corporate 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.

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.

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

How Boards Work – Really?

Dambisa Moyo has written a book that fails to deliver on a great title: “How boards work and how they can work better in a chaotic world”[1]. Her own website describes her as “a pre-eminent thinker, who influences key decision-makers in strategic investment and public policy…respected for her unique perspectives, her balance of contrarian thinking with measured judgment, and her ability to turn economic insight into investible ideas”. Her book is not the place to test the final claim. However, the bold title of this book suggests that it might provide some evidence for the other claims but there is precious little.

Despite having served on the boards of SABMiller, Barclays Bank, Barrick Gold, Seagate Technology, 3M, Chevron, and a couple of charity boards, her account of board operation is pedestrian and, possibly because she is reluctant to bite the hand that feeds her, is merely descriptive but without providing either light and shade or texture. It is frustrating that with a CV that suggests that she might actually be quite smart, her account of corporate governance is pitched at the level of a US college freshman, without any discussion of alternative models of board structure and board purpose (not even of the Anglo Saxon model on the other side of the Atlantic with its unitary model including substantial executive presence and the statutory obligation to consider all stakeholders under Section 176 of the UK Companies Act).

For someone who bills herself as a contrarian with unique perspectives, the changes in society that she suggests are evidence of a “cultural revolution” entering the boardroom have been mainstream for a generation (once again, little recognition of the progress made in increasing the representation of women in the board room or the degree to which changes in wider society have entered into boardroom debate – notwithstanding the survival of some dinosaurs and dinosaur attitudes). Her account might have been a cultural revolution had she been writing in the time when Young Pioneers were waving copies of the Little Red Book, but she does not appear to be on the bleeding edge of change in the third decade of the 21st century. Likewise, as increasing numbers of corporate leaders are signing up to environmental responsibility and addressing climate change and the Business Roundtable’s Statement on the Purpose of a Corporation has been around for eighteen months, her prescriptions, though sound, are hardly earthbreaking.

One of the corporate leaders who has provided an endorsement on the dustcover describes this as “not only a must-read for the most tenured and experienced board member, but it also provides critical context for those who one day hope to have a seat at the table. CEOs and corporate leaders everywhere would also be wise to pick up this book.” I can only assume that this individual didn’t read the book herself – probably quite a sound move had she not chosen to perjure herself by writing such a ringing recommendation.

[1] Moyo D. (2021) How Boards Work London: The Bridge Street Press

Lessons from Emmanuel Faber’s departure from Danone

On 26^th June 2020 99% of the shareholders in Danone voted for it to become an enterprise à mission, or purpose driven company, required not only to generate profit for its shareholders, but do so in a way that it says will benefit its customers’ health and the planet.

Less than nine months later, Emmanuel Faber, Danone’s chief executive and the architect of the new strategy, was ejected by the board in the face of pressure from activist investors. The FT leader writer observed on 18^th March that “a backlash against purpose-driven capitalism was overdue” and that the debacle was “a reminder that distractions from the core goal of making a profit can be dangerous” before concluding that it did “not …. signal that leaders should rein in their ambition to go further and reassert the role of companies in society” and that to “revert now to simplistic and damaging pursuit of crude share-price maximisation would be a mistake.”

The ejection of Faber was not an illustration of the primacy of Friedmanite shareholder value, but an example of a chief executive failure to manage the investor market interface. We don’t know precisely what the activist investors were thinking, but they were clearly dissatisfied with the returns they were expecting and believed that their investment returns would be increased with a different chief executive.

Under Faber’s successor, the activist investors hope that the value of their investment (in terms of capital growth and dividend returns) will increase as a result of improved internal operational performance and a changed strategy towards the customers at its other market interfaces – including suppliers, employees, consumers, owners of real estate and local communities, regulators, and government (recalling the appetite of the French government to view large domestic consumer businesses as strategic national assets when threatened by acquisition by overseas multinationals). The choices of the different types of customer will include some consideration of ESG: consumers with an eye to environmental consideration (packaging, use of sustainable resources; employees preferring to work for companies whose conduct they can take pride in; investors wanting to see good governance. The rhetoric employed by the activist investment customers may reflect discontent with financial returns, but implicitly they are concerned with how the Danone’s mission is translated into strategy and the possibility that Faber’s rhetoric around purpose conceals a lack of grip on operational performance.

