Corporate governance and Due diligence

(By Richard Holway) As each year, month, week, day goes by, the more I feel that there is something quite rotten at the heart of our corporate society.

Ten years ago I thought there was something rotten at the heart of Misys. I thought their corporate governance, which allowed Kevin Lomax to be both Chairman and CEO and stay on way past his ‘sell by date’, to be wrong. I thought that the presence of Cadbury (who had produced the first major report on corporate governance) on the board was therefore two faced. Lomax was also on the board of M&S were similar corporate governance issues arose.

Lomax did eventually get his come-uppance. By common consent, Mike Lawrie has done a good job turning Misys around post-Lomax. Then a few weeks ago it was announced that (I quote from the FT) “Sir James Crosby, one of the most respected names in the City, is to become its non-executive chairman”. This is the same Sir James Crosby who was CEO of HBOS until 2006 and must bear a large part of the responsibility for the awful mess created there. On top of that there are growing accusations that he not only ignored warnings of excessive risk taking, but fired the whistle-blower.

All this leads on to Due diligence. I’ve been involved in quite a lot of Due diligence in the last 20 years – as, I am sure, have many HotViews readers. I’ve also been involved in aborting quite a few transactions because of what I’ve learned from Due diligence. My teams have always been told that “We will be prepared to walk away”.

I’ve banked with Lloyds since I was 18 and have been a shareholder for much of my life. Having gloried in my Boring Awards to Sage and Capita, if banks were eligible I could have awarded one to Lloyds. Boring really was – and most particularly is still - GOOD! Then along comes HBOS and Eric Daniels succumbs to the ‘this is my chance to become the biggest bank in the UK’ – pretty similar to the power drug that affected Fred Goodwin when he saw the chance of acquiring ABN. Raw ambition overtook common business sense. Not to have done sufficient Due diligence on a transaction of this size and risk is…well, personally I think it is criminal. Criminal because I (and 3m other small shareholders) are the victims – the victims have lost real money (like 80% of the value of my Lloyds shareholding) as a direct result of Daniel's misplaced ‘ambition’.

I’m also a shareholder of Misys where the person who caused the problems at HBOS which caused the problems at Lloyds is about to take over as Chairman.

As each year, month, week, day goes by, the more I feel that there is something quite rotten at the heart of our corporate society.