Telegraph Article

 

More foreigners in our boardrooms
By Philip Aldrick  (Filed: 27/10/2005)

A quarter of all directors in the FTSE 100 are now foreigners, new research shows, and the boardrooms of Britain's biggest companies are becoming increasingly international.

Seven years ago, just 184 of the 1,131 executive and non-executive directors in the UK's top 100 listed companies were from overseas - 16.3pc. In 2004, foreign board members accounted for 250 of the 1,066 positions, or 23.5pc.

Pete Hahn, a former managing director of corporate finance at Citigroup who is doing a PhD on overseas directors at Cass Business School, said: "There are fewer chairs around the boardroom table now with foreigners taking up more of them."

The dynamic is just one of the ways in which corporate ownership is moving overseas. Foreign investors hold 35pc of the shares in the FTSE 100, and 10 of the 100 blue chip companies are not British in origin.

In addition, at least 11 leading UK businesses have been taken over or received bids from foreign rivals in the past year, the latest being this week from Sweden's Ericsson for the telecoms equipment maker Marconi.

Economists and academics argue that the globalisation of corporate Britain is to be celebrated. Ernst & Young partner Simon Perry said: "If corporate Britain was xenophobic, we would cut ourselves off from a lot of capital and job creation, and to some extent the economy would grow more slowly. We'd be shooting ourselves in the foot."

Britain is also embracing globalisation. Roughly £255billion of the total 822billion of revenues made by FTSE 100 companies last year came from overseas subsidiaries, and recent World Bank figures showed one in six graduates - 1.4m in total - have left the country to work abroad.

The "brain drain" of skilled workers is one reason companies cite for employing foreign directors, but Mr. Hahn said: "The idea is that they should bring an increased knowledge of overseas capital markets and competition."

He added that their presence has had a creeping influence over UK pay, as companies are forced to match the packages directors would receive in the US, for example.

Why open-door policy is 'highly successful' for UK

(Filed: 27/10/2005)

British firms are under siege, writes Philip Aldrick, but if we rejected foreign capital 'we'd be shooting ourselves in the foot'

'Corporate Britain". Stirring words, aren't they? Rolls-Royce, BP, Barclays Bank, Marks & Spencer: great old British institutions of which the country can be proud. Surely our national champions are little British protectorates - owned and managed by the finest minds in the country? Think again. They aren't as national as might at first appear.

Overseas investors own more than a third of the 100 blue chip companies listed on the London Stock Exchange, 10 of those aren't even British, 250 of the 1,066 top flight directors are foreigners and some of our most important industries - such as energy and banking - are largely controlled by European and US companies. Multicultural Britain seems to extend to business as well.

For much of the past year, though, it has felt like corporate Britain was under siege. Spain's Santander took over the high street bank Abbey, France's Pernod Ricard gulped down drinks group Allied Domecq, China's Nanjing seized control of Rover, Switzerland's Holcim bought gravel group Aggregate Industries and Mexico's Cemex bagged cement giant RMC.

The list doesn't end there. Just this week, Marconi joined the host of once great British institutions in foreign hands after agreeing a price with Sweden's Ericsson for most of the telecom equipment maker. Bids are also on the table for plasterboard group BPB, media buyer Aegis, logistics giant Exel and even the London Stock Exchange itself.

Is this something to be worried about? Sir Callum McCarthy, chairman of the Financial Services Authority, believes not. "In the UK, as a deliberate and, I would argue, highly successful act of public policy, we have an approach more open to foreign investment in financial services than any other large EU country, and probably than any G10 country," he recently told delegates at a Harvard Law School conference.

"We now have a major retail bank in the UK owned by a Spanish parent - a European cross-border first for a major EU country," he added. That celebratory tone is not something you'd hear in Italy, where the central bank chief Antonio Fazio is under investigation over allegations of blocking a Dutch takeover of a local bank.

Or France, where yogurt was recently declared a "strategic" business by industry minister Francois Loos after Danone shares surged on rumours of a takeover by America's Pepsico.

So what makes Britain's open-door policy "highly successful"? Sir Callum's communications officer Robin Gordon-Walker explains: "The more investment we bring into the UK the better. Ownership is not the issue.

What's being brought in is investment, not to mention a huge amount of work for the likes of professional services firms - lawyers, bankers and accountants." Grey as they may seem, those money men account for an 8pc and growing portion of the UK labour market.

Inevitably, foreign ownership removes profit from the UK. But Ernst & Young partner Simon Perry says: "Profits may be taken out of the country by foreign owners but where's the logic in buying a UK business and not investing in it?

If corporate Britain was xenophobic, we would cut ourselves off from a lot of capital and job creation, and to some extent the economy would grow more slowly. We'd be shooting ourselves in the foot."

It's a point not lost on Deutsche Bank economist George Buckley, who adds: "The big advantage of a foreign firm taking over a UK firm is it increases the pool of investment funds. The inflow of investment rises."

