It's an old saying, but you really must practise what you preach. And this is especially important when you work for a regulator of any sort. Having taken up the position of deputy chairman at Quindell this month, Jim Sutcliffe stepped down from his position as chairman of the Codes and Standards Committee at the Financial Reporting Council (FRC). This came after criticism that the share options handed to him by Quindell were in breach of the UK Corporate Governance Code (the “Code”), which Sutcliffe was responsible for overseeing at the FRC.
His departure demonstrated two things: first, it’s not possible to easily reconcile occupying a non-executive role at a regulator alongside working for a publicly-listed company; second, you cannot enforce a system of governance only to undermine it shortly after by “interpreting the rules differently.”
Sutcliffe is experienced, well-connected and incredibly appreciative of how integral the Code is to maintaining good levels of governance in the UK listed market. And in his defence, the one problem with any code of governance is that it is just that: a code, a set of principles that is open to interpretation or in some cases (although not in Sutcliffe’s) exploitation. Indeed, many companies can, and do, construe the rules of governance in the UK slightly differently. Such flexibility permits firms to tailor their governance frameworks to their specific needs, albeit within the broad parameters of widely accepted best practice.
So what was the crux of the problem? The share options Sutcliffe received from Quindell will be exercisable within 12 months of his appointment. However, as a member of the company’s executive, the following rule in the Code should have applied: “[options] should not be exercisable, in less than three years.” The justification from Quindell was that exceptional times call for exceptional measures, and certainly the appointments of Sutcliffe and Richard Rose appear to have done the firm some good, with shares having risen 30 per cent on the news of their arrival.
The Code’s main principles don’t have to be complied with, and companies can – and have – explained why they have chosen not to comply with them. That’s perfectly reasonable. The success of the Code lies in its inherent flexibility and, with over 90 per cent of its main principles complied with (across the FTSE), it certainly seems to be working. But for us, the key point is that the explanations companies provide (in place of compliance) must be of a high quality and detailed.
Ultimately, Sutcliffe’s non-executive role at the FRC became incompatible with his interests at Quindell. The FRC is a well organised and important body, headed by two of the most respected individuals in the City (Stephen Haddrill and Sir Win Bischoff). The consensus seems to be that there is little problem with non-executive directors of regulators taking up another role, but they ought to be aware that any role that can be seen to undermine their position at the regulator will be severely damaging to that body. Both the individual and the regulator itself must answer this question: does this role create a perceived or real conflict of interest?
I suspect that Sutcliffe’s departure from the FRC will act as a warning that working for a regulator in a non-executive capacity, while also holding a position at a publicly-listed company, could very well damage the integrity of the regulatory environment itself.