determined to put things right. We have already tightened our security arrangements and we are working alongside outside experts to complete a definitive account of what is missing, damaged and stolen. This will allow us to throw our efforts into the recovery of objects.” Fischer resigned on 25^th August after it emerged that the museum had first been alerted to the theft in 2021 by a dealer in antiquities who had come across some of the items for sale online, but that Fischer claimed that all the items had been accounted for. The impression has emerged of an organisation with shortcomings in governance and lacking assurance about the security of the processes for protecting its collections and a degree of denial at multiple levels – but spectacularly among top executives – about the possibility that anything might be wrong.

On 18^th August, the verdict was handed down in the case of Lucy Letby, a neonatal paediatric nurse working at Countess of Chester Hospital, found guilty of the murder of seven babies and the attempted murder of six others, in addition to which the jury were unable to reach a verdict on a six further attempted murder charges. The incidents took place between June 2015 and July 2016 and the failure of the executive team to respond appropriately at this time has been greeted with justifiable outrage. In particular, the paediatricians who first raised concerns about the pattern of baby deaths were first asked to apologise to Lucy Letby for bringing allegations against her, and it was only in July 2016 that she was removed from clinical duties. On 3^rd July 2018, Letby was arrested on suspicion of eight counts of murder and six of attempted murder after a twelve month police investigation.

The history of the case has raised major questions about the failure of the Countess of Chester Hospital, its management, and its board to scrutinising spikes in mortality in the neonatal unit, pay attention to concerns raised by clinicians, and take appropriate action. Given the attention that I recall being given to mortality trends in NHS Trusts[1] at the time of the incidents, I find it remarkable that the board appeared to pay so little attention to the data. Much has been made of the failure of the board to respond to the concerns raised by the paediatric consultants. The inquiry due to be commissioned may shed light on this, but I suspect that interprofessional cultural issues may have contributed: between the doctors flagging concerns and executive directors with a nursing background (chief executive, director of nursing and, I understand but can’t confirm, director of operations); or even between the medical director, who I understand to have been a surgeon, and the paediatricians. If so, where was the chairman and where were the non-executives? Not only does it appear with hindsight that they displayed insufficient curiosity to what was going on, but they should have been calling out interprofessional cultural issues if there were any, and assisting in their resolution. Given that the chair of Countess of Chester was a former chief executive of the NHS Management Executive, lack of experience can’t be the explanation.

I became aware of the case at some point in 2019. I believe I saw papers relating to Letby’s referral to the Nursing and Midwifery Council (where I chaired Fitness to Practise interim order hearings) and recall saying to a colleague on the panel that her case had similarities with that of Beverley Allitt[2] . I don’t think that the case was heard by my panel , rather that we were asked to consider it when another panel was struggling to complete its agenda. Hovever, it turned out that we did not hear it, either because we had insufficient time ourselves or that original panel was able to conisder the case after all. Given that Letby did not receive an interim suspension order from the NMC until March 2020 when she charged with the murders, I assume that the papers I saw related to a review of an existing conditions of practice order. This probably restricted her to working only at Countess of Chester Hospital, who should have been fully sighted on the concerns at the time and able to take actions to protect patients while the case was being investigated. This was our normal approach to an interim order when a nurse remained in employment but their case was still under investigation and charges had not yet be brought by the Crown Prosecution Service. Given the shortcomings in the management of this case by Countess of Chester Hospital, I am not sure that this was necessarily the right approach by panels such as mine. But I always took the view, as a serving Trust chair myself, that I and my board would have been adequately sighted and my professional reputation was at stake if I was not assured that my executive colleagues were not managing such a case safely, and consequently the Trust employing a nurse was better placed than the Nursing and Midwifery Council to manage a case safely and proportionately.

Both the British Museum and the Countess of Chester cases raise major concerns about the possibility that senior executives and boards adopt a culture of complacency and denial, that board members lack cultural sensitivity and fail to triangulate what they are told and read in their papers with sufficeint engagement with the front line (which I have described as “kicking the tyres”), and, above all, fail to employ enough curiosity in relation to both data and to “soft intelligence”.

I am grateful to Elizabeth Rantzen, my former deputy and then successor as Chair of West London NHS Trust for her insight into the juxtaposition of these incidents coming to light in the same week.