The Danone debacle generated further commentary on whether this apparent backlash represented a retreat from “purposeful capitalism”. John Plender wrote a powerful article for the FT on 4^th April reflecting both on the Danone story and on the lessons from the Covid about the impact on stakeholders (particularly suppliers) who were unable to diversify their risk (unlike investors) when a business hit rocks as the pandemic closed down parts of the economy. He shared the view, which we addressed during the debate in 2017 on corporate governance reform in the UK, that appointing employee directors (or by implication directors representing any other specific stakeholder group) does not address the governance gaps. He went on to argue for changes to the incentive models for senior managers to address short-termism and that profit or share value metrics determining them should be supplemented by ESG related metrics. In short, “stakeholder capitalism must find ways to hold management to account” and that “the prevailing commitment to short-termist shareholder value has undermined corporate resilience.”

Hakan Jankensgard, Associate Professor of Corporate Finance at Lund University responded to Plender in a letter published by the FT on 7^th April with an assertion that the firms should adopt the Hippocratic oath since this “would ensure that firms act as good corporate citizens”, with focus on long term profitability and “not become do-gooders picking sides in social debates”. It is probably a reflection of the challenge of drafting a letter of appropriate length for publication, but some steps in his logic seems to missing. However, other parts of his letter are compelling, echo arguments within the Escondido Framework view on how firms work and pitfalls in contemporary corporate governance, and are worth producing in full:

“As far as everyone is concerned, shareholders are the root cause of all the troubles afflicting our societies.

“Well, think again. The real problem today is managerial capitalism – that managers run firms primarily to increase their own wealth and prestige. A few decades back, managers were busy building wasteful empires, and the shareholder model arrived as a particular remedy for this gross inefficiency.

“Another innovation that arrive about the same time prove more fateful. It was the idea that managers, if given the right financial incentives, would rediscover their entrepreneurial spirt. It caught on, to say the least. What it really did, however, was to shift managers’ focus from building empires to extracting wealth through compensation packages.

“As manager took n their new role, they found willing accomplices in a cabal of short-term oriented investors looking for a quick return. This unfortunate marriage is the problem at the heart of today’s economy as it creates short-termism that adds to long-term risk.”

Lockdown reading: Piketty’s Capitalism and Ideology

The Year of Revolution - a clash of ideology Chartists meet on Kennington Common in 1848 — Chartists meet on Kennington Common in 1848 – the year of the Communist Manifesto and “All things bright and beautiful”

I went into the first Covid-19 lockdown in March with three doorstep sized volumes to keep me going.

The 912 pages of Hilary Mantel’s Mirror and the Light were riveting, even if I knew from the outset that Thomas Cromwell’s career would come to an abrupt end at Tower Hill in 1540. The 1088 pages of David Abulafia’s magisterial The Boundless Sea kept me entertained as it opened my eyes, chapter by chapter, to the way that different parts of the world became progressively connected by maritime exploration, communication and trade.

I had started turning the 1041 pages of Thomas Piketty’s Capital and Ideology before restrictions started to be lifted in May but, despite finding some stimulating ideas in his opening account of the different sources of power of different parts of premodern society (which he describes as ternary or trifunctional, and have echoes in the Escondido Framework’s account of the three currencies or sanctions), it was not until the re-imposition of lockdown (the UK government’s Tier 4 restrictions) that I finally completed it.

I admire much of what Piketty has done in Capital and Ideology. His effort to document the movements in the shares of income and wealth between different groups in different societies throughout human history, and particularly the past century or so, is admirable and revealing. It is possible to challenge some of his assumptions and definitions, but the picture he paints of the direction of the trends in material inequality are compelling. I agree with his spin on Rawls’s maximin principle: “To the extent that income and wealth inequalities are the result of different aspirations and distinct life choices or permit improvement in the standards of living and expansion of the opportunities available to the disadvantaged, they may be considered just.” (p.968). His chapters on the increasing support of the “Brahmin” classes educated to degree level for parties of the left and the corresponding “Nativist” alignment of parties of the traditional right and “left-behind” communities are persuasive. But the book is far longer than it needs to be, many of its graphs add little, and he strays from the professorial scholarship of the economist/social scientist-turned-historian into an undergraduate level of prescription.

