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The reputation of Ireland Inc has taken a battering over the past couple of years. Regulation has come under the spotlight but equally important is corporate governance, writes John Walsh.

It is ground zero for Ireland Inc. The downturn exposed an economy that was massively overleveraged and over-exposed to a construction sector that was on the wrong end of a speculative bubble.

The precipitous decline in the Government tax-take prompted a wave of adverse commentary across international media outlets. Whereas Ireland was once the poster child of open market economies, the downturn quickly made way for the view that the country was nothing more than a highly leveraged play on cheap credit, which was on the verge of a debt default.

Moreover, events at domestic financial institutions, particularly Anglo Irish Bank, appeared to confirm the view that had been expressed by some international commentators that this country's light touch regulatory regime had become synonymous with an ‘anything goes' culture.

A series of austere budgets introduced over the course of 2009 Government has been largely successful in getting the international credit markets back onside. Spreads between Irish government debt and the benchmark German bund have narrowed considerably over the past twelve months - over the same time that spreads between Greek debt has widened with alacrity.

The establishment of the Central Bank Financial Services Authority of Ireland and the appointment of Patrick Honohan as Central Bank Governor and Matthew Elderfield as Chief Executive of the Financial Regulator have given heft to the Government's claim that it is addressing the regulatory shortcomings.

But experts are divided on whether corporate governance standards in this country are robust enough to match what is now accepted as best practise across other OECD jurisdictions.

Paul White, a partner at the law firm A&L Goodbody, says that corporate governance standards in Ireland have improved significantly over the past few years on the back of Government as well as EU legislation. Jerry Kelly, head of the corporate governance association of Ireland and a former IDA executive, says that analysis of corporate governance standards in Ireland often misses a crucial determinant: ethics. "Anecdotally, a lot of people are expressing concern about the image of Ireland and very often the perception becomes the reality. I would say that our ethics are the problem and consequently our behaviour. Take the example of our banks, I would say that when the report on the banking system is concluded it will show that the banks tick all the boxes when it comes to good corporate governance but where they will be found wanting is in their judgment."

The importance of having good corporate governance standards was underlined at the G20 conference in London on April 2nd 2009. There were a number of communiqués issued which were unwavering in their promise that any jurisdiction that is found to be playing hard and fast with the rules will be on the receiving end of punishing sanctions. Moreover, when multinationals are making investment decisions in the future, a country's corporate governance credentials will be well up the criteria that will determine where the investment goes.

There have been a number of high profile cases in this country over the recent past that have raised concerns about existing standards. Probably the most high profile case of all was the case for insider trading taken by fruit importer Fyffes against former DCC chief executive Jim Flavin (see box). But there have been a slew of other examples. The semi-state agency the Dublin Docklands Development Authority (DDDA) has been caught in the middle of one of the biggest property deals that have gone awry: the glass bottle site in Ringsend, Dublin 4. It was part of the Becbay consortium which stumped up €410m for the 4.3 acre site. That site now has an estimated value of €60m, which means that the State agency has been left nursing heavy losses. Anglo Irish Bank loaned money to DDDA to pay for its equity in the deal. Two directors of Anglo Irish Bank Sean FitzPatrick and Lar Bradshaw were also directors of the DDDA.

Both parties said that they excused themselves from board meetings of Anglo when the DDDA was being discussed. Neither FitzPatrick and Bradshaw broke any company law regulations. But corporate governance experts claim that conflicts of interest as blatant as cross directorships of this nature will fall foul of future legislation. Concerns over Anglo Irish Bank are not just isolated to the DDDA affair. In view of what has emerged since Sean FitzPatrick retired as chairman in December 2008, he was running the institution, which was one of the bigger PLCs listed on the Irish Stock Exchange, like his personal fiefdom. The then chairman and former chief executive of the bank had €122m in loans, which he hid from shareholders through a ‘bed and breakfast' arrangement with Irish Nationwide. Moreover, Irish Nationwide CEO Michael Fingleton appears to have run his bank with similar disregard for risk management and corporate governance and the role of independent directors.

Held to account

In a speech made at the Irish Stock Exchange on January 29th, the Tánaiste Mary Coughlan, outlined the steps the Government would introduce over the course of this year and beyond that will improve corporate governance standards in Ireland. One of the main threads of this new approach will be the introduction of the Combined Code for all banks, public companies and state-sponsored bodies. The Combined Code on Corporate Governance is mandatory for companies listed on the London and Dublin stock exchanges and includes comprehensive guidelines in areas such as the role of non-executive directors, remuneration for executives and the role of auditors.