[1] I was chair at West Middlesex University Hospital 2010 – 2015, and West London NHS trust 2015 – 2023

[2] a nurse convicted of the murder of four infants, attempted murder of three, and gross bodily harm to another six in 1991

Diversity on boards is more than just DEI and EDI

Is there enough cognitive diversity at the top of UK government? — Does visible diversity equal cognitive diversity?

I have long argued that the most important aspect of board diversity is ensuring diversity of thinking around the board table. The public debate about DEI in the United States (Diversity, Equity and Inclusion) and EDI in the United Kingdom (Equality, Diversity and Inclusion) is much more about the optics of the mix of people around the table.

The message communicated to an organisation’s stakeholders by a visibly heterogenous leadership roster is important. This demonstrates the commitment of the organisation to being inclusive, treating people equitably and equally. I have assembled boards that have been broadly representative, in terms of gender, sexual orientation, ethnicity and disability, both of the customers we served and the people we employed. This has to be more than cosmetic and must be carried through into the way that the organisation conducts itself.

Important though the optics and the carry through into corporate conduct are for an organisation’s marketing to all its stakeholders and for its internal operation, this aspect of DEI/EDI is not enough to ensure the diversity of thinking required for high quality governance. Three of the four major officeholders in UK government are from ethnic minorities and the 30% female representation of women in the cabinet is broadly in line with 34% for the House of Commons as a whole. But the cabinet is remarkably homogenous in terms of experience and academic background, with a predominance of lawyers and graduates in PPE or one of its constituent subjects, and only two (Kemi Badenoch and Thérèse Coffey) with degrees in STEM subjects. A prime minister will always face the challenge of balancing the opinions from different wings in his party, but does Rishi Sunak have enough cognitive diversity within his cabinet (allowing for them all being from the same political party) for good quality decision taking?

Two emails appeared in my inbox calling for divergent thinking on boards. One was from the Good Governance Institute (a consultancy that works with boards in the National Health Service). The other was a first-class thought piece from the KPMG Board Leadership Centre (KPMG Embracing Cognitive Diversity in the Board Room) that reminds us of the UK Corporate Governance Code stipulation appointments should “promote diversity of gender, social backgrounds, cognitive and personal strengths”. Its authors observe:

“Perhaps the benefits of diversity have been somewhat ‘mis-sold’ with the presumption that hiring people from historically excluded groups will automatically result in increased performance. But for these efforts to be truly effective and ‘bear fruit’, board diversity will require a different approach and skillset.”

KPMG commissioned Leeds University to undertake a literate review of cognitive diversity and concluded that recruiting for diversity based on protected characteristics alone is not enough and, furthermore, that chairs have a critical role in ensuring that the benefits of cognitive diversity are realised. The KPMG report’s authors argue for personality profiling to inform recruitment for diversity, for example, to actively develop a mix in terms of risk appetite, ability to focus on big picture or detail, be informed by heart or head, and be task-oriented of people-oriented – albeit (thinking about this from the perspective of a serial chair) recognising the management challenge that this creates for the person chairing such a board.

I’m inclined to take this further, and actively seek diversity of experience, professional background and academic training, which provide proxies for cognitive approach. Back in the 1990s, I undertook research with the Ashridge Strategic Management Centre into the strategy development processes of 30 companies in the FTSE 100 and was struck by comments from consultants and planning directors working with some of the chief executives about the different styles of thinking of their clients and bosses, and how this appeared to reflect their academic backgrounds. This resonates with me at a personal level – my wife, a former general counsel, approaches problems in ways that reflect her legal training and are completely different to me with an academic background as historian and business economist. With many years’ experience of boards in healthcare organisations, I have observed the variation in the thinking styles of different health professions and, among doctors, how within the specialities within medicine.

How not to run utilities

Joseph Bazalgetter the Great Sewer — Joseph Bazalgette inspects the Great Sewer

Were the FT journalists consciously punning when they wrote this morning about Assured Guaranty (a US insurer reported to have more than $10 billion of exposure to some of the most indebted UK water utilities) “agreeing to provide liquidity facilities to Yorkshire Water”?

