Calming words but arrogance rules at Glaxo

THERE'S pig-headedness. There's arrogance. And there's GlaxoSmithKline, whose insouciant disregard for the concerns of its shareholders appears to know no bounds.

With great fanfare after a humiliating defeat on executive pay at its annual meeting in May, the drugs giant announced a major consultation exercise.

Out went a couple of non-executives deemed to be lightning rods for shareholder anger because they had presided over an American-style - for which read grotesquely inflated - remuneration scheme for chief executive Jean Pierre Garnier and his finance director John Coombe.

Then the real talking was supposed to start. But shareholders lucky enough to be given the chance to whisper their two penn'orth into the ears of Glaxo's top-flight consultation team have come away more than a little disenchanted.

Yes, they are more willing to believe that the company will not put forward another flagrantly outrageous pay proposal, though in Garnier's case the stratospheric package is never likely to touch earth. But when it comes to the issue of the composition of the Glaxo board, several big investors have told me they are far from happy.

They say that they detected signals from a number of Glaxo's non-executive directors that Garnier and Coombe - the only two executives on the board - treated them and the board meetings as an irritating duty; a side issue to their real job of running the group.

Clearly it is the executive directors who are charged with running companies. But the non-executives are supposed to have an influential role - to question strategy, to challenge powerful chief executives and keep them in check, and to ensure the whole lot does not run off the rails. Non-executives can perform this function effectively only if they are given the proper information from executives.

Concern about the quality of information from the executives was heightened by the meltdown at several US companies that prefer boards with only one or two full-time players.

A little-noticed recommendation in Derek Higgs' recent report could exacerbate the problem. The former banker called for at least half the board to be made up of 'independent' non-executives.

At present, and probably for some time to come, many boardrooms have non-executives who would not qualify as independent either because they have been there too long, have some business link with the company or possibly because they are former executives.

If companies are to comply with Higgs without a rout of many existing non-executives - and don't forget this is a breed in short supply - the room for executives will be squeezed.

There could be many more companies like Glaxo, though for different reasons, that end up with few executives available to be held to account by outsiders.

What worries investors is that this will mean a restriction in the supply of information to the boardroom watchdogs looking after their interests. It will give little opportunity to gauge the dynamic of the whole executive team and limit the chance to pick up on potentially useful dissenting opinion among the wider management.

A powerful chief executive and one other close executive ally could between them easily keep potentially damaging information out of the minutes.

In what has come to be a hallmark of its manner of dealing with shareholder worries, Glaxo has declared itself perfectly happy with the make-up of its boardroom. I'm certainly not suggesting that Garnier and Coombe present anything other than the most comprehensive information to their non-executives. But shareholders would do well to challenge this board structure now, if only to encourage others.

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ON the subject of shareholder trust, what are investors supposed to make of new-style audit reports? Considering how much auditors are paid, shareholders now get precious little for the hundreds of thousands of pounds each audit can cost.

Accountants are signing off with a statement which - I paraphrase but not by much - says: Don't take my word, guv, I'm only the auditor.

They used to certify that the accounts presented a true and fair view of the state of a company's financial health. The new wording is so couched in exceptions that it is hardly worth the page of the annual report it is written on.

Fortunately for some investors, America's powerful Securities and Exchange Commission has not fallen for this nonsense. Auditors are still obliged to carry responsibility if they make a mistake.

Investors would do well to put money into companies listed in the US as well as London. At least then there might be some accountability.