case study: robert maxwell: master of corporate malfeasance

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Case Study: Robert Maxwell: Master of Corporate -Malfeasance

Thomas Clarke

Introduction: The End of an Empire

he death at sea of Robert Maxwell on T 5 November 1991 presaged the almost immediate disintegration of the media business empire he had gathered over forty years of ceaseless commercial activity. The following day the Swiss Bank Corporation con- tacted the Serious Fraud Office in London declaring a f57.5 million loan to a Maxwell private company was in default, and the demand for repayment had been refused by Kevin Maxwell, the son who had become chief executive of Maxwell Communications Corporation (MCC). On the resumption of trading the day after, MCC shares crashed, halving in value in four days, and continuing in free fall. The many banks holding MCC shares as collatoral for huge loans amounting to f3 billion, including Citibank and Goldman Sachs, threatened to break ranks on any restructuring effort and dispose of their shares, precipitating a frantic effort at a fire sale of MCC assets. Share dealing was suspended in MCC, and Mirror Group Newspapers (MGN) the other large public company in the Maxwell group on 2 December. Kevin Maxwell resigned as chairman of MCC, Ian Maxwell as chairman of MGN, and administrators were called in to all the group companies.

The final collapse had occurred with the discovery that in order to support the share price of MCC, which was the only thing that could now save his companies from financial meltdown, Robert Maxwell had stolen f933 million from his two public companies. A total of f448 million in assets had been re- moved from the combined pension funds of the Maxwell companies; f388 million in cash and assets had been taken from MCC; and f97 million in cash from MGN. With the prin- cipal character responsible for this monstrous theft departed, the two Maxwell sons, and Larry Trachtenberg, managing director of

London and Bishopsgate International In- vestment Management (LBIIM) were arrested and charged with the largest fraud case ever recorded in the UK involving a total of f135 million. Shortly after Kevin Maxwell was declared the biggest ever bankrupt in the UK with debts in excess of f400 million. As he confessed on the steps of the court, “Bank- ruptcy is a very public humbling.”

The scale of this corporate failure, the enormity of the fraud, and the human tragedy involved for pensioners, shareholders, and employees instigated the most far reaching questions ever addressed on the subject of corporate governance in the UK. The shock- ing thing was that Robert Maxwell had apparently been able to steal from the pensions of 32,000 past and present employees, leaving many of them facing destitution, without any agency, it seemed, capable of exerting any effective constraint upon him:

One after another the lines of defence failed: directors, banks, trustees, pension regulators, and the Bank of England. They failed to notice the signs, or to recognise

only such dramatic the seriousness; or in some cases,-they failed to look. (Financial Times, 13 June 1992) scandals prompt

governments to review the regulation of companies and financial sewices

Unfortunately it is only such dramatic scandals which prompt government to review the regulation of companies and financial services, and the most thorough official review for decades was propelled by the Maxwell disaster. The Cadbury Report on corporate governance was greatly influenced by the urgent need revealed to provide effective checks and balances in boardroom practice; the Goode review of pensions law prom- ised reform of some long standing issues concerning the ownership and custody of pension fund assets in the UK.

However as the inquiries of the Serious Fraud Office proceeded with painstaking deliberation, the real tragedy of the Maxwell

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142 CORPORATE GOVERNANCE

notwithstanding M Y Maxwell’s acknowledged abilities and energy, he is not in our opinion a person who can be relied on to exercise proper stewardship of a publicly quoted company

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affair was that so much was already known about his business methods: the tangled web of private companies that enjoyed a parasitic existence upon the body of the public companies he controlled; the covert intermingling of the operations of the public and private companies; the chaotic and constantly chang- ing structure of his companies which made them impenetrable to the normal procedures of auditing and regulation. Twenty years before an investigative report published by the Department of Trade and Industry had revealed in high relief precisely how Robert Maxwell ran his companies, and ended with the stunning indictment:

We regret having to conclude that, notwithstanding Mr Maxwell‘s acknowledged abilities and energy, he is not in our opinion a person who can be relied on to exercise proper stewardship of a publicly quoted company. (HMSO 1971: 209)

This might have been expected to stop Maxwell dead in his tracks. The fact is it did not, and Maxwell continued his career of corporate malfeasance for another two decades with devastating consequences.

