COMMENT: Old habits, new hypocrisy from FBI

By Michael S. Olympios, Chief Consultant, Allied Business Consultants

 

In an unprecedented display of shareholder disregard, the board of FBI, or Frou Frou as it is widely known, refused to admit a director’s call to include in the upcoming AGM agenda a proposal to adopt the corporate governance code.

The company issued a short legal statement citing its right not to include any proposals if they are not received 40 days prior to the AGM. But these legal maneuvers are unlikely to get the company off the hook. The second largest shareholder (approximately 17%) is waging war against the autocratic board and its practices, inviting regulators and the media to scrutinize the company’s affairs.

The cavalier approach of the company is typical of family firms, usually having a dominant shareholder that pays lip service to shareholder demands for transparency and accountability. The sad scandals that have tarnished the Cyprus Stock Exchange six years ago have left an important scar. The credibility of many boards has been called into question as many of them have become symbols of greed and self-interest. And despite corporate reforms some companies and family firms in particular can’t get the simple message: that public companies are accountable to the public. It seems that old habits die hard.

Anderson and Reeb in their paper “Who Monitors the Family?” argue that large shareholders often wield substantial control and influence over firm matters, and have powerful incentives to consume firm resources since they bear only a fraction of the total cost. Faccio and Lang (2002) suggest that without vigilant oversight, large shareholders such as founding families are prone to exploit minority shareholder wealth.

FBI appears to be doing well financially but its stock price is trading at a considerable discount. That is typical of many family firms that pay lip service to good governance. In May 2006 the company was ousted from the FTSE/CySE20 which is not a good sign. The company’s chief executive is also the chairman of the board. This kind of dual role bothers governance experts. They contend directors’ objectivity can be impaired when management officials, whom oversee, report to themselves at the board. It’s like having students grading their own exams. If the company’s CEO is also the chairman of the board then it’s impossible to meet the spirit as well as the specific criteria for board independence. Any management action that is supposed to pass the scrutiny of the board is becoming a rubber stamping procedure in a board that lacks independence.

As Andrew Chambers put it “the essential difference between the board and management is the non-executive directors. Strip out non-executive directors from the board and boards become just another management forum – overlaid with the particular legal, regulatory and shareholder-driven responsibilities which boards have.” It appears that the company is desperate to avoid public scrutiny and corporate governance is not its priority. The explanations given by the company for not complying with the code is an insult to human intelligence and makes a mockery of the CSE and its corporate governance code itself. Consider the response of the company to calls for adopting the corporate governance code as they appear in its latest annual report (2006):

1. The high cost for adopting the code

2. To avoid bureaucracy, complexity and ceremonies

3. To maintain board flexibility

4. To avoid board overcrowding

5. To maintain prompt decision making

6. To maintain focus on strategy rather than procedures

7. To maintain board autonomy

8. To maintain relative “youth” in the board

9. To avoid incremental cost by adopting the code

10. To secure the expertise of board members

 

Incidentally, these explanations not only lack substance but in reality are almost exact copy of other family firms in the CSE revealing that this is a symptom of a wider problem of family firms.

La Porta, Lopez-de-Silanes, and Shleifer (1990) observe that the prevalence of continued founding-family ownership and control raises the question of who or what keeps the family from expropriating minority shareholder wealth. Even conventional corporate governance mechanisms used in mitigating manager-shareholder agency conflicts are found to be less effective in dealing with family opportunism. If the board of FBI can’t tolerate some minimum governance requirements then one can’t help question its true motives.