Sir Christopher Gent
Chief Executive, Vodaphone
On: US/European Relations from a Governance & Globalisation point of view
8th March 2007
“Much has changed for me since those early days (when Sir Christopher first knew Lord Dykes) particularly in my business life and I hope that gives me some authority to speak on the matters tonight. I have been asked to comment on issues affecting regulation, governance, extra-territoriality, from the US and what it means for European based global businesses. I propose to incorporate these topics in my thoughts about how I see the US role in the world, which I hope will be a trigger point for discussion, particularly as you recently had the US Ambassador speaking to you.
I’m not here as a guru or sage; I’m someone who is very much interested in global business practices and involved in multinational companies who have global reach, who are critically affected by regulation, and by pure geopolitical considerations. I want to make it clear that I am a great admirer of America and Americans. I love their can-do attitude. I’m a passionate believer in socially engaged capitalism, the beneficial impacts of globalization and in the free movement of trade and capital on the worldwide basis. My views stem from my experience which develops my opinions. I’ve been visiting the US to meet with investors for 20 years.
On the whole I have found American investors more constructive with a longer term bias than those I generally encounter in Europe. I’m on the board of Lehman Brothers, the leading US investment bank, which takes me to New York 9 or 10 times a year and plugs me in to what’s happening in the New York markets and their view of life. My principle business activity, having moved on from being Chief Executive of one European based, global company, Vodafone, to being a non-executive chairman of another, GlaxoSmithKline. GSL has 50% of its turnover and 60% of its profits arising from US markets and operates in over 140 countries worldwide. We have two headquarters, Brentford and Philadelphia. There is another down in Raleigh, NC who considers themselves to be the third headquarters. I’m also a board member of Ferrari which is a very exciting Italian business, a special advisor to Bain, and I’ve sinned badly so I’m also on the Financial Reporting Council, which is my one regulatory activity. I hope these credentials allow me to express a view and particularly some concerns about America’s current position in world politics, economics, trade, and business.
According to the Pew survey of international opinion, of which I believe Madeline Albright is the custodian, the US stands at its lowest ever ratings in terms of international regard. While many in the US see their country as a champion of the free world and anti-colonialism, as the last remaining superpower, many outside of the States feel that it acts without regard for world opinion. America is seen to be pursuing its own interests against weaker states using its economic and military strength in a purely self interested way.
Let me say that I fundamentally disagree with this view. But there is no denying, I’m afraid, that it is widely held by political leaders and voters in countries that used to be firm allies of the US, as well as those in the developing world who are concerned with American conduct which many see as detrimental to their national interests. Sadly America’s stance on other issues tends to reinforce this view, be it on Kyoto, on the issues concerning sustainability and the environment, where the US refused to sign the accords. No matter how well they justify it to themselves, it is seen as destructive and irresponsible.
At the World Trade round in Doha, the failure of these talks has largely, and in my view rightly, been attributed to both the EU, very much influenced by France, and the US for denying access to world markets for the developing world.
US protectionism is increasingly isolating it from free movement of trade and capital, which is ironic because this has been hitherto the basis, the foundation of much of its success. It is after all the place where there are more multinational, global companies than anywhere else. Another example of the protectionist thinking is the entirely misguided, but successful, attempt to block the Dubai bid for P&O, or at least the bit that incorporated the New York Ports. Now while this has been going on, the US has been seen as increasingly aggressive in its extraterritorial reach on its legislation enacted primarily to supervise companies in the US, but being implemented on any foreign issuer listed on the New York Stock Exchanges. That applies to GSK and to Vodafone. Now, this applies not only to Sarbanes-Oxley and its provisions, but also to the Foreign Corrupt Practices Act, bankruptcy provisions and in other areas of business such as extradition. Here provisions set up to deal with terrorism are far more frequently being used on alleged white collar crime.