The DTI reports on the affairs of Pergamon Press

The evidence provided by the earlier public inquiry into the business practices of Robert Maxwell was ignored. These detailed, incisive and completely damning reports were avail- able from 1974, after Maxwell’s protracted attempt at legal blocking manoeuvres failed to prevent their publication. The account of the affairs of Pergamon at the time of Maxwell’s abortive bid to takeover the News of the World, was a graphic illustration of the mortal perils of attempting to do business with him. Yet this did not prevent bankers from lending Maxwell in excess of f 3 billion. Did any of them read the report?

From small beginnings, by the use of ag- gressive business techniques in the traditional world of academic publishing, Maxwell built the Pergamon group into a multi-million pound concern by the late 1960s. Despite the image of a midas touch he liked to convey, his business career was not strewn with repeated success, the opposite being nearer to the truth. Maxwell’s first major business operation in the early fifties was a clear indi- cation of the direction in which he would proceed throughout his life. He acquired a respected book wholesaling firm, Simkin Marshal, and proceeded to run it into the ground; he used it bluntly as a bank to fund

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his private companies. But the Receiver discovered it was impossible to disprove the many counter claims which a profusion of Maxwell private companies made against Simpkin Marshall. (Bower 1991: 97)

From this time Maxwell began to build the wealth and reputation of Pergamon, his major company, on the basis of the enormous post-war expansion of scientific and educational publishing. Pergamon captured the market in important academic areas and then proceeded to charge extremely high prices for this specialist knowledge. Pergamon‘s pro- gress was admired in financial circles in the 1960s and shares in the company were popular in the City when Maxwell turned Pergamon into a public company. The trading relation between Maxwell’s private companies and the Pergamon public company provided a means to artificially, and temporarily, increase the profitability of Pergamon, thus improving the share value. Pergamon shares were then used by Maxwell in an incredible series of takeover attempts:

Maxwell had grasped the essence of the takeover game: that a public company did not need cash to take over other companies. If you could keep your share price high, then the shares themselves made a most effective currency, which could be used to buy the shares of companies with lower prices. Share price depends to some de- gree on a company’s image, and Maxwell was expert at using the media to project an impression of streamlined, computerized efficiency. But in the end, share price depends upon expectation of profit, and during the Sixties Pergamon reported startling profit growth. By 1968 Maxwell was talking in terms of profits of f2m on a turnover of less than flOm. Dazzled, the City attributed scepticism to ‘sour grapes’. In reality, Pergamon’s profits were being inflated by, among other devices, manipu- lating the relationship between the public and private companies. (Sunday Times, 21 September 1975).

Maxwell then turned his attention to George Newnes Ltd., an encyclopaedia publisher, which he acquired in partnership with the British Printing Corporation (BPC) and transformed into International Learning Systems Corporation (ILSC). At this time Maxwell was chairman and managing director of Pergamon, and chief executive of ILSC. However Maxwell’s ambitions reached their apex when he was prevented from entering the enticing world of national newspaper publishing and failed to acquire the News of the World organization in a f26 million bid in

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September 1968, being beaten by Rupert Murdoch. Finally, Maxwell failed to negotiate the sale of Pergamon itself, when in August 1969 the Leasco Data Processing Corporation of the United States withdrew a f25 million bid due to the condition of the accounts of ILSC; the relationship between Maxwell’s private company MSI Inc and the public company; and the composition of Pergamon’s last profit forecast. The dramatic failure of the Leasco deal rocked the stock market, the Pergamon shares plummeted, dealing in them was suspended, and the City Takeover Panel was rather belatedly alerted. At an EGM on 10 October 1969 the shareholders re- moved all the existing directors of Pergamon and appointed others in their place, and on 15 October, Maxwell and the other directors resigned from ILSC.

