Whistleblowers must be heard

SET a thief to catch a thief. Sir Richard Sykes, former boss of Glaxo-SmithKline, didn't put it exactly like that in his report last week into restoring trust in UK financial services, but that was the gist.

Sykes and a 20-strong team of worthies brought together by the business think-tank Tomorrow's Company spent almost two years contemplating the state of the financial services sector and how it can be improved.

Few could disagree that in the aftermath of endowment mis-selling, pension mis-selling, precipice bonds and the split capital trust debacle, there is substantial room for improvement.

Some practitioners may have been chastened by the recent bear market in shares. And with the Government's gun at their heads, investment firms have become considerably better at engaging with companies in an attempt to fulfil their role as owners of corporate Britain, rather than as punters out to make a quick turn.

Still, though, there is a chasm of confidence to be bridged before private investors will be attracted back into the stock market or tempted to buy many of the financial products on offer.

The Sykes study - billed as a report to end all reports - argues that there has been a 'near-fatal erosion of trust' in the industry. It says it can be corrected only if the financial services sector establishes a system of self-regulation and practitioners sign up to a 'Hippocratic Oath' pledging to act in customers' best interests.

Underpinning this is a compulsion for anyone in the sector who spots dodgy dealing to blow the whistle. A forum of professionals would, presumably, mete out appropriate punishment.

Industry insiders are best placed to see when something is beginning to go wrong or to spot deficiencies in products being marketed. It beggars belief that no one noticed the potential flaws in precipice bonds, for example.

But as allegations of collusion between split capital trust companies suggest, participants in the sector may not regard it as in their best interests to blow the whistle.

While the industry remains driven by upfront commissions and the notion of a sale at any price, there is every incentive to flog dubious products to people who may not recognise a worthless investment until years later.

The majority of those working in the financial sector are honest citizens who want to do the best by their customers.

They are only too aware that unless the industry rekindles faith in potential customers, their business faces terminal decline.

Consumers can only hope they have the self-interest and mettle to resist the deep-seated conflicts of their trade and chuck out the rotten apples.

Workers' shares poser

HELPING employees to become shareholders is supposed to be the hallmark of a forward thinking company. It encourages staff to align their interests with the performance of the organisation, should help reduce workplace problems such as absenteeism and give a cosy feeling all round that employees are building a nest-egg.

There are, though, downsides that have become all too clear. The recent fall in the stock market meant employees who had been told that working ever harder should lead to an improving share price suddenly found it resulted in no such thing. Outside influences were stronger.

For companies such as Marks & Spencer or Cadbury Schweppes, which made a policy of encouraging employee share ownership, this resulted in significant management challenges.

Not only did bosses have to placate big City investors, they also had to confront staff demoralised by the drubbing their company has taken in the eyes of external shareholders and depressed at the knock to their own wealth.

But there are other problems in dealing with employee shareholders, as Sainsbury's is finding out. The beleaguered supermarkets group is seeking investors' approval for a cash return following the $2.5bn sale of its US business, Shaw's, coupled with a share consolidation.

At its simplest, Sainsbury's plans to pay 35p per existing share and will then shrink the number of shares issued, so investors end up with seven shares for every eight they now hold.

Helping the 68,000 shareholders among its 140,000 staff to understand the issues is causing a tremendous communications problem for management, not least because employees may view their bosses with a degree of scepticism as the staff Christmas bonus was recently axed, while discredited chairman Sir Peter Davis enjoyed another shares windfall.

The issues for employees are complex. And, though I believe that Sainsbury's - like M&S which recently faced similar problems - is trying to do the best for its staff, next week we will publish a Midas special explaining the ramifications of capital returns and share consolidations for all small investors in the supermarkets group.