Foreign direct investment into London alone last year totalled £38billion. To keep that up, London needs to retain its allure. Earlier this month, it was named European city of choice for the 16th consecutive year. More importantly, the gap between London and Paris, the perennial runner-up, is widening.

London's success as a financial services hub has been in a large part down to its warm embrace for all things multinational. It's a virtuous circle, with success making London even more attractive to overseas institutions.

Some 182 of the 347 authorised banks in the UK are foreign and only 83 are purely British owned. Deutsche Bank is now one of the largest players in both debt and equity in the UK market.

It's a similar story in insurance. Some 439 of the 870 general insurance companies are foreign and 105 of the 422 life insurers.

Dominance of a local industry by overseas companies is just the tip of the iceberg. More subtle has been the gradual creep of foreign ownership of Britain plc. In 1963, just 7pc of the stock market was owned by overseas investors. That's now 32pc, and 35pc in the blue chip FTSE 100 index.

Some consider it pernicious that foreigners are making key decisions on our prize national assets. In the case of Abbey, for example, publicity-shy US institution Brandes was a major power broker in Santander's £8billion takeover. At the height of Philip Green's approach for Marks & Spencer, the same investor held a 12pc stake in the high street retailer.

Others worry that a dominant US investor base could put pressure on a board to change its priorities. Miles Gietzmann, professor of corporate disclosure at Cass Business School, says: "Boards would be speaking to major US investors, who could be exerting their influence. Several US institutional investors are activists."

The benefits, though, outweigh such parochial concerns, he believes: "US money in UK companies provides liquidity for the market, which makes it easier for companies to raise funds by selling shares. If US investors start pulling out, it would have a damaging effect on share prices." US pension funds are paying for the equity-financed growth of our corporate champions.

It's not just the US. Increasingly, European institutions have been buying UK stock. In 1999, 28pc of foreign-owned UK shares were in European hands and 41pc with the North Americans. Those positions have reversed. European institutions are now the main foreign investors (see chart).

Politicians on the continent may not like the Anglo-Saxon economic model but their bankers clearly do. Foreign companies have also been tempted by the pool of equity in the UK, with 10 listed in the top tier FTSE 100. Another 512 overseas companies have dual or secondary listings on the London Stock Exchange - home to 2,500 British companies.

To be fair, the internationalisation of share ownership is not unique to the UK. But Britain has been more attractive of late than other destinations. "The allure of the UK has been the recent strength of the economy," says Mr Gietzmann.

Of course, British companies are as interested in expanding overseas as foreigners are in settling here. More than a third of FTSE 100 companies' revenues are derived from foreign operations. Take Vodafone, for example. The UK accounts for just 15pc of the mobile phone giant's turnover. Last year, the profit for all UK companies on direct investment abroad - opening new offices or buying businesses - was £48.3billion, official statistics show. A decade earlier it was just £19.2billion.

Mr Buckley says: "There is a clear advantage in diversifying your revenue generating ability. A downturn in the UK can be offset by the global economy. Global cycles are not synchronised and ownership of overseas assets smooths the income stream."

With the globalisation of business has come the multicultural boardroom. "The idea is that foreign directors should bring an increased knowledge of overseas capital markets and competition," says Pete Hahn, a former managing director of corporate finance at Citigroup who is currently doing a PhD at Cass Business School on the subject.

They may be a growing presence (Mr Hahn likes the image of there being "fewer chairs around the boardroom table now with foreigners taking more of them") but not at the rate that might be expected. "We would have expected more foreign executive directors but that hasn't increased. Instead, the number of non-executives has risen," he notes. "Why there are more international businesses but there is not more international management is a mystery."

That's not to say there hasn't been an impact from the globalisation of the board. "Remuneration has been affected by the trend," Mr Hahn says. "Put simply, the more foreigners there are, the more everyone gets paid."

Non-executive directors in the US receive share and option packages that can pay out small fortunes. British corporate governance disapproves of such practices, which makes the scale of pay here dramatically different. But, as the annual clamour about fat cats testifies, the gap is narrowing.

On balance, economists, academics and business leaders agree, a foreign presence in corporate Britain has been a boon. In fact, unlike the French, there appear to be very few "strategic" industries that require protection. Much of our energy is foreign owned. Innogy, Npower and Yorkshire Power are all RWE companies, as well as Thames Water.

Powergen was bought by another German group E.ON, which is now after Scottish Power, and both London Electricity and Seeboard Energy are owned by France's EDF. Apart from our defence and nuclear energy industries, little is untouchable. That approach may be anathema on the continent, but has served Britain well.

Key assets - such as power stations - can be seized in a state of emergency, Mr Perry points out. "In the end, the businesses stay here," he adds. "So does it really matter who nominally owns them?"

 

[IMPACT Partners] [Mission - IMPACT] [Scope of Services] [Our Approach] [Our Clients] [News & Articles] [Telegraph Article] [Contact Us] [Related Links]