The long running problems with the financial management and governance of Britain’s water companies have come to a head with the crisis at Thames Water. The company has been at the heart of allegations about releasing sewage into water courses. The company is struggling with rising interest payments on $14 billion of debt. Sarah Bentley, chief executive has resigned. Along with the UK’s other water companies, who also face criticism for releasing untreated sewerage and collectively waste 20% through leaks of the water treated and ready for consumption, it faces public pressure for renationalisation. This sentiment is shared by Conservative Party voters who, according to a YouGov poll last year, are 58% in favour of a return to public ownership.

Before delving into the questions about governance, funding and risk bearing on the water industry, it is important to note the context. The water companies (and Thames Water in particular) operate a system that includes extensive very old and infrastructure (similar issues affect the UK’s railway system) that need maintaining, repairing and replacing, and face increasing demand from consumers and cope with the consequences of climate change – the paradoxical combination of longer periods of drought and increased frequency of incidences of torrential rain that exceeds the capacity of drains and sewers. This is well illustrated by the Thames Tideway Tunnel project, the £4.3 billion, 16 mile long “super sewer” nearing completion to replace Victorian sewerage system built under the direction of Sir Joseph Bazalgette between 1861 and 1875 and intended to reduce the number of “Combined Sewer Overflow” discharges into the Thames in London from an average of 60 a year to fewer than five.

But who is to pay, who should be running the show, and who should bear the risk when things go wrong? Ultimately the customer will pay, whether charges for domestic consumption are averaged out on a per household basis prior to water metering being rolled out or, as is now generally the case, based on the water you use (and is drained away on your behalf using water consumption as a proxy for sewerage generation)? (In a country with bountiful rainfall, the public struggle to understand why they should pay for something that falls from the sky, without understanding what is involved in getting potable water to them). When addressing the investment required for new reservoirs (noting that Portsmouth Water’s new reservoir in Havant will be the first in the past forty years despite at 21% growth in population) or schemes like the Thames Tideway Tunnel, capital needs to come from somewhere (whether from shareholder, lenders or government (either taxpayers or, more likely, investors in government debt, aka lenders) and then needs to be serviced until the cost can be recovered from the customer.

Since the regional water boards (responsible for both water supply and wastewater disposal – noting that thirteen smaller water supply only companies – generally former municipal businesses remain, albeit also now in private ownership), were privatised in 1989, they have geared up with substantial amounts of debt. Critics allege that this has released cash to pay over £60 billion in dividends to investors since privatisation, almost half the sum invested addressing the leaks and the sewer overflow discharges and increasing capacity. A further criticism of the companies is that the interest burden reduces the corporation tax paid by the water utilities, with the result that in 2021-2022 only South West Water reported a profit after tax, with Thames Water in the spotlight for losing £973 million.

Would nationalisation solve any of these problems? As a member of a sailing club that opened in 1979 on one of severally new reservoirs to the west of London, I am a beneficiary of the investment in water supply capacity by the nationalised water industry prior to 1980. I am not in a position to take a view on whether adequate maintenance or investment in distribution and disposal infrastructure took place prior to privatisation but I recall burst water mains and pollution of rivers and beaches in my childhood, so suspect that the nationalised industry underperformed on this count. The industry today has an economic regulator, the Water Services Regulation Authority, and is policed by the Environment Agency, both of whom have their critics. As Dieter Helm wrote in the Financial Times on 2nd July, the problems in the water industry demonstrate a prima facie case that the regulators have failed to use their powers adequately and that they should been given more teeth. But the problems identified do not make the case for replacing regulated privately owned companies with stronger governaance with a system of direct accountability for the management to ministers and civil servants in Whitehall, and financial accountability – including for access to capital for investment – to HM Treasury?

Lessons for leaders from a front-line healthcare team

I couldn’t fail to be impressed by a slide in a recent presentation by the community health director at the NHS Trust that I have chaired for the past eight years. It described the Team Charter developed in a programme of mutually agreed behaviour workshops in the Hammersmith & Fulham Community Independence Service in which community nurses, occupational therapists, physiotherapists, and care workers support patients to keep them out of hospital. They are a high performing team delivering a great service, facing challenging demands, working with constrained resources, juggling priorities, and taking difficult decisions. The Team Charter illustrated above speaks for itself. It may look like a “motherhood and apple pie” recipe, but it is no worse for that. And, what’s more, it provides a lesson for teams and their leaders everywhere.

