» Interview
The quality of
governance
Peter Montagnon, corporate governance heavyweight and former Financial Times
journalist, speaks to David Anderson to discuss the need to go beyond corporate
governance and instead look towards retaining values in order to regain trust in business.
You took an unusual path to the
senior ranks of financial regulation
and corporate governance in the
UK, dedicating much of your
professional life to journalism.
Was there purpose in this path?
It has been an accidental path. My professional
life in journalism started with Reuters before I
went on to spend 20 years with the Financial
Times (FT). At the FT, I was fortunate enough
to hold a number of different jobs: Head of
the LEX column, then Asia Editor, writing
editorials, visiting the field and doing set
piece interviews. This background proved
instrumental. As a journalist I learned to write
and communicate; I was also able to bring
together an understanding of policymaking
and a broad knowledge of global markets.
What I needed to develop subsequently was
greater attention to precision and detail.
Your first step out of the world
of journalism was to join the
Association of British Insurers
(ABI). How did that come about?
It wasn’t until I was 50 that I decided to
do something different. An unexpected
opportunity came in the form of an advert
by the ABI for a new Head of Investment
Affairs. Insurers are major providers of capital.
A key objective of the ABI was to help build
efficient markets in which it could invest and
an important part of that was developing the
core relationship between ABI members as
investors and the companies in which they hold
stakes. It’s important for long-term sustainability
that companies are well governed – that they
make good decisions, manage risks and be
accountable to shareholders on whom they rely
when more money is needed. Before joining the
ABI, I hadn’t given a lot of thought to corporate
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24 w w w. g o v c o m p m a g . c o m
GC11 4. Features.indd 24
governance. Once there, I realised that it was
not only a question of challenge, but also,
for the ABI, of helping to resolve differences
between shareholders and companies in a way
that preserved and deepened the relationship
between the two. This was by far the most
rewarding part of the work.
Toward the end of your ABI tenure,
you chaired the board of the
International Corporate Governance
Network (ICGN). Were you able
to affect change in the quality
of corporate governance?
The work of the ICGN provides a useful
means for dialogue among global institutional
investors. Most institutional investors deploy
their capital well beyond their home countries,
so it is very much in our shared interest to
raise general awareness of the importance
of good governance. That is not to say that
all jurisdictions should think and act alike;
the business, cultural, legal and regulatory
environments differ meaningfully and we have
to respect that. Nonetheless, there are certain
basic principles and the ICGN is the recognised
investor forum for promoting them and
working for investor rights. So the ICGN had
to engage with a wide range of international
stakeholders: company directors and
executives, market regulators and the stock
Ethics is the missing link in the response
to the financial crisis.
exchanges. Its sphere of interest covered a
range of issues and initiatives, such as director
independence, executive remuneration, listing
standards and corrupt practices; but none of
this works if investors themselves don’t deliver.
That’s why stewardship has become such an
important theme.
How did your ten years of
experience at ABI on the buy side
prepare you for your next step
into the world of market regulation
and reporting at the FRC?
My time at the ABI culminated in the banking
crisis, which brought into question a lot of
things we all took for granted. It was a tough
time for investors dealing with serious issues
in both equity and bond markets. At the ABI,
members were concerned about ownership
rights of both equity and bonds, as they were
themselves owners of equity and debt in the
banks – one of the hardest hit sectors. Yet
with tensions multiplying elsewhere in the
market, such as hedge funds coming under
pressure from the regulators in Brussels, the
policy debate became very emotional and the
results often rather poorly thought through.
The Financial Reporting Council (FRC) gave me
an opportunity to focus on a critical part of the
agenda: governance and investor stewardship.
The approach to capitalism in the
UK differs in important ways from
that of continental Europe. What
did you see in the reaction to the
financial crisis in Brussels?
There was a big reaction in Brussels; a number
of policymakers viewed the financial crisis
as evidence of a failure of Anglo-Saxon
capitalism. Our approach to markets was
seen as thoroughly discredited and the
cause of considerable damage to their own
economies. The predominant view in Brussels
was that a step change was needed in the
level of regulation, and in particular that the
days of light-touch regulation were over.
10/10/2013 15:50

Did you find any merit in this view?
I agreed that the crisis was a signal that we
needed to review regulation to make it more
effective, but not necessarily to increase
it. We needed better quality regulation
and supervision, not necessarily more
regulation. The epicentre of the crisis was
the banking sector and the clear failure was
in the supervision of banks. Supervision and
regulation are not synonymous; you can’t
improve supervision by rewriting regulation.
Beyond a deficit in the state
supervision of financial institutions,
was there also a failure in their
corporate governance as provided
by the boards of directors?
Yes, the quality of governance generally needs
to improve. I agree with the proposition the
banking crisis was an egregious failure of
corporate governance, but it’s not quite fair
to say corporate governance was the cause of
GC11 4. Features.indd 25
the crisis, or that it could have been prevented
by better governance alone; that said, better
governance might have limited the damage.
The pressure for regulation arises
from the public’s distrust of business.
What alternatives to regulation do
you see?
It is true that the public perceives a system
of self-interested and self-sustaining dealings
that privileges and protects the well-off few.