The Board of Trade appointed inspectors under Section 165(b) of the 1948 Companies Act to investigate the affairs of ILSC and Pergamon in September 1969, and the De- partment of Trade and Industry (DTI) ex- tended the protracted inquiry to include Maxwell Scientific International (Distribution Services) Limited (MSI(DS)) and Robert Maxwell and Company Limited (R.M. & Co.) in January 1971. The inquiry reported in three impressive volumes published by the DTI. (1971, 1972, 1973) The inquiry was conducted by a barrister Sir Owen Stable, and a chartered accountant Sir Ronald Leach, and examined with great diligence the intricate business connections of the Maxwell companies despite the constant impediments which were placed in their path. In fact Maxwell succeeded in delaying publication of the final report of the inspectors until April 1974, when the House of Lords dismissed his appeal. A cen- tral contribution to the Leasco affair, which was the key to why Robert Maxwell survived his ejection from the Pergamon board, even though the public company had suffered so badly in the fiasco, was the plethora of Maxwell private companies inter-connected with the Pergamon business. Pergamon could not easily have extracted itself from the close commercial embrace of the other Max- well publishing companies, besides Maxwell still owned 28% of the Pergamon shares, the reluctant Leasco owned 38%, and ordinary shareholders owned 34%.

At the time of DTI inspectors were prepar- ing their final report on Pergamon therefore it seemed likely that Maxwell was to resume control of the company, and they offered the following advice to those involved:

Having now investigated a large number of transactions between Pergamon and the

Maxwell family private companies we have come to the conclusion that until the Leasco deal foundered the real purpose behind the transactions on which we have reported was to increase the value of Pergamon’s shares in the stock market. The Pergamon saga and Pergamon’s reputation as an exceptional ’growth stock’ could not have been established without the network of related private companies and without undertaking transactions such as the ones on which we have reported, and this purpose is discernible through all Mr. Maxwell’s conduct with regard to Pergamon. It runs like thread through all that he did up to the time when the Leasco deal went off. From the time when the Leasco deal foundered part of his energies switched to ensuring that so far as he could arrange matters the private companies were relieved of some of the special transactions into which they had entered. This change of purpose can be seen in . . . the terms of settlement with the private companies which Pergamon was obliged to accept in 1971 . . . .

Maxwell in fact, was restored to the Per- gamon board three hours before the inspectors final report came out, and certainly long before it was digested. The DTI inspectors were in no doubt there had been a number of serious breaches of the Companies Act in the affairs of Pergamon and the related Maxwell companies, but no one was ever charged with malfeasance of any kind. (Thompson and Delano 1988: 177) Prosecution in complex cases of fraud are extremely difficult to mount, and the DTI did not have the powers then it has today. If there had been a Dis- qualification of Directors Act at that time Maxwell would have faced disqualification as a director of a public company. It was thought that publication of the Reports alone, in the words of Ronald Leach, “would put people on notice that they should be careful in dealing with this man,” though in the event, “even the banks fell over themselves to lend him money.” (The Director, May 1992)

(HMSO, 1973, pp. 658-664).

Maxwell’s second coming

Whilst fighting the DTI inspectors Maxwell had found time to mount constant attacks upon the Pergamon Board, he incessantly re- minded them ”He was the Only Man who could run Pergamon.” Early in 1974 he convinced the remaining Pergamon shareholders to accept an offer for the outstanding shares from MIMC a Maxwell private company

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Robert Maxwell’s greatest ability wus to overcome any business adversity, which might have sunk other people without trace

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based in New York, (without accounts, bal- ance sheet, directors or address) which was a small fraction of the offer Leasco had been prepared to make (now called Reliance). Once again chairman of Pergamon, Maxwell energetically proceeded to convey the impression that the DTI Reports did not exist, that if they did they were about someone else, or (including to the Wall Street Iournal in 1987) that subsequent legal opinion had exonerated him, which was completely un- true. (Thompson and Delano 1988: 178-9) In a rapidly expanding educational market, Pergamon’s commercial recovery continued and by 1977 the company employed 3,000 people, published 360 journals and 1,000 books a year. Its sales had increased in eight years from ff million to f20 million, and its net profits from f27,000 to f3.3 million. (Bower 1991: 329) Later Maxwell claimed the entire credit for this turnaround, but as Sir Walter Coutts, the Chairman of Pergamon during 1970-74, wrote in protest against one press report of Maxwell‘s selective percep- tion: “The mess in which Pergamon Press found itself in the late sixties was entirely of his own making. Had it not been for the hard work of three independent directors appointed by Grindlay’s bank and a dedicated staff at Headington Oxford, Pergamon Press would have been declared bankrupt, handed over to a receiver and disappeared with Mr Maxwell into oblivion.” (Thompson and Delano 1988: 179)

