Having invested in karaoke business Lucky Voice, Sir Stuart Rose has backed out after protests over independence
As reported in this month's edition of Director, Marks & Spencer has come under increasing scrutiny over corporate governance issues. In addition to criticism earlier this year in relation to Sir Stuart Rose combining the role of chairman and CEO, Sir Stuart has now become the subject of further media attention.
Having invested in Lucky Voice, a karaoke business founded by Martha Lane Fox, a non-executive director on the M&S board, Sir Stuart has been forced to bow to investor concern and agree to sell his stake. Investors' concern is that this stake could jeopardise Lane Fox's independent role on the board.
Not content with bringing quality food and underwear to our high streets, M&S now seems to be on a mission to raise the profile of the Financial Reporting Council's Combined Code on Corporate Governance.
One of the most well-known principles of the Code is the "comply or explain" obligation. This allows businesses to take decisions that they see as being right for the business (even if it contravenes accepted best practice), so long as the decision is justified and justifiable to investors. This principle is touted as one of the strengths of the UK's corporate governance regulation. The concept is not that one model fits all, but that there is one commonly accepted model that may be tailored.
It is worth noting that even under new EU regulations, the requirement to comply or explain will largely survive. From September 5, all listed EU companies will be required to provide a corporate governance statement in their annual report, or by way of reference in their annual report.
If the board decides compliance with the code is not appropriate, and investors disagree, the solution is simple. The adoption of appropriate governance is considered a business decision, and if the shareholders do not think their board is managing the business appropriately, then ultimately they can look to replace its members.
Board balance and independence are trickier issues. The Code says: "The board should determine whether the director is independent in character and judgement, and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director's judgement." The board is required to state its reasons if it determines that a director is independent, despite the existence of relationships or circumstances that suggest otherwise. The Code then goes on to provide a non-exhaustive list of concerning circumstances.
Sir Stuart and the M&S board have taken the view that Lucky Voice investment is not a bar to Lane Fox's independence.
It is extremely unlikely that the M&S board and all its advisers simply forgot about corporate governance when considering the combination of chairman and CEO, and the independence issue. They probably thought hard and concluded that their actions either did not deviate or deviated for good reason. But Sir Stuart has clearly decided that the prudent course is to dispose of his investment, rather than add fuel to a raging fire.
Richard Ufland is a partner at international law firm Lovells
Posted 2 May 2008 : Director.co.uk