Piketty’s underlying thesis is that “no human society can live without an ideology can live without an ideology to make sense of its inequalities.” I didn’t need to read 1041 pages to recognise this: growing up in a churchgoing family, I remember singing the third verse of “All Things Bright and Beautiful”

The rich man in his castle,
The poor man at his gate,
God made them, high and lowly,
And ordered their estate.

These days, it is generally omitted!

It may or not be a coincidence that Mrs Cecil F Alexander wrote these words in 1848, the “Year of Revolutions”, in which Marx and Engels also wrote The Communist Manifesto. Piketty chooses to reformulate the opening words of its first chapter “The history of all hitherto existing society is the history of class struggles” as “The history of all hitherto existing society is the history of the struggle of ideologies and the quest for justice.”

There is something in Piketty’s thesis about the relationship between the ideas that prevail at any point in time and the organisation of society and its impact on the distribution of wealth and income. It may be that I started out as a historian whereas has come to history by way of economics, but I find that he oversimplifies to sustain his argument. Ideas ebb and flow and they can influence behaviours, but this is not the same thing as saying that they determine behaviours. He falls into the trap of assuming that the behaviours that are generally ascribed to “capitalism” are the product of the past few centuries.

He frequently quotes Karl Polanyi with approval, who was even more blinkered in this respect, regarding capitalism as an entirely modern phenomenon. Peter Acton has undermined Moses Finlay’s thesis that the ancient economy was shaped by considerations of status and civic ideology rather than rational economic considerations, demonstrating in Poiesis: Manufacturing in Classical Athens demonstrates that the commercial decisions of Athenians “were for the most part…consistent with today’s understanding of good (rational, profit-maximising) business practice[1]. It does not require a 21^st century reading of the biblical parable of the talents to see that the notion of investing for a return was established by the time the Christian gospels were written. And Abulafia’s The Boundless Sea, contains plenty of evidence for the commercial underpinning of the development of maritime trade over many centuries. One of the primary shortcomings in Polanyi’s approach was that set very specific conditions around anything that he would define as a market and, by framing his argument in this way, created a platform for his dismissal of the longstanding heritage of commercial activity. It is as though Polanyi, and to a lesser extent Piketty, seek to dismiss market mechanisms and their place in human societies on the basis that, prior to Adam Smith and his successor, the conditions assumed in classical economics had neither been articulated nor did they prevail.

Essentially, it is not that Piketty is wrong, but his case is overstated and needs reframing. It is not that ideology determines the form of economic organisation, but it helps shape relationship between the parties. In Escondido Framework terms, the prevailing ideological frameworks will influence the attitudes and trade-offs made by parties in their relationships with each other at market interfaces. For example, a religious ordained prohibition on usury does not undermine the human behavioural drivers for gratification today over gratification tomorrow and discounting for risk (although these can be culturally influenced), but historically has resulted in work-arounds (eg Islamic finance) or lending being undertaken by a community less constrained by the prohibition. Certain activities, as in caste based societies, may be undertaken by tightly defined social groups, with implications for the commercial terms on which these activities take place. But this is not the preserve of caste societies: while the boundaries may be less clearly defined and not religiously ordained, even in contemporary society there is an intergenerational stickiness in occupations and values, traditions and attitudes acquired in childhood shape occupational choices and behaviours.

So, two cheers for Picketty for the underlying thesis. And, in due recognition of his own disclaimer in his concluding chapters, he has set out to provoke further debate and provide the foundation for further scholarship rather than provide the definitive answer

However, where I find Capital and Ideology most flawed in when Piketty moves from diagnosis to prescription. In particular, his leap from describing to the increasing inequality in economic outcome for the richest few percent compared to the poorer mass of the population to concluding that all would be solved by appointing worker representatives to corporate boards highlights the danger of straying too far from your own area of expertise.

