Authors of the Business Risk Management Handbook, Linda Spedding and Adam Rose identify key corporate power risks.
The following corporate power issues were identified and evaluated using Safety and Environmental Risk Management (SERM) rating methodology and are illustrated with case studies to highlight some of the current international research.
The research found that unrestrained corporate power risk is 0.5% of market value to be put at risk (the average net risk for the top 500 US and EU-listed companies).
The areas in which companies need to improve, in order to effectively manage power risk are as follows:
(a) A statement of company and directors’ duties.
(b) Improved transparency and accountability, with improvements to the quality, timeliness and accessibility of information available for shareholders and others.
(c) More effective machinery for enabling and encouraging shareholders to exercise effective and responsible control.
This research found that, while risk has been reduced from 0.6% of market value, the management of these issues is sub-standard compared to other risk categories.
MARKET MANIPULATION
Examples of this low quality of risk management are flagged up in cases of allegations of market manipulation of monopolistic power.
The European Union (EU) imposed a €497m ($613m) penalty on Microsoft for the alleged abuse of its Windows monopoly. This is the highest ever EU fine, eclipsing the €462m imposed against Hoffman-La Roche in 2001.
British Airways’ shares weakened 0.5% to £323.5 following the news the airline had been asked for information from the EU and the US Department of Justice "relating to alleged cartel activity" involving a number of airlines and cargo operators (Financial Times 29 March 2006).
Mobile network operator Vodafone saw its share value drop 4% to 1,191.2p after the news that the European Commission (EC) planned to cut "excessive" charges levied on roving calls made from abroad, with estimates that new regulation would cost between £750m and £1bn in turnover (Financial Times 29 March 2006).
GOVERNMENT IMPACT
Government regulation can impact upon share prices through structuring of market forces.
UK sugar and sweetener producer Tate & Lyle saw its shares fall 1.1% on 21 June 2005 ahead of EC proposals for sugar price reforms (Financial Times 22 June 2005).
Shares in Moody’s Corporation fell 3% after it emerged that New York attorney-general Eliot Spitzer pressed for information on how Moody conducts its reviews of re-insurers (Financial Times 30 July 2005).
UK retailer WM Morrison’s shares fell 0.8% to 163.5p over fears the Office of Fair Trading was considering a probe into the UK groceries market (Financial Times 1 November 2005).
Shares for UK directory services company Yell Group fell 9.8% to 422 3.4p on 5 April 2005 after the Office of Fair Trading announced its interest in the lack of competition within the classified directories sector and referred the matter to the Competition Commission (Financial Times 6 April 2005).
LOBBY GROUPS AND POLITICAL DONATIONS
Political associations can also draw attention.
British Telecom was noted as a member of the European Social Forum, which lobbies for further liberalisation of services through the renegotiation of the General Agreement on Trade in Services (GATS) Treaty within the WTO. This agreement has been criticised for increasing the power of corporations to challenge the efforts of national governments to regulate environmentally damaging industries and to protect welfare provision.
GlaxoSmithKline plc was listed on the Boycott Bush website as one of the top 30 donors to the US Republican Party. This is mainly due to the freedoms afforded to staff to contribute to political companies through work collections.
CORPORATE GOVERNANCE
Corporate governance risk issues were highlighted again during the 2004 voting season in light of failures such as Ahold, Enron, Worldcom and Vivendi. There is an increased activism among financial investors to ensure companies are adhering to the Higgs guidelines and the Combined Code of practice. There is growing belief that trustees are not doing their fiduciary duty unless they engage in issues like accountancy compliance, remuneration, golden parachutes etc.
The shareholder revolts over pay issues, like GlaxoSmithKline’s AGM in 2003, or the ABI’s ‘red top’ warnings on companies like WPP plc’s pay plans are also examples of this. As is Reckitt Benckiser, with concerns over its excessive director remuneration as its CEO received a £5.1m pay deal and payment of 1.5 times his annual salary if he were fired.
The regulatory regime is set to strengthen globally. Even in the otherwise red tape- free US there are moves to further extend the Sarbanes-Oxley Act. The requirements were initially expected to only affect public companies, but nowadays non-profits and private companies now have to familiarise themselves with the regulations.
The following corporate governance information has been reviewed in research.
(a) Whether the role of the chairman and chief executive is split.
(b) How long the chairman, chief executive and financial director had been in place and where they had been recruited.
(c) The executive remuneration package.
(d) The composition and background of the board.
(e) Information about mergers and acquisitions.
(f) Strategy development and implementation.
(g) The use of complex financial engineering techniques.
With awareness and guidance, CEOs and business leaders will be able to navigate the damage posed by corporate power risks.
Abridged excerpt printed with permission from Elsevier/CIMAPublishing. Business Risk Management Handbook by Linda Spedding and Adam Rose is available now to order from http://books.elsevier.com/accounting.