A “Big Read” feature in the Financial Times recently (23^rd February 2023) described how the isolation of Vladimir Putin within the Kremlin and narrowness of the circle he consults contributed to his disastrous decision to invade Ukraine and subsequent conduct of the “special military operation”. Pictures can paint many thousands of words, but if there was anything to illustrate the need for the Kremlin to take a lesson from the healthcare workers of Hammersmith & Fulham, the photograph below, used by the FT to accompany its article, does the job.

Putin with foreign minister Sergei Lavrov - a clue to why we're in the mess we're in? — Putin with foreign minister Sergei Lavrov – would they benefit from a team charter?

US Republicans who don’t understand shareholder capitalism

Freedom, but not to do business with ESG informed institutions

Ron DeSantis, governor of Florida and fancied candidate for the Republican presidential nomination in 2024 is proving to be an unexpected enemy of investors in US businesses and the “free market”. The FT reports that he announced legislative initiatives on 13^th February to ban banks and other financial groups from “discriminating against” energy companies, gun sellers and other businesses, and asset managers from considering ESG in investment decisions.

This appears to be only one of 49 legislative initiatives so far this year across the United States. To the extent that these are the result of the efforts of lobbyists working for pariah businesses, this is fair enough and – in terms of the Escondido Framework model of the firm – represents an understandable response by the managements of such businesses to the pressures they face as they attempt to shape the interface of their businesses with the suppliers of capital.

Whether it is a rational response or is likely to succeed (by reducing the cost of capital or relaxing the pressures faced by management from active investors) is uncertain. The FT reports further that the Indiana Bankers Association, representing 116 banks, is trying to frustrate legislators in the state who are trying introduce a measure to require the state to divest and cancel contracts with financial groups that consider “social, political or ideological” factors. The Chief Policy Officer of the IBA has said “A lot of my members have ESG statements [that] could prohibit an organisation being a custodian of the state’s finance as a result of this legislation.”

But the growth of ESG is a rational response of businesses to institutional investors’ concerns about the outlook for businesses who traditional activities and business models face a long term threat because of they harm that they are perceived to present to people and to the planet. Each mass shooting in the US contributes to a ratcheting up of the anti-gun lobby and, absent short term crises resulting in a profit windfall (and these invite a taxation response) the outlook for companies extracting and supplying fossil fuels is undermined by the need to move to net zero. And when it comes to good governance, the example of value destruction by an unshackled Elon Musk, reinforces the case for the “G” in ESG.

It is reasonable for climate-change-denying and gun-toting Republican elected officials to include financial institutions that do not subscribe to the “E” and “S” elements in the ESG principles among the organisations with whom they do business, providing that such organisations can demonstrate over the long term that they serve the fiduciary responsibilities of the offices to which they have been elected (it is hard to see how they can ignore the “G”). But it is conflicts with their duties and with the commitment claimed by most Republicans to market capitalism to cave in to the pressure from the pariah businesses and legislate against doing business with ESG informed investment decisions that offer better long term returns and less risk of fraud, provider capture or adverse outcomes from wacky decision making.

The paradox of the anti-woke investor

Fundsmith founder, Terry Smith – No Nonsense?

The Escondido Framework argues that all the market interfaces of the company (with customers for their goods or services – either B2B or B2C, labour, their own suppliers of goods and services, and providers of capital) are essentially similar.

Customers for goods and services make their decisions to purchases on the basis of a variety of characteristics of the offering: quality, product features, after-sales support, credit terms, price and more, and in relation to all of these, the competing alternatives. Employees consider not only the raw salary package, but the variety of employment terms, both hard and soft benefits, company culture and values, corporate reputation, risk, opportunities for career development, and that’s just the start of the list. Suppliers of goods and services also have complex decisions in terms of how they view their customers, whom to serve and how. It is not just a matter of price. For example: is this customer big enough to justify the effort to sell to them compared to the other potential customers out there; can we support the service levels and stock requirements to meet their demands; would our brand be damaged in the eyes of our premium customers if we sell to downmarket segments? And suppliers of funds to companies, whether equity, debt, or hybrid instruments, consider a wide range of trade-offs: risk (reflecting a wide variety of considerations: operational, financial structure, regulatory exposure), term, liquidity, income generation, value growth, portfolio diversification for starters.