The inequality that Piketty documents arises from the endowments that we start out with in life (geography, genetics, family wealth, upbringing, education) and our life choices and chances (too many possibilities to enumerate). These will shape whether we end up with investable wealth (the impact of this on equality is thoroughly documented in his earlier work: Capital in the 21^st Century) and whether we end up in positions in which we have market power and are able to extract economic rent, which has arisen most egregiously in recent years for executive directors of large companies as a result of shortcomings in corporate governance. Addressing inequality arising from our endowments needs primarily to be by “levelling up” in terms of investment in education and social support, particularly in early years, and widening opportunities, but in relation to inherited wealth is a proper area for taxation. Addressing inequality arising from investable wealth is also clearly an issue for taxation and also needs international solutions, but is a complex matter not least because of the risk of creating perverse incentives and unintended outcomes. Taxation has its place in addressing inequalities in income, but as with addressing issues surrounding taxation of wealth and wealth transfer, is also fraught with difficulty. Piketty raises these issues quite correctly.

But addressing inequality arising from market power and the ability to extract economic rent is a proper matter for better corporate governance and regulation to address market failure. Piketty fails to recognise the role of market failure and consequently the need to address this, and also the problem of the increasing ability of corporate management (and some of the services that support them), to extract economic rent (ironically, at least in part, at the expense of the owners of investible wealth), and that this is purpose behind the need for reform of corporate governance. His own prescription, worker representation on boards, is not the solution for reasons that I have argued elsewhere. Rather, and this comes back to his underlying thesis around ideology, there is a need to widen the understanding about the proper purpose of the company (the core of the Escondido Framework), and an improved understanding of the role of boards in serving them.

[1] Acton P (2014) Poiesis: Manufacturing in Classical Athens. New York: Oxford University Press

So, auditors can say “boo to a goose”

With their decision to resign as auditors to Boohoo after seven years, PwC’s partners have at last shown that they are willing to say boo to a goose. Ditto those at Deloitte, who quit as auditors to EG, the petrol station operator that has agreed to relieve Walmart of Asda (albeit with a big slug of vendor finance). And their colleagues at Grant Thornton who, prompted by a probe by the Belgian tax authority, decided that they had had enough of dealing with Mike Ashley at Fraser Group (better known as Sports Direct). And those at EY, who quit from auditing Finablr in May over weaknesses in corporate governance and links to troubled NMC Health.

This is welcome news, given that the Financial Reporting Council observed in November last year in its annual “Developments in Audit” publication:

“Audits are not consistently reaching the necessary, high standards required to provide confidence in financial reporting.

“A series of high-profile corporate failures has dented trust in the profession and highlighted the need for improvement……

“Our 2018/19 AQR inspections show auditors still struggle to challenge management sufficiently.”

The final point is nothing new. I worked alongside one of the big firms in the early 1990s, undertaking a review of branch level financial controls (which were not as good as they should have been) in the largest chain in a quoted retail group. I recall attending a meeting alongside the audit partner with the chief executive, a “strong personality”, and observed him forcefully objecting to proposals for qualifying the accounts. I understand his reasons for doing so, and have in the past made a similar argument to an auditor to persuaded them that my organisation passed the “going concern” test. However, the shocking aspect of this case was observing the chief executive drawing the commercial value of the advisory business attention of his company to the audit firm to the attention of the audit partner, that the subsequent audit opinion was not qualified, and that the company collapsed within six months.

Kate Burgess, writing in the FT today, suggests that the decision by PwC is a calculated commercial decision rather than motivated by principle. She suggests that as the revelations about Boohoo’s employment practices emerged the reputational risk from being its auditor exceeded the value of the £389,000 annual fee income. This may be harsh, but few in the audit profession can forget what the relationship to Enron (although it may have amounted to more than guilt by association) did to Arthur Anderson, and noting that EY’s partners must remain anxious about potential impact on the company of its involvement with Wirecard.

