DCC directors cannot ignore court's ruling

Business Opinion:If DCC was a football club, Jim Flavin would most likely be clearing his desk this morning. If there is one thing football managers fear most, it's the "unanimous backing" of the board after the team has suffered a significant reverse. It's the beginning of the end.

And make no mistake about it, last week's judgment by the Supreme Court is a very significant reverse for DCC. The company and its executive chairman were found by the Supreme Court to have broken the law and been in possession of insider information when engaging very significant transactions that made the company a great deal of money.

As result of the Supreme Court decision the company now faces a bill of at least €50 million. Some estimates run to over €100 million, or getting on for the whole of last year's profits of €124 million before exceptional items.

Flavin and DCC's position is made all the more difficult by an uncontested High Court judgment to the effect that he controlled the whole process, as was clear from evidence given during the case.

In the normal way it would be surprising if the senior executive, or even executives, who had lost the company so much money in such circumstances did not resign.

Equally, the independent directors might be expected to give them a nudge should they show any inclination to hang around.

But when the individual in question is the driving force behind the company and is the largest individual shareholder with a 3.1 per cent stake, things are not that simple.

Flavin founded DCC in 1976 as a venture capital business and has grown it into a diversified group with a market capitalisation of €1.8 billion. His style is hands-on and at times is said to border on control freakery.

Nobody is indispensable, but as far as DCC goes, Jim Flavin is pretty close to it. The cold reality that faces the directors of DCC is that forcing the departure of Flavin at this stage is almost certainly going to do more damage to the company than just toughing things out.

And one suspects the companies investors, who include Bank of Ireland Asset Management, are not that keen to ditch him either.

Against that, you have a unanimous decision of the Supreme Court that he broke the law on insider trading. And the judges did not mince their words on the importance of this, particularly Justice Fennelly who said: "It used not to be considered any sort of sin to profit financially from the use of secret, private or privileged information. That was how fortunes were made. Now things are different. To trade on the use of inside information is recognised for what it is. It is a fraud on the market. The insider who exploits his access to the special knowledge he enjoys for the purposes of the company in his capacity as executive or director of a company commits a crime. He may be made, additionally, to answer for the profits he has made."

From this perspective it seems like a fairly open and shut issue, particularly in the climate of higher corporate governance standards that has prevailed since the collapse of Enron and other scandals. But the independent directors of DCC don't seem to think so.

And the board of DCC is a pretty representative cross-section of Ireland's business elite. It contains Michael Buckley and Maurice Keane, respective former chief executives of AIB and Bank of Ireland. Bernard Somers, the insolvency expert who also sits on the boards of AIB, Independent News & Media and ICG is a director, along with Paddy Gallagher, a former chairman of the Irish Association of Pension Funds.

The other two non-execs are Tony Barry, the former CRH chairman and chief executive and Róisín Brennan, the chief executive of IBI Corporate Finance.

It is by Irish standards a very strong and independent board, but to date has not bothered to explain publicly why they feel in a position to effectively disregard the implications of the Supreme Court judgment.

As best we can ascertain, they would appear to be relying on a number of issues, the main one being that Flavin was found to have committed an offence under civil rather than criminal law. A criminal prosecution would have required a higher burden of proof and crucially, Flavin would have had to be found to have actually used the insider information rather than merely be in possession of it when he dealt.

Flavin and DCC maintained they sold their shares in Fyffes because they did not think the valuation put on the company by its internet business was justified, and not because of the information he had on trading.

DCC's position seems to be that the High Court accepted this, but it should be noted Flavin's motive for dealing was not a substantive issue in the case. But if you accept this, then it's possible to see Flavin's breaking of the law as little more than a technicality.

The court would appear to view things a little more seriously and it behoves the independent directors of DCC to give a full account of why they feel able to disregard the judgment. It is open to them if they choose to hide behind the shield of ongoing legal action, but anything less than a full explanation makes a mockery of their role as guardians of the interests of ordinary shareholders and leaves them open to accusations of cronyism or worse.

[  http://www.ireland.com/focus/2007/fyffes/index.pdf ]