Corporate Governance at
Marks and Spencer

July 2009
Marks and Spencer has from time to time featured prominently in the corporate governance debate. Sir Rick Greenbury, one-time boss of M&S, led the follow up to Sir Adrian Cadbury’s ground-breaking Report in 1992 with a set of recommendations on directors’ remuneration, which later became part of the Combined Code. Sir Rick was seen by some as an interesting selection for this role in the light of his reputation as a man of overbearing manner whose complacency led Marks and Spencer into near terminal decline from which it has still not properly recovered. It was predicted that the focus on remuneration (arising particularly out of the excessively generous packages awarded in the newly privatized industries) would lead to a great inflation in directors’ pay. This in due course came to pass – Sir Fred Goodwin’s leaving package being simply the most egregious in the UK. But surprise, surprise, it was the remuneration packages of Sir Rick’s successor, Sir Stuart Rose, and his colleagues at M&S that caused the biggest stir at the AGM 15 years on from Sir Rick’s report.

Sir Stuart had already offended the guardians of the Corporate Governance Code by insisting on holding the combined roles of chairman and chief executive. As those who are familiar with our approach to good corporate governance will be aware, we have no problem with this, provided that the key stakeholders are happy that this is for their collective good. Despite the periodic complaints from purists, Sir Stuart has delivered just about enough for his shareholders for them to accept his terms for doing the job. And, most importantly, the customers are still coming and the staff don’t seem to feel that this causes them a problem.

However, the Remuneration Committee or RemCom, as it seems to be called these days, led by Lady Louise Patten, seems to be well out of line with the wishes of Marks and Spencer investors (one can only guess at the views of the staff). Lady Patten’s qualification for chairing the RemCom presumably derives from her recent record, which includes stints chairing the boards of retailer Somerfield and property company Brixton, and as a director and chair of the RemCom of Bradford & Bingley, all rather questionable as success stories. It is perhaps not surprising that there was a vocal objection from major investors to her role in recommending generous rewards against a record of underperformance by Marks and Spencer. Sir Stuart and his colleague Steven Sharp were persuaded to give up a third of their share entitlement awarded in a Long Term bonus scheme, and there was ultimately a substantial vote against Lady Patten’s re-appointment.

This apparently followed months of meetings between investors and Lady Patten, at the end of which one of M&S’s biggest investors was quoted as wondering about the dysfunctionality of the board, which he said had been a feature in recent years.

The Association of British Insurers was quoted as being particularly concerned about the pay awards given the recent decision by Marks and Spencer to cut its dividend, and uncertainty over its strategic direction. The perception is that there is still the unhappiness among the main investors which arose over Sir Stuart’s determination to combine the roles of CEO and Chairman. One suspects that if the trading performance of M&S was significantly better, the complaints would die away. As it is, the feeling appears to be “better the devil you know …..” in the absence of any obvious candidate to replace Sir Stuart. However, the succession planning is a real worry, for in the end Sir Stuart will be gone and his residual commitment will simply lie in the shares that he has accrued through the Long Term Incentive Plan – assuming the trading performance allowed him to post big enough profits for the plan to pay out.

But what of the role of the key figure in corporate governance, the Senior Independent Director, who is supposed to assure compliance with best practice, or give satisfactory explanations of lack of compliance? The Senior Independent Director and deputy chairman is Sir David Michels, who supposedly wants to take over as chairman from Sir Stuart when he retires. Sir Stuart has indicated that he will first step down as CEO next year but will stay on as chairman until a new chairman has been found. Supposedly he doesn’t favour Sir David stepping into his shoes as chairman, though he has denied this. It doesn’t sound like a closely knit team does it?

How did the two senior directors of Marks and Spencer respond to the remuneration controversy? Sir David’s response was to attack the complaining investors. He was quoted as saying that the Remuneration Committee was disappointed at this unexpected reaction from shareholders. This was despite the months of discussion and the well-known irritation of investors over the M&S board’s response to the corporate governance guidelines, and from the person who was supposed to be the guardian of the flame of corporate governance on the M&S board.

The FT said his use of the term “ unexpected” made him sound out of touch; this about the Senior Independent Director.

Sir Stuart was more mollifying, saying that he had never used the words surprised and disappointed, but that Sir David was Deputy Chairman and Senior Independent Director and entitled to have a voice. When the votes were cast at the AGM nearly 38% backed the appointment of an independent chairman within the next 12 months and there were big protest votes against Lady Patten and Sir David Michels.

Not the best example of good corporate governance in action, and from one of the UK’s leading companies. How can investors and the board have such a poor relationship and be wrangling over remuneration 15 years after a previous chairman of M&S had issued the Greenbury Report on Directors Remuneration? This 10 years after the issuing of the Combined Code and as we wait for the release of the FRC and Walker reviews of its effectiveness.

Surely time for a fresh approach, and one which brings together the owners and managers to support a common purpose! But will the Establishment just come up with more of the same?

The final word
Sir Rick Greenbury chipped in recently to attack Marks and Spencer shareholders for their vindictive attitude towards Sir Stuart. What light does that cast on the attitude of the M&S board towards its owners? And for that matter, what does it say about the attitude of the owners, still complaining after 15 years of corporate governance regulation. Willing to wound but afraid to strike, as the saying goes.

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