The Great Debate UK

from Breakingviews:

UK governance code fails at BP and Prudential

(Republished on Oct. 19 with the following disclaimer: Neil Collins owned shares in BP when he wrote this article; he bought shares shortly before and after)

BP  and Prudential are two of Britain's biggest and most respected companies. Their lavish annual reports contain dozens of pages on how these great corporations are run. Both boast of their compliance with the code of corporate governance, which encourages proper boardroom debate to avoid bad decisions, boosts the chairman, and insists that he cannot also be the chief executive, lest one person become too powerful.

At BP, a powerful chairman in the shape of Peter Sutherland was replaced in January by Carl-Henric Svanberg, who had been chief executive of Ericsson. He has been the invisible man at BP.

In normal times, this might not matter. As the company's oil pollutes the southern coastline of the United States, it's a PR disaster. In a crisis, the chairman must be seen to be supporting his chief executive. Unfortunately, Svanberg's chief executive, Tony Hayward, is not media-friendly either.

Hayward is only starting to show that he grasps the severity of the crisis facing BP. The board seems to be further behind. It should have decided to suspend dividend payments until the Macondo incident is closed, before external pressure to do so becomes irresistible.

The failure at Prudential  is a different sort of corporate disaster. Chairman Harvey McGrath has indeed stood right beside Tijane Thiam, his chief executive, throughout the doomed attempt to buy AIA, the Asian insurer.

The Pru board is full of luminaries, some of whom may even understand life insurance company accounts. Yet they allowed an untried executive team to try to pay a high price for a business the Pru couldn't afford.

from UK News:

Pru’s Asian misadventure: a cautionary tale

By Clara Ferreira-Marques

Prudential's ill-fated Asian adventure has left the company and its management badly bruised. But it has offered at least two valuable lessons for ambitious executives tempted onto the acquisition path by post-crisis, "once-in-a-lifetime" deals.

Lesson one: It's not 2007 any more, Toto.

Lesson two: Disregard shareholders at your peril.

On the first, bold mega-deals that once impressed the market now seem to mostly unsettle both investors and regulators.

Unease at the Financial Services Authority -- and a need to tick every box -- was responsible for the unprecedented and damaging last-minute delay to Pru's offer details last month.

For that, Prudential can thank the financial crisis, but also Royal Bank of Scotland's near-fatal role in the hubristic and record takeover of ABN Amro -- despite shareholder misgivings and clear signs of an impending crisis.

Why the bulk-annuity market won’t revive

- Richard Jones is principal at Punter Southall Transaction Services. The opinions expressed are his own. -

A bulk annuity buy-out is an insurance contract which allows a defined benefit pension scheme sponsor and its trustees to absolve themselves of their responsibilities in regard of the accrued liabilities to members.

During 2005 and 2006, the buy-out market saw new mono-line insurance providers challenge the more established and diversified market players such as the Prudential and Legal and General. Despite the attractiveness of certain aspects of this insurance product, the premium required makes buy-out too expensive for many pension schemes.

Successive government statutes establishing stricter regulation, more transparent accounting disclosures and substantial movements in asset markets have made defined benefit pension schemes an increasingly unwieldy and frightening animal for companies to manage on their balance sheet. Buy-out provides a means to remove this risk: reducing the likely volatility of contributions and the exposure to longevity and investment risk.

Further benefits from a company’s perspective are that insurance companies may potentially have more efficient administration systems, and lower investment transaction costs due to large aggregate fund sizes. From the member’s perspective, the credit rating of an insurance company and the stringent oversight by the FSA may provide a better guarantee of benefit promises being met, than had they continued to be sponsored by their employer.

However, the transfer of pensions risk to an insurer is expensive. An insurance company faces the very same risks as a sponsoring employer of a pension scheme, but is encumbered by additional regulatory constraints associated with operating within an insurance regime and the obligation to make a profit. As a result the cost of purchasing annuities has historically been prohibitively expensive to most.

To generate interest in the market some of the new participants priced aggressively. Legal and General continued to compete, whereas some of the other players such as Lucida, Rothesay Life and Prudential appeared to cherry pick deals. This led to deal volumes rising to 2.9 billion pounds in 2007 and 8 billion pounds in 2008.