Irrespective of the motivation, the decision of audit firms to step back from working with clients who do not have adequate controls and who may well operate unethically can only be welcomed. And even if progress can seem glacially slow, the action of regulators in trying raise standards must be welcomed too.

Advice from someone with “the heart of a luvvie and the mind of a suit”

John Tusa is an eminent former broadcaster, managing director of the BBC World Service, and managing director of the Barbican Centre. He is a veteran of a variety of boards of cultural organisations and proud of being described as possessing “the heart of a luvvie and the mind of a suit”. He has written an account of his experience of governance that should be on the reading list of everyone either occupying or contemplating appointment to a board. His experience may be drawn from not-for-profit organisations in arts, broadcasting and education, but it is as applicable to boards in the private and public sectors as it is to the third sector. As he remarks in the introduction to “On Board”[1]:

“It is sometimes assumed that boards in the business world are totally different from those in the not-for-profit sector. This is far less true than might first appear. Both kinds of board choose their chair and chief executive, both decide how they appoint colleagues, how they sell to or serve their public, their customers or their audiences; both are responsible for brand, communication and reputation; both supervise the internal health of the organization. Of course, one deals with profit, the other does not. But while ‘not for profits’ are not businesses, they must be ‘business-like in the way s they manage their resources.”

While Tusa does not have direct experience of private sector boards himself, he has sat on boards with plenty of people with this experience, notably Kenneth Dayton, founder of the Target retail chain in the US and Tusa’s chair at American Public Radio, who pointed out to him that “governance in the not-for-profit sector is absolutely identical to governance in the for-profit sector”, besides which that it can also be a lot more complex.

Tusa builds his account of governance around his experience on the boards of the National Portrait Gallery[2], American Public Radio, English National Opera[3], the British Musuem, English National Opera, Wigmore Hall, the University of the Arts London and the Clore Leadership Programme, each of which merit a chapter reflecting interviews with fellow board members, executives and other stakeholders. Tantalisingly, he also alludes to other experiences, such as his time as President of Wolfson College, Cambridge, but without the same detail. Most of these organisations faced major challenges during his time with them, some potentially threatening to their existence. His accounts of how the boards weathered their storms and his candour about the mistakes made along the way are pulled together with a short section ending each chapter drawing out his reflections on what he learned from each experience and provide a rich seam of learning not only for people joining boards for the first time but also for those with many board appointments already on the CV.

This book should be read for the lessons Tusa draws out at the end of each chapter. Board members would do well to reflect on each, and whether they are applicable to their organisations. But “On Board” can also be read for more: it provides anyone who has observed the ups and downs of some of Britain’s leading cultural institutions of what went on around the board room table. As someone with strong ties to the Isle of Portland, I was suitably scandalised by the failure twenty years ago to use Portland Stone for the Great Court development at the British Museum. Tusa’s first career was as journalist and tells a good story, about this debacle and much more besides, as well providing a required text for chairs, directors and trustees.

[1] John Tusa, On Board (London: Bloomsbury 2020)

[2] His chair at NPG was Owen Chadwick, from whom I took my first lessons in chairing. Chadwick was Regius Professor of History at Cambridge University and a masterful chair of the faculty Joint Academic Committee, on which I sat as first year undergraduate (along with Diane Abbott, whose approach to faculty politics was considerably more radical than than the one she adopted later in her career as a leading member of the Labour Party in the House of Commons).

[3] I have a small gripe. John Tusa, having studied history at Cambridge, should know better than to suggest (in the context of ENO which, despite a catalogue of errors made by the board in the 1990s, managed to survive, an achievement that he observes “should not be underestimated”) that it was the French politician Talleyrand who said of his part in the French Revolution “I survived”. Far from just surviving, Talleyrand’s extraordinary achievement was to serve just about every government in France between 1780 and 1834, from the Ancien Regime, through every stage of the Revolution, the Napoleonic Empire, the Bourbon Restoration and the Orleanist “July Monarchy”. It was not Talleyrand, but Emmanuel-Joseph Sieyès, usually known as the abbé Sieyès, a chief political theorist of the French Revolution, who is reputed to have said in answer to a question about what he did during The Terror of 1793-94: “J’ai vécu”