Smaller companies pay the price for decades of boardroom excess

A favourite joke of Sir Ken Morrison was to ask the difference between a supermarket trolley and a non-executive director. His answer, “You can get more wine into a non-executive director.”

Big public companies earned their reputation for offering sinecure, with boardrooms of a previous era notorious for employing claret-swilling types who approached directorships as a lucrative form of semi-retirement. Complaints about being held to account for actions taken by the board are therefore unlikely to elicit much sympathy.

Yet the burden is now being carried much more broadly. A growing threat of litigation against individual managers has pushed up the cost of companies’ directors and officers liability insurance, or D&O as it is called. Jonathan Geldart, director-general of the Institute of Directors, complained to business secretary Kwasi Kwarteng that the spiralling costs of professional indemnity and D&O cover were having “a profound effect on some smaller businesses”.

Premiums are rising even before the government wraps up a consultation into audit reform, which includes proposals promising to make directors personally responsible for the accuracy of financial statements. Inflation so far has largely reflected the import of US litigation practices that use a broad definition of fiduciary duties to attack the top tier.

Class-action lawsuits in Britain are gaining momentum after many years of false starts, making historic mis-selling allegations a popular target for opportunistic law firms. Board members are expected to vouch for the work practices in offices they have never visited, and for the security of data held in computer systems they barely understand. The #MeToo movement adds another dimension: since 2019 there has been an upsurge in actions against directors for failing to instil a culture that stops sexual harassment.

Responsibility has outgrown remuneration. FTSE heavyweights have hiked annual retainers for their non-execs by 25 per cent in the past decade, according to consultant Spencer Stuart, but such corporate top-slicing fails to capture the pressure on smaller companies and pension funds. For them, fees rarely exceed a few thousand pounds and indemnity insurance can be mandatory for recruitment, either on regulatory recommendation or to pacify stakeholders. With underwriters retreating from an unprofitable market many may now struggle to get cover at all.

Nevertheless, political lobbying risks exaggerating a problem that ought to be fixed in time by market forces.

D&O cover costs were kept artificially low in recent years by a flood of yield-seeking capital into the insurance industry. Covid-19 and recession then pushed the claims forecasts sharply higher, just as a fight over business interruption policies undermined customer trust.

A fit-for-purpose insurance market depends on economic recovery, not regulatory intervention, so the IoD complaint to government just days before its audit reform white paper smacks of opportunism. But then, as Morrison noted, directors often enjoy a whine.

Straight and Arrow

When thickset men in black bomber jackets knock on debtors’ doors, they typically do not say: ‘Oi, open up, it’s the alternative asset managers’. But that is the reinvention being sought by an altogether more reputable debt collector: London-listed Arrow Global, writes Matthew Vincent.

It no longer wants simply to buy banks’ non-performing loans and collect what is owed; it wants to manage portfolios of loans for lenders and yield-hungry institutional investors. And private equity firm TDR Capital clearly likes its new image — because it can’t stop trying to hand over money. On Monday it made a fourth proposed cash offer for Arrow, of 305p per share, in the space of two and a half months.

At first glance, TDR appears to be copying Arrow’s original business model: buying up underperforming assets on the cheap, believing it can squeeze more out of them. Arrow has certainly looked cheap of late. Having traded at well over 450p in 2017, its shares fell below 70p last spring as the market doubted its ability to collect anything but opprobrium amid the Covid-19 pandemic. 

But it has not been underperforming. After a £134m writedown on its portfolio value in the summer, the business has beaten management forecasts, surpassing its estimates on what it could collect by 41 per cent.

Its new asset management business has also started strongly, having raised around €1.7bn for its Credit Opportunities fund in a year, making it the largest first-time European private fundraise of the decade.

Longer-term supply/demand dynamics also play into Arrow’s hands. It estimates the pandemic will create an extra €500bn of non-performing loans between 2020 and 2022, at a time when rival debt purchasers are looking to deleverage and invest less.

Before TDR’s interest, Shore Capital analysts applied a price/earnings ratio of 12 times to 2025 earnings per share estimates of 51p, and then discounted it back to the present day to give fair value of 390p a share. Their research was sponsored by Arrow, but the p/e metric they used was still half that of peer Intermediate Capital, which has been on a similar ‘asset management’ journey. 

Arrow’s only share price drag — which may make 305p an offer it can’t refuse — is its position at the reputable end of the debt collection street. As first-choice provider to high-profile banks, working closely with Citizens Advice, StepChange and Christians Against Poverty, it might not be able to go after that €500bn too aggressively. Or noisily.

Indemnity insurance: bryce.elder@ft.com
Arrow Global: matthew.vincent@ft.com