ANALYSIS:In calling for the most senior figure in a major Irish listed company to leave his position, the move by the IAIM is without precedent, writes Arthur Beesley Senior Business Correspondent.

AFTER MANY months of silence, the investment community has rejected the contention of DCC's board that Jim Flavin can stay on as executive chairman in spite of a decisive Supreme Court ruling that he engaged in illegal insider trading when selling his company's Fyffes shares in 2000.

Flavin insisted on Monday that he would not be standing down before his scheduled retirement in July 2010. To stress the point, the DCC board issued a lengthy statement on Tuesday in which his fellow directors outlined for a fourth time the reasons for their unswerving support.

Institutional investors passed judgment on Flavin last night when the Irish Association of Investment Managers (IAIM) published the conclusion of its review of the case. "Having regard to all of the governance issues raised by this matter, the IAIM does not consider it appropriate for Mr Flavin to continue as executive chairman of DCC," the body said.

In calling for the most senior figure in a major Irish listed company to leave his position, the move is without precedent.

Carrying as it does the imprimatur of the IAIM's entire membership, the statement can be seen as a declaration of no confidence in Flavin from the Irish financial establishment.

The IAIM represents the investment arms of each of the main banks - AIB, Bank of Ireland, Anglo Irish Bank and Irish Life Permanent - some the major insurers and pension providers such as Eagle Star, Hibernian and Standard Life, and other companies such as FC Ireland, KBC Asset Management, Oppenheim, Pioneer Investment Managers and Setanta Asset Management.

It is most unlikely that the IAIM statement would have been issued without specific approval from the top echelon of each of those institutions.

Even if investors continue to admire DCC's financial performance, senior business figures have stated in private that DCC's defiance of the Supreme Court reflects badly on Irish commerce in general and on our domestic stock market.

Still, IAIM chief executive Frank O'Dwyer said Flavin had been acknowledged as a "superb entrepreneur" and said there was no intention on behalf of the IAIM to "undermine the performance" of his company.

He declined to say when Flavin should go, but said it would not be satisfactory from IAIM's perspective that he stay until his planned retirement.

Asked about suggestions from within the investment community that DCC should move in advance of its annual general meeting in July to name a date for his departure, he said: "They are views that I have heard around as well."

He added that discretion would be required "in the context of an appropriate handover".

On whether the IAIM statement had implications for the DCC board at large or whether it was appropriate for other DCC directors to continue in their roles, O'Dwyer said the "only statement" the IAIM was making was that it was inappropriate for Flavin to remain as executive chairman.

"It is the view of the IAIM that it's inappropriate given the specific finding of the Supreme Court. There is nothing in our statement that is suggesting that the board of DCC was less rigorous than is necessary in their evaluation," he said.

"They have clearly reached a conclusion. We have felt it appropriate, because we are in disagreement with the conclusion, to make a statement today."

O'Dwyer had nothing to say about the performance of the senior independent director on DCC's board, Michael Buckley.

It was Buckley, a former chief executive of AIB, who engaged with the IAIM in the immediate aftermath of the unanimous Supreme Court ruling against Flavin, following which the entire DCC board supported the executive chairman.

So why has the IAIM taken this unusual step now? "The view of the association is that there are a series of governance matters. The net point is that the finding that there was a breach of the [Companies] Act is a hugely significant finding," O'Dwyer said.

"In this particular case, the view of the IAIM is that the breach of the Act was of itself - and the finding of the Supreme Court that the Act was breached - was a matter of such significance that it led to the conclusion which the association has published today."

O'Dwyer said the IAIM acknowledged Flavin's position, and that of his board, that there was no intentional breach of the law.

"But, just as the capacity to comment on corporate governance issues doesn't relate necessarily to having a shareholding in a particular company or not, it's bigger than just necessarily the specifics," he said.

"It is true for example that - and I wouldn't want you to draw a direct analogy - a dealer in one of my member firms who even inadvertently dealt while in possession of sensitive information would have their licence withdrawn immediately by their employer."

O'Dwyer said the IAIM had communicated its view to DCC in advance of the release of its statement. He said the IAIM body studied the DCC board statement but did not make a detailed comment on its stance or on IAIM's engagement with the company.

Referring, however, to the rulings in the case from the Supreme Court and the High Court, he said the IAIM "have never either internally and certainly not externally engaged in trying to look at individual parts" of judgments.

"We've just tried to form a composite view of what is the import of the net finding. As I say, the conclusion we've reached was the one we're publishing today," he said.

So what happens next? "The board of DCC has issued its own statement in terms of its belief that Mr Flavin is the appropriate person to be executive chairman," he said. "We are responding to that statement. I'm sure there'll be some contact between the board and IAIM subsequent to this. Of what nature I can't speculate."

Asked what would happen if DCC continued to support Flavin and he remained in his position, O'Dwyer said IAIM members would form a view as to how they will vote at the company's agm.

"The point I'm not making and am not capable of making is that the IAIM can mandate its members in terms of their specific actions, which I think is probably illegal and there would never be a suggestion of that," he said.

Still, he said that members of the association had to account for their votes to the pension funds whose money they managed.

Although some clients of IAIM members have asked them how they were dealing with the governance issues at DCC, he pointed out that IAIM controls only about 15 per cent of that company's stock.

"Ultimately, in the case of any specific companies, what a majority of shareholders wish is what will prevail. Certainly Irish institutions and IAIM members in particular do not hold significant shareholdings in terms of the total issued capital of DCC."

While the IAIM itself has taken some considerable flak for not making its views known earlier, O'Dwyer was unapologetic.

"This is a serious matter. Corporate governance is primarily driven and its interpretation is driven by the Combined Code on Corporate Governance and institutional investors have specific obligations under the code and ancillary regulations," he said.

"At all times, the IAIM has conducted its engagement on this matter in line with that code and those principles, which include a specific comment on the appropriateness of confidentiality between institution and company and the appropriate timing for any public statement, which is clearly identified as at a time approaching an agm.

"They are general principles which would apply always. In addition, there was an ongoing legal case, which was only concluded in recent weeks.

"However much commentators might have invited us to make a comment, to have done so before now, was to invite us to breach the very code of conduct were being asked to comment on."

Statement from IAIM

The governance implications arising from the litigation between DCC plc and Fyffes plc has been the subject of continuous monitoring and assessment by the Irish Association of Investment Managers (IAIM).

The litigation was finally concluded in recent weeks.

The conduct expected of Institutional Shareholders in respect of investee companies is set out in the Combined Code on Corporate Governance and in the related Statement of Principles published by the Institutional Shareholders Committee (see below). The IAIM has been conscious at all times of these obligations including the correct process for engagement with the company and guidance on the appropriateness of any public statements.

Following the conclusion of the litigation, the IAIM discussed the matter again in detail and communicated its views to the Board of DCC. The statement made by the company in recent days has also been reviewed. Having regard to all of the governance issues raised by this matter, the IAIM does not consider it appropriate for Mr Flavin to continue as executive chairman of DCC.