All these policies and regulatory developments seem mean spirited, insular, and so out of character for those like me, who are deeply appreciative of what the United States did in carrying the huge burden against totalitarian in defeating both communism and Nazism and now in the fight against Islamic Terrorism. We must also not underestimate the importance of the US support for science, innovation, creativity and how American excellence in these areas has both benefited and inspired countries and communities across the world. Corporate governance failures, typified by what happened with Enron, WorldCom, and Tyco have of course resulted in the increased regulatory and risk control program that is Sarbanes-Oxley.
I believe the measures are an over reaction to regulatory failure. I still wonder (what would be the outcome) if I was to pose some of the fundamental questions, which are addressed by the principle-based European approach to audit and control procedures. In the US there is still no requirement to verify that reports and accounts are a true and fair record; nor does the board consider, in the audit process, whether the company has sufficient financial resources to be a going concern. Now this excessive regulation is beginning to have an impact on the New York markets and its leadership of world companies. A few interesting ‘stats’: last year, the London market had a better than 26% share of global IPOs and New York was just over 6%. If we go back to 2001, before Sarbanes-Oxley, London had a share of less that 9%, New York had 60%, that is how much it has changed. When it comes to mergers and acquisitions, while you might think the scale and business activity of the world’s most liquid market should put the US well ahead, in point of fact it retained its leadership by a very small margin with announced deals worth $1.5 trillion compared to $1.4 trillion in Europe. That is partly a function of time zones but, on foreign exchange dealings, the average daily volumes in London are $1 trillion, nearly double the US figure of $570 billion.
London is enjoying a much faster rate of growth: 40% compared to New York’s 30%. In derivatives, New York now has a 56% share of the $52 billion global market. London is the benchmark for metal transaction and the dealing pits of London dominate the world. This commodities position and foreign exchange advantage is leading to very rapid growth of the hedge fund industry and though this is an area where the US was effectively 20 years ahead of us in Europe, and although they are still much larger with $70 billion of assets managed, Europe is catching up with $325 billion under management and we are producing a significantly better return, nearly double the US rate at 16%.
This growing strength in London and Europe is having an impact on US markets and in particular on US regulators. The SEC is worried about European firms de-listing from US exchanges. Hank Paulson, a former chief executive at Goldman’s, now US Treasury Secretary, knows from first hand experience the negative impact Sarbanes-Oxley is having on the US stock exchanges. London, very sensibly, has been actively advertising itself as “SOX free,” which in part explains why it’s gaining business and market share in the US. Paulson’s team of experts has recommended the relaxation of some of the Sarbanes-Oxley requirements as well as easing the ability of foreign firms to delist in the hope that giving them an easier exit route. More firms will be encouraged to list in New York in the first place.
New York’s Mayor Bloomberg is also worried. He recently started a study group which commissioned a report from McKinsie which reported back in January as to why London is powering ahead at the expense of New York. They identified three separate issues. They said of course, that this would be a trend anyway as Asia and Europe’s less mature capital markets are developing, but the US decline went beyond that natural evolution. The three factors were the skill of the work force, the legal environment, and finally what they called the regulatory bounds.
In both legal and regulatory terms, London is clearly seen to be much more attractive than New York, while, on skills, London is catching up. It is sucking in talent from Europe and the US. Paulson and Bloomberg are both influential and capable people. Their recommendations of modifying the legal and regulatory environment will have some impact at the margin – if they are implemented. I contend, however, that unless the US both re-engages constructively with the rest of the world and moves towards a principle-based light touch regulation then the current trends of negative opinion and the threat of a long term decline in American leadership of global capitalism will continue.
Now I am delighted to see Europe and Asia continue to rise in prosperity and take their fair share of the wealth creation that globalization and capital markets can deliver. It is a matter of regret for me, however, to see the US lose its way as it seemingly has over the last few years. If this trend continues it will be to everyone’s detriment. America’s outstanding record in trade and support for innovation and enterprise has served as a benchmark and inspiration for us all. I for one do not wish to see the US retreat from the very beneficial role it’s played in the development of the world economy. I think these are matters that should concern us all and I would be very interested to hear your views.”
Lord Dykes: “Thank you very much Sir Christopher for that very comprehensive and also succinct presentation. Now is your opportunity, ladies and gentlemen, to put your questions and comments.”