So what should we make of the debate raging over ESG informed investment and rise of the vocal “anti-woke” investor?

The Escondido Framework is not a normative model, arguing over rights and wrongs of ESG investment. The model describes the world as it is, and highlights the shortcomings and incompleteness of other models of the organisation. Investors, alongside with consumers, suppliers and especially employees include ESG type considerations in the mix when deciding who to do business with and on what terms. Do I want to be complicit in the destruction of the planet, oppression of minorities, exploitation of disadvantaged populations – whether on a third world plantation or facing an early death through a predisposition to consume addictive toxins (alcohol, tobacco or opiates). ESG is a fact of life in all markets, the only question is the weight and precise form in which it plays into the consideration of all the parties (aka stakeholders) with whom companies interact.

There are conflicting accounts as to whether ESG focussed companies and investment funds deliver superior returns. Part of the problem is one of definition and the nature of the measures employed: movements in share price are a poor metric because any starting point in a share price measure has future performance expectations priced in. However, to the extent that robust taking ESG issues into considerations reflect long term strategic thinking and the combination of transparency to investors and quality in decision-making processes, it is hard to see why and how ESG would not offer great value creation over an “anti-woke” alternative.

The Financial Times has once again (Helen Thomas on 11 January, following an article by Harriet Agnew on 12 January last year) focussed on a spat between “anti-woke” investor Terry Smith of Fundsmith and the leadership of Unilever. Smith has mocked Unilever’s leadership in his annual letter to investors for highlighting its sustainability credentials and for “virtue-signalling ‘purpose’”. He takes issue with Unilever for “purposeful” brands. For example, he comments about soap that “when I last checked it was for washing” dismissing Unilever for talking about “inspiring women to rise above everyday sexist judgements and express their beauty and femininity”. But, as Thomas points out, “the huge success of Dove – one of Unilever’s biggest brands, held up as a marketing case study – suggests a bit of female empowerment and body positivity isn’t a stupid way to sell soap. Rather like efforts to make mayonnaise appealing to health-conscious millennials [Smith laid into Unilever’s account of the “purpose” of Hellman’s last year], Smith just isn’t the target market”.

He is on stronger ground in his criticism of Unilever, which has been subject to a raid by activist Norman Peltz who now has a seat on the board. He complains that Unilever has failed to engage with his fund which had been a long-term holder of Unilever stock and twelfth largest shareholder. Marketing to investors, involving both taking strategic marketing decisions about the proposition provided to the investor (ie the profile of the investment including characteristics such as those listed provide above) as well as communicating with the shareholders, is one of the core responsibilities of the chief executive.

Reading the Fundsmith shareholder letter, I take away the impression that Smith’s criticism of “virtue-signalling” reflects a politically informed discomfort with a company that responds to trends in society and to the new consensus about threats to the environment. However, his language elsewhere and his stated strategy to invest in good companies, hold onto shares for the long term, suggest that he doesn’t recognise that his fund should invest in companies that adopt the underling strategic approach of Unilever (even if not its failure to communicate adequately with large shareholders or its apparently inept approach to large transactions). Given the stated approach (effectively to emulate Warren Buffett), Smith ought to be able to leave his personal politics and any “anti-woke” tendencies outside in the carpark when he comes to work and to recognise the value of purpose and ESG when investing on behalf of his clients.

“It’s the investors’ fault, not ours”

Financial communications company Tulchan’s State of Stewardship report, capturing the views of 35 FTSE company chairs (26 from FTSE 100), makes depressing reading. “Many of the chairs interviewed for this report conveyed a sense of deep unease at what they feel is a lack of alignment between their objectives and those of their shareholders” writes Mark Burgess, a Tulchan Communications partner, in the foreword to the report. And whose fault is this? According to the commentary and the chair’s quotes scattered through the report, it appears to lie with the investors.

“The report suggests….that we should recognise that board are mostly constituted by good people trying to the do the right thing for the good of their stakeholders., and invites shareholders overseeing them to start by assuming positive intent, placing accountability for stewardship where it belongs;[1] in the boardroom and working together to improve conditions for growth”.