By corollary, that system is stacked against the
‘common man’. In my view, regulation is not
the only answer. The banking crisis was not
only a failure of regulation, supervision and
governance; it was also a failure of values.
That’s where ethics come in. Most people
know ethics are important, but many fail to
apply them when they see disadvantage in
the short term. It’s tempting to fall back on
the concept that if it’s not illegal it’s okay. The
trouble is, especially after the banking crisis,
Ethics
this has led to a dangerous erosion of trust in
business generally.
In your work at the FRC, what
stands out for you as areas where
you made progress in improving
corporate governance?
Two initiatives are particularly worth
mentioning. One was the Stewardship Code.
Regulators had for years focused on company
boards and management teams. It was clear
that owners themselves needed to raise their
game. The FRC promoted the development
of committed investors in equities prepared
to act as owners to address problems with
companies and hold informed discussion on
strategy and risk management in addition to
the financials. Companies need the support
of a critical mass of such investors, enabling
boards and management to adopt
Ô
a business model that will develop
sustainable returns. The Stewardship
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10/10/2013 15:50
 » Interview
The quality of governance
continued from page 25
Code provides a framework for institutional
investors and companies to better understand
these obligations and responsibilities of
ownership. The second area was the debate
in the EU, which is the policy originator for
the UK and other member states, where we
had a big battle to preserve the concept of
comply-or-explain against the advancing tide
of regulation.
You’ve noted with concern that
Britain and other countries are
facing a serious problem in erosion
of public trust in business, extending
well beyond banks. What’s the
antidote to distrust?
This is serious. We must not lose sight
of the need to have a system in which
entrepreneurs can be financed and investors
can be rewarded for the risks they take and
companies can grow, generate jobs and
wealth for investors and society as a whole.
We must also recognise that several issues
have resonated with the public: corruption,
mistreatment of labour and customers, and
most prominently, executive remuneration. On
top of the banking crisis, these are causing
us to rethink what the corporation is there
for. The old idea that companies are there to
deliver short-term shareholder value is widely
discredited. While the knee jerk reaction to
the financial crisis was predictable, it hasn’t
really helped. We need to find a way to
restore trust that doesn’t involve massive
regulatory prescriptions or approaches that
stultify the entrepreneurial spirit. Ethics is the
missing link in the response to the financial
crisis. We’ve done a lot of work on regulation
26 w w w. g o v c o m p m a g . c o m
GC11 4. Features.indd 26
and governance. But ethics isn’t being
discussed, and that’s partly because it’s the
hardest issue.
Do you see a threat to the social
license of business to operate?
The regulatory mood has swung; there are
questions about the right of some companies
to do business. I think much of the distrust
we see – and the real threat to a business’s
social license – is the view that it is engaged
Regulation is not the only answer.
in fundamentally unfair or predatory
behaviour. I think it’s useful as a thought
experiment to divide banks up into those that
make money out of providing or helping to
create value for their customers and those
that extract value from their customers.
Some parts of investment banking, in the
run up to the crisis and since, have been a
significant extractor of value, bringing the
whole industry and beyond into disrepute.
The public has come to distrust the integrity
of business decision makers, believing they
are eager to extract value whenever they
can get away with it. Careful discussion
of business models is critical for boards. In
most businesses, there’s an element of both
extraction and provision of value. A good
question to start with would be ‘Where do
we stand on this spectrum?’
As public equity markets face the
headwinds of regulation, compliance
and scrutiny, are you concerned that
some companies may delist
and others contemplating
public ownership may
remain private?
Yes, I’m worried about the long-term
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trend of shrinking public equity markets. A
robust public equity market offers long-term
capital par excellence; it is the bedrock of
everything as capital in perpetuity and a place
where savers can invest and make a good
return. Of course, not every shareholder will
behave the same way. Indeed, it’s helpful
to have different kinds of investors for the
benefit each offers the market; traders bring
liquidity, activists move the agenda forward
and long-term owners provide stability.
Will corporate governance remain
central to the next stage in your
career, and if so, what will you
make your priority?
Capitalism is still the best approach we have
got, but the banking crisis shows that we need
to make it work better. We need to go beyond
regulation and think carefully about what
companies are there for. We can’t lose sight
of the paramount requirement on them to be
entrepreneurial so that they can contribute to
our economic development. Everything is in
flux: the role of companies, time horizons for
investment, the duties and rights of capital
providers and the position of values. In some
areas there is a disconcerting tendency to
what I call mob-rule. We need a measured
and rational debate, so that we can build a
viable consensus for the future in which trust is
restored, companies can be entrepreneurial and
the rights of those who provide their capital
are respected. I’m lucky that my new role at
the Institute of Business Ethics in the UK will
allow me to contribute, as well as my positions
on the board of the Hawkamah Institute in the
Middle East and as a member of the corporate
governance advisory board, established by the
Norwegian Sovereign Wealth Fund. „
» About the authors
Peter Montagnon is
currently Director of
Investment Affairs at the
Association of British
Insurers and Associate
Director at the Institute
of Business Ethics.
David Anderson is the
president of The Anderson
Governance Group, based
in London and Toronto. He
can be reached at david.
anderson@taggra.com.
11/10/2013 10:51