Utility Week expert view: Karma Ockenden

“Some companies will no doubt resent this latest ‘intrusion’ into management territory… but won’t want to be demonised, as energy firms have been.”

It was a year ago this week that Ofwat chairman Jonson Cox raised concerns about board leadership and governance in the water industry during his lecture at the Royal Academy of Engineering. He noted that while the UK Corporate Governance Code was established in most companies’ licences, “the current principles of the code are not widely observed”.
Among other things, Cox highlighted that corporate strategy and structure were sometimes reserved for investor rather than regulated business boards; that independent non-executives were not always in a majority; and that chairmen were not always independent of management or investors.
Moreover, he flagged up as issues for privately owned (unlisted) firms: “Opaque complex holding companies, the lack of clear disclosure of interests, the allegation that these companies use shareholder or other additional loans at the holdco levels purportedly to achieve tax efficiency or tax avoidance (an issue of significant public concern) and the reserving of strategic issues to these boards beyond the scrutiny of independents.”
Fast forward a year and today [7 March] is the closing date for responses to Ofwat’s latest consultations. There are two papers, one for regulated businesses and one for holding companies, which set out the minimum standards the regulator wants (see box). Respondents should not expect much movement from Ofwat’s latest position. Company responses to its September consultation on draft principles were largely rebuffed. For instance, multiple firms questioned the need for a majority of independent non-executives. But Ofwat has held firm; Cox seems as determined to “raise the veil” on board governance now as when he penned that Tele­graph article last June.
And he has very good reasons. Widespread delisting has complicated and obfuscated corporate structures and financial reporting. Corporate governance has (or at least, should have) tightened across the board in the wake of shocking failures in other markets. And legitimacy does need to be maintained among customers who rely on these companies for a vital service and pick up the tab for their activities.
Moreover, Ofwat’s own price review strategy of handing ownership of business planning for 2015-20 back to companies means it is even more important that the boards of those companies handle competing interests fairly and transparently.
However, the regulator’s interest in board governance does raise a number of interesting issues. Should directors’ duties have a moral, “right-thing-to-do” dimension or literally require compliance with the letter of the law? Is Ofwat overstepping its remit and edging into management territory?
Behind closed doors, some companies will no doubt resent this latest “intrusion” into management territory, particularly when emotive language is used in the national media and little mention is made of the fact that the government and regulator have allowed much of the industry to pass into private hands, to refinance, restructure and reward investors as they have.
But there is unlikely to be a public scrap. Ofwat says companies have said they will meet its deadlines of having codes in place by April 2014 and meeting principles by April 2015. “We welcome this as a demonstration that this sector is taking leadership so it can retain the confidence of its customers and all its stakeholders,” it says.
The last thing water companies want is to be demonised, as energy firms have been, and to lose the confidence of customers. Most will likely comply quietly with Ofwat’s principles, although we may see some arguing they comply already without ticking every new box.
Meanwhile, after this weekend we will see which firms’ governance Ofwat already approves of. Board assurance was a key requirement for PR14 business plans, so we can assume those that achieve enhanced status on Monday already have boards that fit the bill.