Rough diamond of the finance world

MILLIONS entrust their savings to faceless institutions in the City of London, putting their faith in people they have never heard of - people like David Rough.

Behind the granite walls of the mighty finance houses, Rough and others like him decide how a huge chunk of the population's savings are invested. Ultimately, his impact on our personal wealth can be enormous.

Rough, the 51-year-old son of a south London greengrocer, is an armchair rugby fan who is packing up his job because he is fed up with the long hours.

Sounds an ordinary sort of bloke, and that is how he comes across when you meet him. Yet he has been doing a far from ordinary job. For more than 10 years he has been investment director of Legal & General, one of the most powerful UK financial institutions.

Rough is identified as one of the driving forces behind the explosive growth in savings and investments managed by L&G, which now top £116bn. He has also had a profound influence on the way the City has policed itself, becoming the scourge of underperforming companies and bungling boards.

He has handed out blunt, uncompromising criticism of corporate failings at three of the best known companies in the land, Marks & Spencer, Marconi and BT. His words have been seized upon as a rallying cry by other disaffected institutions, prompting board sackings and major policy changes.

One fund manager says: 'Some boards have discovered that the days when you could pull the wool over the eyes of your major shareholders are over. Much of that is due to the way people like Rough have refused to be intimidated, and kicked up a fuss. That is usually behind closed doors but as we have seen recently, in public if they have to.'

When companies are taken to task in public, it is a sure sign that they have refused to mend their ways in private. Rough fell out publicly with BT after a disastrous slump in its share price. He says: 'I wanted them to come forward with a strategy. They had acted in a cavalier fashion in the way they were spending shareholders' money. They were just not listening.'

There was an equally public falling out with Marks & Spencer. But Rough, while critical of its performance, was disturbed by the public ridicule of chief executive Luc Vandevelde over plans to pay him a £800,000 cash bonus.

'Institutions and the media were wrong to chastise Luc on the bonus,' he says. 'The board had given him that as a signing-on fee. He joined from Carrefour and part of his package was a bonus after 12 months.

'Many people in the media, fund management and certainly footballers get a signing on fee and I thought it was honourable of him to give up his bonus. It set a bad precedent that a contract is not a contract. Now M&S shares have doubled over a year and suddenly Luc is a saint, not a sinner.'

Campaign for Railtrack compensation

ROUGH'S latest scrap is with the government over the way Railtrack was put into administration. 'I never thought there was a one in 50 chance that would happen. When the decision was taken to pay a final dividend, I thought it was a sweetener for shareholders to prepare the way for a rights issue.

'I can understand why the government was unhappy with the way Railtrack had gone. Privatisation was wrong for a business which had been underinvested for decades and was never going to achieve its ambitions. But the way the government tackled it was not the way I expected.'

Rough has led a campaign by major funds for compensation for investors. 'We will continue dialogue with interested parties whether it is the government or the company or any other potential-bidders to see what way forward there is. If there is a chink of light, we try and push on the door. But to me, there is another nine months of uncertainty ahead.'

Brought up in Mitcham, south London, Rough won a first-class chemistry degree at the new University of East Anglia - 'it is obvious you take a chemistry degree for a career in fund management!' He joined Royal Insurance and was headhunted, at the fourth attempt by L&G boss David Prosser in 1989.

Rough is handing over to Tim Breedon, 43, described as 'more cerebral' who is expected to adopt a less high-profile, less abrasive style. Breedon himself admits: 'There is only one David Rough but we are all a bit like him - a bit outspoken, a bit iconoclastic.'

Although well rewarded - he earned salary and bonuses of just over £600,000 last year - Rough is still at an age when many professionals are preparing to step up the next rung of the corporate ladder and his decision to quit caused widespread surprise.

Rough explains: 'The hours are killing and I have seen too many good colleagues die young. People think of me as Mr Corporate Governance, Mr One-Liner Rough, but 95% of my time has been spent running fund management. My team has been hugely successful.'

Indisputably, L&G has been one of the real success stories of the 1990s. Its funds have increased sevenfold to £116bn as more pension funds switched into its index-linked funds.

Rough, married with one daughter, says: 'I honestly believe you should only be in this sort of job for seven to 10 years. You need new blood. I only have one gear. When I joined it was 75mph. I am still running as fast as I can but it is at 50mph.'

When L&G began planning the next stage of its growth, Rough decided enough was enough. 'It would have involved another three to five years' commitment. It was time to call it a day.'

L&G has been the pacesetter in the phenomenal growth of indexed funds but competition is growing and margins are tighter, prompting worries that it is too dependent on this strategy.

Rough says: 'Index funds have got further to go. Long term they are at least average performers and in many cases, due to lower charges, tend to be in the top third of the performance tables, better than 70% of other funds.'

Scant regard for shareholders

BUT he thinks a typical share portfolio should be balanced to allow a 'satellite' network of active funds.

Rough has had a lasting impact on UK corporate behaviour. He admits: 'Twenty years ago management had scant if any regard for shareholders, unless they were part of the family! In the 1980s, two things happened.

'One, management thought they had better start talking to investors because they could sack the board. Then we had firms being bid for and normally they weren't the ones which had achieved much.

'As they tried to defend what they had done, you heard the great cry of short-termism which really meant - we failed to perform for the last three years but don't worry, we will do for the next three.

'Suddenly the light bulb went on in our brains that we had power and could influence management. Boards also recognised they needed to talk to their shareholders. Today we do actually have sensible dialogues.'

Rough stays with L&G as an adviser until June, allowing an orderly handover, and time to pursue his aim of taking on part-time board jobs, although not in financial services. It is difficult to know whether his independence, brashness and intolerance of underperformers will endear him to potential boards or make them wonder if they are hiring a wolf in sheep's clothing. It is clear Rough is already setting himself high standards.

He says: 'Over 10 years, the role of a non-executive director has changed radically. Shareholders expect a lot more in terms of how they perform.

'It is no longer come in once a month for 20 minutes, then go for a nice gin and tonic. It is a higher risk, higher profile role. When things go wrong, non-executives are up for as much vilification as executives.'

Report by Cliff Feltham