Maxwell and the Mirror Group Newspapers plc: The report - What have we learnt?

United Kingdom

We have been warned...

The creator of Morse can relax. He is not, after all, to be challenged in the suspense stakes by the authors of last week's DTI report on Mirror Group Newspapers plc. Imagine that penultimate scene, where John Thaw reveals his thoughts and surprises even his loyal assistant with a conclusion which was there for us all to see, if only we had been clever enough… and a proper whodunnit needs an ending which involves a sight of the unmasked villain, either struggling in vain in a last ditch attempt to escape the scene or trembling and tearful, gushing with respect for the awesome detective who has uncovered what he did and why he did it. Measured against that formula, the long-awaited DTI report – bound in bright yellow, 45 pounds in money and nearly half that in weight - did not come close.

We all knew that Robert Maxwell was the main villain. We did not get that from early copies of the report, either; we had known it for years. And as for the villain's final scene? Mr Maxwell (RM, as the report refers to him) has not been with us for some time: Guy Fawkes night this year will mark the tenth anniversary of his unexplained death. Did he fall or did he jump that night from his Maxwell – sized gin palace, The Lady Ghislaine? As with so much else to do with Maxwell, this is not just a lingering question of prurient interest; money is involved, too. Granted, it has been a small part of the overall Maxwell story, but millions of pounds of insurance money have ridden on whether Robert Maxwell was the victim of an accident or took his own life.

In Robert Maxwell's absence, we had to make do last week with a sighting of his son, Kevin. Very much the second best, but his value as an understudy for his father has been enhanced by his defiance, his pride, his determination to build a business empire of his own and his apparent belief that we ought to be willing to trust him.

The inspectors who wrote the DTI report did not go unrewarded for their work, but their task was huge and not without its frustrations. They are anxious to retain the role of critic and not be pilloried themselves: they can only wait until line three of their report to make it plain that they were good and ready to give their recommendations and sign off as long ago as 1995. Factors beyond their control intervened to bring six years' more delay. Consider, though, the time which must have gone into designing the following words which are contained in the report's summary:

In view of the acquittals in the criminal proceedings, we decided that we would proceed in a manner that did not, and would not be seen to, call the acquittals into question. Nonetheless conduct can be blameworthy without being criminal. Furthermore, because our functions as Inspectors are essentially investigative so as to ascertain and report facts and we are not a court of law, we do not make legal determinations on any issue. Where therefore we attribute responsibility, we do so in that context and in terms of blame.

We always enjoy seeing people in public office squirm with embarrassment. Did the Inspectors sit still in their chairs as they drew this distinction between making legal determinations (to be avoided at all costs) and attributing responsibility in terms of blame (acceptable and, indeed, a major objective of the exercise)?

Enough, for now, of Kevin: whilst the report decides that he bears a heavy responsibility in respect of many of the events, the Inspectors get no points for surprising us with that conclusion. Much more interesting is where the report leaves various members of the case who played much smaller roles. What should people like them be doing differently in the wake of Robert Maxwell? This report goes far beyond dishing out blame in the case of one shabby plc; it lays down benchmarks for acceptable levels of conduct for the future. The report will not only affect those individuals and organisations who must have been dreading seeing their names in print, but every company director, banker accountant and lawyer… We have been warned.

The smuggest commentators now belong to that huge category of us who did not actually meet Robert Maxwell, but knew people who did. We know enough to delight in his deserved posthumous downfall, but do not bear the burden of wondering whether we could or should have done anything at the time to question was what going on. But we, too, are drawn are into the picture by this report. How are we going to be affected by it?

Much has been said and written about what non-executive directors should do to perform their roles properly. The image persists, though, of a wise head who will lend his or her name to a company and attend the odd board meeting – cum-lunch for an annual fee which is far too low or far too high depending on whether or not active thought is really involved. The non-executive director has been seen as the company's conscience, but a reactive conscience.

This report ratchets-up the expectation of the non-executive director and consigns firmly to the past any idea that a non-executive directorship is a sinecure. Maybe it is obvious stuff, but changes will be needed to implement this benchmark for the approved way of doing things.

Where non-executive directors are appointed to use their skill, experience and independent judgment in the board's control over the management of a company, they must be expected to do exactly that. Far more than being a reactive conscience, they must make positive enquiries; they must not rely on the executive directors to bring matters to their attention. The presence of a "dominant character" such as Robert Maxwell should be seen by these non-executive appointees not as a block to their efforts but as a signal calling them into action.

There is guidance in the report, too, on the subject of financial controls. This was, of course, highly relevant in the case of MGN, with Robert Maxwell having sole unlimited signing powers and the board having no control over him. The report makes it clear that the non-executive directors should have found out how MGN was being run and, as part of that exercise, they should have enquired about what financial controls existed.

Following the flotation of MGN, Robert Maxwell continued to conduct the business of the company in an inappropriate manner, despite the representations which had been made in the run-up to listing. The report criticises the directors for allowing Robert Maxwell to conduct a board meeting without giving them time to read board papers which were only placed before them when the meeting started. According to the Inspectors, the non-executive directors should have stood up to Maxwell and insisted that proper disciplines were applied: …their presence on the board was used to convey the impression that MGN was a properly run listed company subject to the control of the board and not RM, whereas this was not the case….

