Mar 10

Why the IMF needs to rescue the UK

Corporate governance: a Lent tale

Giving up chocolate for Lent proved impossible so I decided to do something more proactive, namely trying to be more patient. Note my realism: trying rather than being, else it would have been as impossible. I presume Prime Minister Gordon Brown is on a similar quest, following recent allegations of phones being flung amid volcanic rages.

Patience is all the more apropos, I realised, when a wise chairman told me it was one of the attributes I would need to make a success of my new career, as I cosseted prospective non-executive directors through the process of board level headhunting.

On the subject of the current and potentially future – if the polls are to be trusted – leader, I note Brown believes aid for beleaguered Greece should come through the IMF, if the eurozone can’t solve the problem.

The IMF should also come to the aid of the UK.

Virtually every intelligent person I have seen in the last months believes a sterling crisis is imminent post-election – unless there is a clear majority for either party, in which case there might be a short-lived relief rally. But this is, in any case, deemed unsustainable.

Sterling is not the euro. There is no potential saviour like Germany – however unwilling – waiting in the wings. The numbers are frightening. It is not just that the UK has a budget deficit of around 12% of GDP, even more worrying is that the forecast level of public sector debt increases faster in 2007-2014 than in any other G-20 country other than Japan.

The better than expected inflow from taxes last week was headline-grabbing. But it is a one-off that must be kept in perspective. A man on Death Row may well welcome the extra piece of chocolate cake on Sunday, but it does not change his ultimate fate.

And the actual statistic – pace the headlines – did not mean much: the drop in government revenues for 2009-2010 compared to the previous year (and with only 11 months counted) was 6.2%, instead of the forecast 7.3%. 

The cost of issuing gilts, UK treasury bonds, will go through the roof. This is classic emerging market stuff. I spent many years talking to IMF top officials in various Asian and Latin American capitals. Getting into their diaries was usually more difficult than seeing the local Prime Ministers. Their offices oozed power.

Whatever the merits of the IMF approach, it gave those embattled governments the ideal whipping boy for the very necessary but unpopular measures to cut swollen budgets. Although the IMF changed its tune during the most recent crisis, advocating spending via unsustainable debt burdens, it has recently rediscovered its orthodox roots.

An IMF programme would be extremely helpful for whichever UK party won the election. There is, of course, a precedent.

In 1976, after six months in which the pound plunged 14% and showed no signs of stopping, a Labour government asked for a standby loan from the IMF, the first time an industrial nation had done so. It was for all of £4 billion.

Even taking into account inflation, that may seem a risible amount today. After all, the Treasury borrowed £12.4 bn in February alone. But the principle remains.  Having an external enemy on whom opprobrium can be showered will make it politically more palatable for the Tories or Labour to make the needed public expenditure cuts. It would be a bold enough move to calm markets which are gearing up for a slaughter.

The perfect riposte to the current slew of reports/codes/discussion on corporate governance comes from a friend of mine who has worked in places as diverse as Iceland, Asia and Drexel Burnham Lambert in California. “You cannot legislate for good behaviour,” he said, over an overpriced Lebanese meal earlier this week.

Having being one of the speakers at a recent discussion on the subject by the Doughty Centre for Corporate Responsibility (www.doughtycentre.info), sponsored by KPMG, I entirely agreed.

The Doughty Centre’s Professor David Grayson put it well when he said that “one size does not fit all.” The problem is that the reaction to the crisis has lead to an overreaction which aims to stop future crises – an impossible task.

As part of this, we have a plethora of changing rules which mean, according to entrepreneur Luke Johnson, that companies are becoming obsessed with the theory of corporate governance while moving further away from “getting business done”. This was at a recent seminar put on by the Financial Times Non-Executive Directors’ Club, which should more accurately be called the Wannabes, considering the dearth of non-execs in the room, bar the panellists.

Sir Christopher Hogg, currently chairing the Financial Reporting Council which has just closed its consultation on a new UK Corporate Governance code, said that non-executive board directors need “character, commitment and experience.” To this, Johnson added the ability to “challenge.”

Character and challenge cannot be legislated. But a plethora of rules (even if couched as “recommendations”) on time commitments for non-executive directors, their independence and the like, can do a lot to negate those qualities.

I rather worry that impatience is a family trait, as evidenced by these words uttered by my nine-year old son last week: “Mama, why can’t they just stop the credit crunch? Just say ‘Enough!’ and it is finished.”

May I just clarify, I have never thrown a phone. But I do eat chocolate cake while cherishing my clients.


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