Jerry Kelly has his reservations about the effectiveness of the Combined Code. Even though the combined code did not cover banks in the past, they were obliged to meet the thrust of its guidelines and that included the prohibition of the chief executive moving up to the position of chairman. "The way the combined code works is that you either comply or explain. In the case of Anglo its explanation for not complying was that Seanie Fitzpatrick was very important to the bank and that they needed some continuity and that David Drumm was very young." Anglo was supposed to take on an independent vice-chairman as a quid-pro-quo for allowing Fitzpatrick to move upstairs. In the event the bank failed to follow up in the agreed appointment without facing any sanctions.

The trend across most western countries over the past decade has been increased shareholder activism acting as an unofficial watchdog. The Irish Association of Investment Managers (IAIM) claimed a high profile scalp when it forced the resignation of DCC's Jim Flavin following the Supreme Court ruling in the Fyffes's case. But Jerry Kelly argues that the IAIM shows much less teeth when it comes to financial institutions. "The watchdog most people would look to is the IAIM, but the IAIM has a problem because its main members are banks or subsidiaries of banks. In that case you would look to the Financial Regulator, but the regulator up to now has been focused on ticking the boxes and meeting certain requirements, but behaviour does not come into it."

Ailbhe O'Neill, a law lecturer at Trinity College Dublin and corporate governance expert, argues that boardrooms in Ireland are a reflection of society, and consequently that presents cultural difficulties in attaining good governance standards. "The boardroom is a microcosm of society. Why do politicians never resign in this country? [these interviews were conducted before the resignation of Willie O'Dea as Minister for Defence]. The Combined Code requires the appointment of independent directors. But there is a view that there is a level of cronyism and old boys network in this country. The appointment of independent non-executive directors assumes that they are really independent and that really is the difficulty."

Paul White, a partner at the law firm A&L Goodbody, takes an opposing view to both Kelly and O'Neill. He argues that there has been a vast improvement in corporate governance standards in Ireland over the past decade. He cites the introduction of the Company Law Enforcement Act and the establishment of the Office of the Director of Corporate Enforcement as having hugely beneficial impact on corporate governance standards in this country. In 1998 before the creation of the ODCE, only 14% of Irish companies had filed up-to-date accounts with the Companies Registration Office. Now the level of compliance is over 90%. Moreover, he argues that there has been an injection of new candidates as independent non-executive directors over the past few years.

But for Kelly, it all gets back to behaviour. When there were two major corporate scandals in the US in 2002 - Enron and Worldcom - the US Senate responded by introducing  the Sarbanes-Oxley Act, a very comprehensive set of corporate governance guidelines. The Irish Government tried to implement the Directors' Compliance Statement as part of the 2003 Companies Act. Kelly argues that having codified guidelines only does not in itself lead to better standards because there will always be a reaction against what is seen as excessive regulation. "Good governance is about doing the right thing even when nobody is looking. What we need more than anything else is tone from the top. Whether that be tone coming from the Government and politicians and their attitude to regulation on one hand and state-owned institutions on the other hand. Also the tone from the top in the private sector whether that be the stock exchange, Ibec or individual companies."

Jim Flavin v Fyffes

High profile corporate governance

Jim Flavin versus Fyffes is by far the most high profile case in the albeit short history of Irish corporate governance. It certainly stoked a huge amount of interest both here and abroad. But experts are divided about its legacy. The fruit importer Fyffes took an action against DCC and former chief executive Jim Flavin, pictured below, in 2002 on the basis that Flavin, when he was a non-executive director of Fyffes, had possession of price sensitive information when he divested 2106m of shares in the fruit importer in 2000. Justice Mary Laffoy ruled in the High Court in 2005 that Flavin was not in possession of price sensitive information. In 2007 the Supreme Court overturned the High Court ruling and found that Flavin was in fact in possession of price sensitive information. That ruling cost DCC €42m in damages. By 2007 Flavin had moved from being CEO of the company to chairman. He refused to stand down and what's more he received the full backing of his board. The Irish Association of Investment Managers forced the resignation of Flavin in 2008. The ODCE applied to the High Court to appoint an inspector in 2008. In 2010, the inspector Bill Shipsey, found that Flavin had not acted in an intentionally wrongful manner and consequently had not breached company law. Jerry Kelly thinks this sets a very dangerous precedent. "I think it throws up some very interesting findings. The Supreme Court said he had price sensitive information and the Shipsey Report says that he didn't use it in a price sensitive way and had legal advice to that effect. It is almost tantamount to saying that ignorance of the law is an excuse. Shipsey puts more faith in legal advice than anything else and that sets a very bad precedent."

TCD's Ailbhe O'Neill agrees with Kelly.  "The problem with this [Shipsey report] is that it basically says that solicitors firms are going to set the standards of interpretation for insider trading - that if a solicitor says it is ok, then no action will ever be taken."

But a senior legal source says that he doesn't think it will become the signature case for corporate governance in Ireland. "I think it may well end up being seen as being borne out of its own circumstances."

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