This is a bit like a sales and marketing director blaming customers for not buying their products or services. No, you need to design your offering to meet customers’ needs, and your advertising agency (Tulchan’s equivalent in the consumer marketplace) should shape your messages to so that they demonstrate how your offer will address those needs.

Shareholders don’t “oversee” boards. Boards are accountable to shareholders, and to other stakeholders too. Their companies have a duty to provide returns that are sufficiently attractive to shareholders in terms of the balance of capital growth, dividend income, risk, timing, and alignment with ethical and any other shareholder concerns. Folded into risk are concerns about consumer and supplier market movements, competition, government intervention, financial leverage, and investors’ portfolio composition[2]. Get that right, and investors will place a higher value on your shares. Get it wrong and investors will either sell or, if they believe other directors will provide returns (taking all the dimensions list above into account) that are more attractive to them, replace you. Boards need to think of their shareholders as customers and shape their offer to them as though they were customers.

[1] Tulchan’s punctuation

[2] Witness the challenge faced by Baillie Gifford needing to unweight its investment in Tesla as the share price took off

Norwegians have the power to tackle executive abuse of power

Norway’s population and land area may be only 0.07% and 0.08% respectively of that of the world, but through their nation’s $1.2 trillion oil wealth fund they own the equivalent of 1.5% of every listed company. If any single organisation is able to help overcome the market failure represented by the capture of economic rent by the managers (and the connivance in this of toothless or complicit remuneration committees), it is the custodians of Norway’s accumulated oil receipts.

It is reassuring to discover that Nicolai Tangen, chief executive of the fund, is on the case. Not only has it just voted against the pay packet proposed for Intel’s executives, but it voted against the remuneration proposal at Apple in March, having voted done the same at IBM, General Electric, and Harley Davidson earlier this year.

In an interview published in this weekend’s Financial Times, Mr Tangen explains that it has remuneration proposals that are not justified by performance, are opaque or not long-term in its sights. “We are in an inflationary environment, where we are seeing many companies with pretty mediocre performance coming out with pretty big pay packages. We are seeing corporate greed reaching a level that we haven’t see before, and it’s becoming very costly for shareholders in terms of dilution.”

He continues by blaming shareholders for not voting their shares: “We feel to a certain extent that shareholders haven’t really done their job in this area. We are sensing a bit of a shift in sentiment among the large shareholders in the world towards more scrutiny and more requirement for alignment.” However, he argues that the fault lies primarily with the boards themselves, stating that the “main blame is clearly with the CEOs and boards.”

Blaming the CEOs may be a bit unfair, even if it suggests that they are being less than strategic and are failing to fulfil their fiduciary responsibilities given that this will probably damage the interests of the company in long term, certainly if the investment community ever gets its act together. But it does point to a failure of the board as a whole, and particularly non-executive directors.

The FT also quotes the fund’s chief governance and compliance officer who says that the fund is currently targeting US companies because this is where the problem is most egregious. This suggests that there is a particular problem in relation to governance in the US. Part of the problem may be that although the US model places, in theory, greater power in the hands of the non-executives who generally compose almost all the board other than the CEO than models elsewhere, there is a tendency towards appointing a high proportion of NEDs who are either current or former CEOs themselves. The problem is compounded further in the US in the ease, particularly in the tech sector at the IPO stage, with which corporations employ share structures that limit the voting power of external investors. In some respects, the US corporate governance is broken, but it most certainly is if other big investors fail to follow the lead of the very large investor from the very small country near the top of the world.

A charity’s purpose should inform its investment decisions

Sarah Butler-Sloss wins case for purpose informed financial investment by charities

Of course, a charity’s purpose should inform its investment decisions. But that was not the position that the Charity Commission argued in the High Court recently when Sarah Butler-Sloss, who chairs a Sainsbury Family Trust that addresses environmental causes, sought to exclude investments in companies who policies were not aligned to the Paris Agreement targets for limiting carbon emissions.[1]

The Charity Commission took the position that the purpose of a charity’s financial investment is “to yield the best financial return within the level of risk considered to be acceptable – this return can then be spent on the charity’s aims” and further provided guidance that ethical investing by charity’s should not result in “significant financial detriment” to the charity. But what if the activities of the company in which your charity is investing directly undermine the purpose of the charity itself? It is not just a matter of a financial return that reflects “dirty money” (either income or capital gain) but that the investments held by the charity increase the size of the mountain that the charity is seeking to climb in its charitable work. In this case in question, the Charity Commission’s position was that the Ashden Trust board had not properly balanced the potential financial detriment from its investment decision against the risk of conflict with its charitable purposes.

