Corporate web: the ties that bind

A study carried out by think tank TASC has found that between 2005 and 2007, many of Ireland's biggest companies and State-owned bodies were dominated by a small number of interconnected business people, writes SUZANNE LYNCH

IRELANDS CORPORATE world was dominated by a small number of interconnected business people during the years 2005 to 2007, a trend that posed serious risks to corporate governance, a major new report has found.

Forty of Ireland’s top private companies and State-owned bodies were analysed for Mapping the Golden Circle, an 80-page study compiled by think tank TASC, launched yesterday by TASC member and journalist Fintan O’Toole.

Over three-quarters of the companies reviewed had “interlocking boards” – companies with directors who were members of two or more boards simultaneously.

A network of 39 individuals held powerful positions in 33 of the 40 organisations, according to the report. Eleven directors had 10 or more links – via multiple directorships – to other companies in the network.

These 11 were: former Anglo Irish Bank chairman Seán FitzPatrick; Smurfit Kappa chief executive Gary McGann; former Glanbia managing director Ned Sullivan; Anne Heraty, chief executive of listed recruitment business CPL; accountant and former Bank of Ireland governor Laurence Crowley; Declan McCourt, a partner and chief executive of motor distribution group OHM; former Accenture director Terry Neill; former IDA Ireland chief executive Kieran McGowan; Philip Lynch, chief executive of investment group One51 and former chief executive of IAWS, former AIB finance director Gary Kennedy and accountant and company doctor Bernard Somers.

Nine directors sat on three or more boards. Mr FitzPatrick and Mr McGowan were board members of five of the top companies, Mr McGann and Mr Somers sat on four boards, while Ms Heraty, Mr Lynch, Mr Kennedy, Mr McCourt and Mr Sullivan sat on three boards.

In addition, these directors held an average of 17 other directorships in smaller companies.

According to the report, financial institutions played a “central role” in the 33 interlocking boards.

Over half of the 39 directors held board positions in at least one of Ireland’s four largest financial institutions: Anglo Irish Bank, AIB, Bank of Ireland and Irish Life Permanent. All of the 11 most-represented board members were on the board of one of the four financial institutions.

Although no one individual director sat on the board of more than one financial institution, seven companies had different members of their boards on the boards of two or three banks or building societies. Aer Lingus and CRH had members of their boards on the boards of three financial institutions, while the Dublin Docklands Development Authority (DDDA), Dublin Airport Authority (DAA), Elan, Greencore and United Drug had members on the boards of two financial institutions.

According to the report, “this level of connection with the main financial institutions raises the legitimate question of whether there could be a conflict of loyalties created if these companies [or their suppliers/clients] came to seek major loans from the same institutions”.

The report also expressed concern about the considerable “director linkages” between listed companies and State-owned bodies. While noting that, in theory, there can be “useful interaction” between the two sectors, the report stated that the blurring of boundaries between public and private spheres can be problematic.

The report highlighted the practice under which Central Bank directors joined the boards of commercial banks once their terms of office in the Central Bank ceased, as well as instances where AIB and Bank of Ireland directors sat simultaneously on the board of the Central Bank.

The links between the DDDA and private companies is a “salient example” of how the blurring of boundaries between the public and private sectors can be “inimical to the public interest”, the report found.

In addition, the report found that State-owned bodies operated to a lower standard of reporting and provided less detail than listed companies, noting that the annual reports of most State-owned bodies provided less transparency of information than the annual reports of companies listed on the Irish Stock Exchange.

The report strongly highlighted the need for State-owned bodies to be held to a higher standard of corporate governance and called for the introduction of an independent public appointments system. It also called for the public availability of “clear, complete information on the operation of State-owned bodies”.

Directors’ remuneration was also analysed in the study, which found evidence of “excessive remuneration” for the chief executives of both State-owned and private companies.

On average, chief executive remuneration rose by more than 40 per cent between 2005 and 2007 according to the report, at a time when combined inflation ran at just over 9 per cent.

The report said that, while it cannot be assumed that individuals were directly involved in setting their own level of remuneration, many directors sat on remuneration committees.

It highlighted the fact that Mr FitzPatrick, Ms Heraty and Mr McGann were members of the remuneration committee of Anglo Irish Bank that set the payment for the chairman Mr FitzPatrick, while Mr FitzPatrick, as chairman of Anglo Irish Bank, was involved in setting the remuneration of non-executive directors, who included Ms Heraty and Mr McGann.

According to the report, the two main issues that emerge from the culture of multi-directorship, are that directors may find themselves over-extended and unable to give the necessary attention to individual businesses, while directors’ independence may also be compromised.

TASC director and co-author of the report, Paula Clancy, said the economic crisis had “rightly focused attention on how we run our businesses” and that a new statutory framework for corporate governance was required. Among the recommendations contained in the report is that new legislation relating to multiple directorships should be introduced. The limit of 25 directorships, not including subsidiaries, introduced in the Companies Act 1999 needs significant reform, it states, while reducing or eliminating the practice of cross-directorships should also be considered.

It also recommends the implementation of tighter criteria for ensuring the independence, objectivity and competence of directors, and the introduction of new rules on remuneration and loans to directors. A quota to increase the number of women sitting on boards should also be introduced.

Launching the report yesterday, O’Toole said that “the more small and intimate the society, the more crucial it is that there are regulations in place to ensure ethical, proper governance”.

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