There must be company directors out there, men and women who never had any connection with Robert Maxwell, who have gone along with receiving board papers at the last minute because to insist upon re-scheduling the meeting would have seemed starchy and unhelpful. Those directors should now know that they were looking at the world from the wrong angle: it is now clear that a director has constantly to bear in mind why he was appointed and to take very seriously his obligation to fulfil that role.

Even companies without the high ambitions of MGN cannot function without calling upon outside advisors from time to time. Last week's report offers us guidance on this subject which, again, comes as no surprise, but it is expressed so starkly that we really must now do something about it. The guidance is not about pure technical competence, but about objectivity, communication, coordination and taking responsibility.

Samuel Montagu were the sponsors for MGN's flotation. They had a considerable amount of direct personal knowledge of Robert Maxwell, gained over many years, and their approach to the MGN flotation was based upon their trust for him. Their view of a sponsor's role was that the sponsor should draw attention to deficiencies – such as the need for a separate treasury and separate secretarial arrangements and the need for change to the composition of the board, including the appointment of non-executive directors and an audit committee, the education of the board and the provisions for related party transactions. They considered that, having pointed out these shortcomings and obtained assurances that they would be addressed, it was not their responsibility to check what action was then taken. The Inspectors' conclusions are of value not just in assessing Samuel Montagu's performance in this case, but in guiding how others might operate in the future:

It was not merely that their judgment of RM was wrong, but they failed even to take into account the obvious need for a high degree of circumspection and care… their entire approach to the flotation was fundamentally flawed…

It is the duty of a sponsor to satisfy himself that a company is suitable for listing. Self evidently…MGN was not… Samuel Montagu… did not take proper steps to see that what they had recommended had been implemented or achieved its intended purpose. They had specified the form but had not given attention to the actuality through the implementation and efficacy of the fundamental changes they had recommended.

The Inspectors have concluded that the accountants involved in MGN's audit and flotation were provided with misleading information, but that they could still have done a better job themselves. They should have been more active in making enquiries. The Inspectors also point out that the accountants might have been able to make a better assessment of the overall finances of the Maxwell "private side" companies and to report properly about Maxwell's Common Investment Fund and pension schemes if they had had an overview of those different elements. The accountants gave the Inspectors a list of reasons to justify their failure to obtain a co-ordinated understanding of what turned out to be closely linked activities. They pointed out, for example, that a partner with an overview was neither required nor desirable under audit procedures and, indeed, that audit procedures were specifically directed against such an approach. The Inspectors are unconvinced. They note that the accountants had an overview partner in the past and that they had done themselves a disservice by failing to continue with such a role:

…by failing to appoint a successor… [they] were not putting themselves in the best position to see what RM was doing.

The accountants also receive criticism on another front, which should make all professional advisors pause for thought. The Inspectors conclude that the two relevant partners were aware of Robert Maxwell's involvement in pensions matters and that they should have considered the pension issues themselves far more thoroughly. To ensure their point is understood, the Inspectors go on to say that the partners should not have relied so heavily upon their assistants, who had much less experience than they had themselves, and that the fault lay with the partners and not those in their team.

Along with the accountants, the lawyers, too, come in for criticism. Again, this is not on the basis that they took a positive role in a scheme to defraud anyone, but that they could have done better at uncovering the misdemeanours of others. The Inspectors note that the lawyers failed to uncover defects in information they were given about the MGN board. More assertive questioning and an increased reluctance to accept what we are told at face value will no doubt become the order of the day.

From the moment these Inspectors were appointed, it was guaranteed that they would quote their predecessors who wrote the reports of 1971 and 1973. In those reports on Pergamon Press Ltd, Robert Maxwell was, of course, severely criticised as being … not… a person who can be relied on to exercise proper stewardship of a publicly quoted company. Everyone who subsequently dealt with Robert Maxwell must have had those words hanging over them, but whilst some no doubt lost sleep as a result, the modern city had no clear guidance for how to cope in such a situation. (I leave out of the reckoning here the older-established branch of the Square Mile which, depending on your slant, had too much integrity to deal with Robert Maxwell or was sufficiently sure of income from elsewhere that it did not have to stoop to dealing with his brand of entrepreneur). This report helps. It brings in an interesting test. It refers to Robert Maxwell's branding by the Pergamon Inspectors and goes on to say that the MGN Inspectors have seen no objective evidence on which anyone should have been justified in acting towards RM and his companies without a higher degree of circumspection and care…

Who else is there out there who calls for this treatment, and in respect of whom should we be gathering, and recording, objective evidence so that we can justify treating them like responsible company directors? Where does this leave Kevin Maxwell?

And how, too, do we deal with the single sentence which sets out the report's central message:

The most important lesson to be learnt is that high ethical and professional standards must always be put before commercial advantage

We might not know exactly what to do about it, but we have been warned.

For further information, please contact Dunan Aldred by e-mail at duncan.aldred@cms-cmck.com or by telephone on +44 (0)20 7367 2709.