The ultimate test: can you sack the boss?

THE analogies between Royal & SunAlliance and Abbey National are irresistible. In the case of Abbey, chief executive Ian Harley had to admit that the company was in a far worse state than its investors had believed. He stayed in his post for a while - largely because there was no obvious replacement.

A few weeks later, still without a successor in sight, Harley went anyway. The company was forced to devise a sticking-plaster solution, with chairman Lord Burns shouldering the chief executive's role while a replacement is sought.

Now look at RSA. Again, investors have been disappointed. Again, the share price has fallen - by more than a fifth on a single day last week when the insurer said it was axing jobs, finding itself short of capital and considering a rights issue. And again, the chief executive - in this case the clean-cut American Bob Mendelsohn - is under intense pressure to quit.

Intriguingly, the analogy continues with RSA's lack of an obvious candidate to replace the chief executive if he does indeed go. As with Abbey, RSA is perceived to lack the depth of management skills to allow a neat, internal solution to the simple question now being asked by many of its investors - who do we really want running this company?

Of course, at times of crisis, it is always chief executives who take the flak. Quite right, too - they have principal responsibility for running the show, and if the show is going badly, then they should be held to account.

But there is a much wider - and arguably much more important - point about corporate governance to be made here. Yes, the chief executive should carry the can when things go wrong. But non-executives bear the responsibility if the company then finds itself with a wounded leader struggling to command the respect of shareholders and without an obvious candidate to take over.

Burns was no doubt a fine Treasury mandarin. But something must be seriously wrong if he finds himself compelled to take day-to-day charge of a High Street bank - albeit temporarily - because he has had to edge out his chief executive and has no one else to slot into the job.

Similarly, Sir Patrick Gillam, chairman at Royal & SunAlliance, must shoulder some responsibility. The company has reached the position where the chief executive is enfeebled by his lack of respect from shareholders. But it is hard to see that the departure of that chief executive, would, in the short term, make matters significantly better.

There is the obvious point that non-executives should, in any case, always challenge what executive directors want to do with their shareholders' money. Executives should be forced to justify their plans. An argumentative boardroom is a healthy boardroom: dispute is not the same as discord. Take an obvious example of where the ties between executives and non-execs were too cosy - Marconi. And look what happened there.

But on top of that, non-executives should have the breadth of perspective to ask the uncomfortable 'what if?' questions. Specifically, they should be asking what if we lost our chief executive? There is a duty to ensure that management teams have talent, training and experience in sufficient depth to ensure that sacking the person at the top would not cause too awful a hiatus.

Put brutally, non-executives should always make sure they can sack the person in charge.

Where next for the Footsie?

STEVE Russell, head of investment strategy at HSBC in London, last week published a splendid piece of research looking at the implications of the recent decline in share prices. He concludes that the recent falls in global equity markets have driven the UK market down to a level where old-fashioned value investors (my phrase, not his) are at last being offered something to get their teeth into. He reckons the FTSE 100 should be nudging 5,000 by the year-end, an increase of nearly 16% on current levels.

The emergence of some genuinely tempting value plays has been caused by the recent decline - over only the past three months or so. And that in turn has been caused by the wholesale, indiscriminate selling of equities. The value of sound companies has been dragged down with those of flakier ones.

Russell rightly points out that 'the latest market collapse has been driven not by panic selling over fears of global terrorism, but by a loss of faith in equities in general'.

For the first time since the Seventies, equities have failed to show a positive return over a five-year period. That alone has been enough to dent or even destroy people's belief that, in the medium term, equities will show the best returns.

But now is exactly the time when there are real bargains to be had. It's an old point, but one worth repeating - picking individual stocks is the real key to investment success.