BUSINESS OPINION:With directors in a bind over support for their chairman, there is one way of saving the day.
SO WHAT happens now? The Irish Association of Investment Managers (IAIM) has said that Jim Flavin has to go because, taken in its totality, the result of the Fyffes-DCC insider-trading court case makes his position untenable. However, the board of DCC argue that certain aspects of the judgments and subsequent changes in the law have to be taken into account - and when they are, Flavin's actions are not sufficient to require him to step down.
It is hard to see how either side can now back down and equally, how a compromise can be reached.
The IAIM has made it clear that they see the Statement of Principles on the responsibilities of institutional shareholders issued by the Institutional Shareholders' Committee of the UK's Investment Management Association (IMA) as their guide. It gives a pretty clear picture as to how things will play out unless a deal is done.
The statement lists a range of issues over which it feels institutional shareholders are within their rights to intervene in the affairs of a company. The most pertinent in this case being independent directors failing to hold executive management properly to account. Others that might come into play include an unjustifiable failure to comply with the Combined Code on Corporate Governance.
Once an institution has decided to intervene, the statement sets out seven steps through which it can escalate its actions. The first three - meetings with management, advisers and independent directors - have been tried in the case of DCC to various extents and have not produced a satisfactory outcome from the IAIM member's point of view.
The IAIM is currently at steps four and five, which allow joint action and the making of a public statement in advance of an annual general meeting.
The last two steps are the nuclear option: "submitting resolutions at shareholders' meetings; and requisitioning an extraordinary general meeting, possibly to change the board".
The clock is ticking on these final options. DCC's annual general meeting is scheduled for July 18th, which means any resolution to remove some or all of the directors of the company, including Flavin, must be submitted by the middle of June, or within the next three weeks or so.
And it must be assumed that, if it comes to it, the red button will be pressed. Having crossed the Rubicon into shareholder activism for the first time - albeit under the umbrella of the IAIM - it would be dangerous for the big Irish institutions to blink now as they would be seen as toothless.
The directors of DCC are also in something of a bind. So trenchant and unanimous has been their support for Flavin, that backing down now would be disastrous in terms of their own reputations and credibility. They may well be tempted to fight on.
The IAIM only speaks for a minority of shareholders in DCC, around 20 per cent. And they have to be very cautious in how they proceed as DCC can be expected to cry foul at anything that smacks of a concert party. The IAIM cannot, for example, make any recommendation to its members on how they should vote.
There is a possibility that if they stick to their guns, the DCC board could drive a wedge between the members of the IAIM. They could also seek the support of some of the international shareholders and possibly defeat any motion put up by an IAIM member.
It is a possibility, but it's hard to see any large overseas institutional shareholders, particularly UK-based ones, not rowing in with the IAIM position since it has followed the protocol of the IMA. Equally, many funds, including big US funds, are obliged to follow the recommendations of outside consultants on corporate governance issues, and its hard to believe that advice would be contrary to the IAIM position.
A full-on proxy fight between the DCC board and some of its biggest shareholders is a mouthwatering prospect for onlookers, but would be an absolute disaster for the company which, as last week's results showed, remains one the best-performing Irish firms of its type.
One man takes the lion's share of the credit for this and one man is in the position to prevent huge damage being done to what is, in effect, his life's work. By stepping down now, he can minimise the impact on the company, the employees who have worked with him and his hitherto loyal shareholders. It will also offer the board of DCC a way out of the impasse in which they have found themselves as a result of their loyalty to him. It's time to go.