Robert Side, EAG member, Skills Knowledge Online Education: “I would like to ask about the relationship between Britain and the United States within the next 18 months under the watch of George Bush and probably Gordon Brown. The idea here is that the Iraq situation is obviously going to deteriorate, and a lot of us believe that it will deteriorate furiously out of control and that civil war will ensue and that the conflagration in the Middle East is therefore certainly a possibility involving Saudia Arabia, Iran, Syria, Turkey and so on. This would lead to the collapse of oil prices or the increase of oil prices and an economic disaster. How do you foresee if such a scenario occurs, the relationship between Brown and Bush? How are we going to cope with this situation together?”
Sir Christopher Gent: “Heaven only knows. I think it is possible that this scenario might develop. I don’t believe that Brown is as much in the pocket of Bush (as Mr Blair) and he probably doesn’t see value in being seen to be so because he’d be looking at the administration after Bush. He is going to have to play a careful game of distancing himself to a degree because he’s also looking at the next election. My view is that we are very unlikely to have a snap election because I don’t think the Labour party has the financial resources to fight one. Therefore we are looking probably at close to 2010, a full electoral term. Given those circumstances, what he does not want to do is have his reputation be blighted to the same degree as Blair has been by his inability to influence the American administration in a constructive way. So I think there will be more distance between us and them. I think it will happen anyway, regardless of how the scenario develops. I see that as being the most likely development, because Blair’s political capital has been largely destroyed by Iraq and as a result I think Brown will say “I don’t want to go there.” I assume this will be difficult but of course he will be managing a relationship with a relatively speaking a lame duck President and he’ll be looking at relations with whoever comes next. Democrats, I think might be quite fertile, but even the leading Republican candidates would like to keep their distance from the Bush legacy. The game will move on and I heard someone say that the American Ambassador said last time that Bush said he is looking at the “long term view” of how history will judge him; that may not be any kinder than the short term view.”
Charles Cavenagh Mainwaring, E-AG Member: “On light regulation, I personally think it is very bad, as I am a victim of the Lloyd’s fiasco. We now have substantial evidence about for instance false prospectuses and a breach of the European money directives. The European Parliament has set up separate investigations, so I (wonder if you would elaborate why you may be) in favour of light regulation, contrasting it with ‘the heavy handed’ type, when there clearly has been a necessity of moving away from too much light regulation?”
Sir Christopher Gent: “I am absolutely in favour of the light regulation, but it has to be based on fundamental principles. That is the approach that we have in practice now in the UK.
I am not qualified however to speak about Lloyd’s but I am qualified to talk about how the American rules based system works against the UK and the rules based systems. You still had Tyco Enron and WorldCom because they do not ask the fundamental question: is this a government concern? So the board doesn’t assess whether the company has the financial resources to sustain its business activity. So in Enron, they did not ask what are the off balance sheet commitments and it is those that fundamentally undermined Enron’s strength. You are obliged to answer these questions in the UK or the continent. You have got to be satisfied that the auditors, your own internal financial controllers, do both the on- as well as the off-balance issues. Light regulatory touch is fundamental to why this is a more attractive marketplace for companies to operate. But it has to be policed. The FSA has to do its job. I sit on the FRC and we deal with people who transgress – and people do transgress – but we should not overcomplicate it; I think rules have missed the point. You can get a tick in the box that a rule required you to get, but it still doesn’t ask the fundamental questions. You have a fairly bitter personal experience but I am not qualified to comment why the process failed. Clearly, investor confidence is fundamental, whether it be in the insurance market or the equities or the debt market. For global capitalism to work better there has to be transparency, there has to be openness, and there has to be better communication. I am in favour of all of this and I feel that we have made progress in these areas.”
Ronald Freeman, Executive committee of the Atlantic Council, Washington DC: “I was in Washington for the annual meeting of the Atlantic Council with senior lawmakers and business leaders. I think they would have been amazed to hear your speech – and enlightened. I would like to, on behalf of the Atlantic Council, invite you to speak to the Atlantic Council next time you are in the United States about the issues that you spoke about here tonight in London.”