I recall just such discussions when chairing the finance committee, charged with managing the £200 million portfolio of Versus Arthritis (at that point called Arthritis Research UK). I argued that it was nonsensical for us not to direct our fund managers to avoid investing (as far as it was possible) in companies whose businesses contributed the problems that we were trying to solve. Fortuitously, the investment strategy of the Baillie Gifford funds in which we invested didn’t raise any difficult ethical issues for us, as well as allowing us to benefit from a bull market in the tech stocks that featured in it

Mr Justice Michael Green took the right decision when he decided that a charity’s trustees can exercise their discretion when managing their financial investments to reflect the charity’s purposes and not solely to maximise financial returns. In doing so, he set out useful principles that address not only the nonsense that investments that directly conflict with a charity’s purposes but also reflect in their turn the decisions that personal investors make in decisions that they make about their savings (witness the growth in the number of ethical or socially responsible investment funds available) but also consideration of the impact on donors to charities, many of whom are concerned that the charities they support invest their financial assets ethically or, at the very least not inconsistently with charities stated purposes.

[1] Sarah Butler-Sloss & Others v Charity Commission [2022] EWHC 974

This was the house that Jack built

This week’s news that GE is to demerge into separate energy, healthcare and aviation businesses follows the disposal of GE Capital Aviation Services in March that finally completed the dismantling of GE Capital, finalises the implosion of the business led by Jack Welch between 1981 and 2001.

Shares in GE jumped by more that 10% on the news, suggesting that, even at this stage in the disaggregation of the conglomerate’s activities, owners of GE stock took the view that the corporate entity sitting above the various businesses was destroying over $10 billion in value. To this measure of the destruction of value by the corporate parent of the underlying businesses should be added the $7 billion paid in fees to Wall Street investment banks since 2000, of which $2.3 billion related to M&A advice and $3.3 billion to fees related to bonds (not unconnected to the parent company’s top executives about the corporate structure).

The FT staff’s covering story commented that “investors welcomed the move, which will make it easier for them to decide which of the businesses they want to back.” We have moved a long way from the 1970s and 1980s approach to corporate strategy captured by the BCG 4 box matrix with its Stars, Dogs, Cash Cows and Problem Children and the idea that at a corporation could create value by shifting resources between the business in these quadrants. Jack Welch’s GE, aided by McKinsey, used a 9 box matrix, but the essence was the same.

The FT’s Brooke Masters has written a first class piece reflecting on the conglomerate cycle.[1] She cites the LSE’s Alexander Pepper: “It becomes the conventional wisdom conglomerates are no good and need to be broken up. Then we end up with companies that are so specialised that somebody decides that there is merit in vertical and horizontal integration. Ten years later you end up with a conglomerate”. Brooke Masters further observes that “the conglomerate’s resurgent appeal lies in the normal ambition to improve couple with a hubristic assumption that good managers can manage anything. Entering new business lines seems attractive new business lines seems attractive when competition rules prevent dominance in a single sector. Cynics note that chief executive pay and influence expands with company size.”[2]

The Escondido Framework approach to the conglomerate is to think of the corporate centre as a business in itself, distinct from the portfolio of businesses that it manages. Jack Welch’s GE was in the business of managing a portfolio of activities, allocating capital, buying and selling business according to a number of guiding principles (such as only buying or selling businesses that could demonstrate that they were number one or two – generally on the basis of market share – in their sector), and rolling out some common approaches (such as 6 Sigma quality) to management across the businesses it owns. How businesses in the portfolio created value themselves for their stakeholders and wider society was incidental. Jack Welch’s GE, the corporate centre of the corporation that bore the GE name, has long since failed to meet the test for an organisation to survive, that it should create value for those with whom it interacts above and beyond what is delivered by markets.

[1] FT 10^th November 2021

[2] A number of these features apply equally in public sector organisations, not least in the NHS where I spend much of my professional time.