Sir Christopher Gent: “Thank you. In my 15 or 16 trips each year to the United States I would be very happy to. I seriously would be.”
M. Guy Saint-Jacques, Deputy High Commissioner of Canada: “I am from Canada, another partner of the UK on the other side of the Ocean. I would be interested in your views on two issues. The first one is social corporate responsibility, and the second one is climate change, as seen from a business point of view.”
Sir Christopher Gent: “I believe its absolutely fundamental for businesses (to engage with communities). You’ve got to have the confidence of the customers and those in the communities that you serve. I’m even clearer in that now at GSK than in my days with Vodafone. I believed it strongly then as well. It doesn’t matter what company you are in, the beneficiaries of business activities are the pension funds, the customers, the shareholders. You are right in that, but you also need to look at your wider responsibilities. I’ll give you an example. At GSK we have HIV medicines which control HIV to a very large extent. Back in the late 90s, Glaxo was involved in suing the South African government. The South African government wanted to deliver those medicines at generic prices because they couldn’t afford it. Happily, J.P. Garnier, who after the merger became our Chief Executive, said ‘This is nonsense. Let’s deliver the drugs at not-for-profit prices in the markets that can’t afford them, and that has transformed our relationship from one of antagonism into one of significance. That’s very good example of exactly what you have to do in this business if you want a constructive reaction to globalisation. You’ve got to serve. That is relatively what I have been saying. Part of the European Model is not as well understood in the States. But then again in the States they have much more flattery than we do here. It’s a strange, different way that they’ve developed comparatively – I’m not criticizing one or the other; they’re just different. I do believe business has to be engaged in the communities it serves and in ways other than just authority and services later on.
On climate change: Sustainability has to be taken on board by the whole of the community. I’m actually a little bit sceptical for now. I actually believe the most important impact on climate is what the sun is doing. But Mankind has its own responsibilities. I don’t think it’s right to wait for the sun to stop activity and let it die down, and then we’ll be alright! I think we have to actually take responsibility ourselves. This is very much a government responsibility – leadership in government, setting targets, and achievement is what we need to do. This is a shared responsibility and this means leadership. I was disappointed with a contribution somebody made in the discussion (just before this) in the House of Commons about Kyoto ‘Well, there were unrealistic times and that is why the US did not sign up to it.’ That is part of the reason. They should have signed up and then said let’s get our own list of times. The other reason for not signing was that they said the provisions didn’t apply to China and India. Well, they don’t even have electricity. It’s a different world than London, Europe, or the States. I think it was a cop out. I do believe that it’s a critical issue. All of us here have a responsibility. I spend much of my time planting trees and so forth. I try and reduce the amount of fossil fuel that I use. I have to tell you, living in the countryside as I do, you have to drive to get from one place to another. So you’ve got to utilise intelligence, to have this debate now. It is a responsibility, and you have to act.”
Chair: “Thank you very much Sir Christopher.
Sir Christopher Gent is in the topmost league of businessmen and entrepreneurs that this country has produced in recent times. He became Chairman of GlaxoSmithKline plc (GSK) in 2005. Sir Christopher is the former Chief Executive Officer of Vodafone Group Plc. He was also Chairman of the Supervisory Board of Mannesmann AG; a non-executive director of China Mobile (Hong Kong) Limited; and on the Board of Verizon Wireless. Sir Christopher joined Vodafone as Managing Director of Vodafone Limited in 1985 when the mobile phone service was first launched, and held that position until 1996. Sir Christopher was also Director of Network Services at ICL. He was Managing Director of Baric, a computer services company owned jointly by Barclays and ICL, and responsible for ICL’s computer bureau services worldwide. He was a Chairman of the Young Conservatives. He was Vice President of the Computer Services Association Council. He is a non-executive director of Lehman Brothers Holdings Inc; a non-executive director of Ferrari spa; a member of The Financial Reporting Council Limited; a Senior Adviser at Bain & Co; and a member of the Advisory Board of Reform.”