Robert Maxwell’s greatest ability was to overcome any business adversity, which might have sunk other people without trace, and live on to exploit new opportunities as they arose. The British Printing Corporation had been seriously weakened by its involvement with Maxwell’s ILSC, and after years of losing contracts and unstable industrial re- lations was on the verge of collapse. Maxwell having acquired a significant stake in a dawn raid, offered to rescue the company and was rebuffed by the chairman of BPC. Lord Kear- ton, a former chairman of BNOC, was re- cruited by the BPC Board to act as a mediator with the banks, but soon became convinced by them, that Maxwell’s plan was the only hope of preventing the company going into liquidation. Kearton’s own view of the DTI Reports was: “I read them carefully and decided Maxwell was a victim of his own exuberance, verbosity and optimism, but he wasn’t wicked.” The view of the bank manager of NatWest’s London District, which had most to lose from a BPC collapse, and at which Maxwell had banked since the 1950s, was that the DTI Reports were “ir- relevant.” (Bower 1991: 338-40)

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Maxwell was invited by the BPC Board to become chief executive, and realised he was on trial not only to save a major public company, but also to prove he was a reformed man. He set about his task of restructuring the aged collossus of the British printing industry with all the enormous energy he possessed, which left the print unions convinced they had to agree to his proposals or face the destruction of the corporation. Gradually transforming the image of the company he renamed it the British Printing and Communications Corporation, and by October 1986 BPCC was in 87th place in the Stock Exchange list of 100 British Companies, capitalised at f656 million. Having saved the company and revived a significant part of the British printing industry, whilst seeing Pergamon develop as an international publisher, Robert Maxwell could have relaxed and pursued the place among the British industrial establishment which had long been denied him. But that was not in his nature, he confessed to feeling “slightly bored,” and began in the mid-1980s an astonishing series of attempted huge takeovers and massive unrelated acquisitions.

“Maxwell’s lust to own a national newspaper had been an unfulfilled ambition for fifteen years.” (Bower 1991: 366) Late in 1983 the Reed group announced their intention of floating Mirror Group Newspapers as a sep- arate company on the Stock Exchange. There was to be a special provision in the articles of the new company forbidding the registration of any person’s shareholding if it exceeded 15% of the total. Clive Thornton was brought in as the new chairman of MGN, and engaged in protracted negotiations with the print unions and bankers concerning the new company. As the potential value of the company slumped while these talks dragged on, Maxwell began to bombard Reed with letters, phone calls and telexes demanding meetings and issuing ultimatums. He held a press conference in July offering f80 to fl00 million for the whole MGN company. Finally Reed reluctantly agreed to sell to Maxwell though it flatly contradicted the undertakings they had given. Warburg’s the merchant bank acting for Reed, insisted that Maxwell pay in cash, on the spot, and he was not given the opportunity to haggle or attach conditions which was his customary practice, by which he renegotiated everything after a deal had apparently been struck. Maxwell paid f90 million for MGN: he thought the buildings were undervalued, knew there was a large surplus in the pension fund, and in addition the company had valuable shares in Reuters. “The assets are equal to what I have

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paid. The newspapers are in for free,” he boasted. From this point Maxwell acted less like a serious businessman, and more like an overblown caricature of a 1930s press pro- prietor, “In his view, the quality of a leader depended upon a display of despotism.” (Bower 1991: 376-9)

With the acquisition of Mirror Group Newspapers, and the renaming of BPCC as the Maxwell Communications Corporation in 1987, a second business empire was in place, which was much grander than the first built around Pergamon, but with a similar inces- tuous relationship to his private companies, and run by precisely the same dubious business methods. (See Figures 1 and 2)

At the centre was a publicly quoted company whose share price was the key to his operations. Surrounding that jewel was a constellation of private companies whose activities, like those of their predecessors in the sixties, were inextricably linked to MCC. But only Maxwell knew all the de- tails, as the ownership of public and private assets was switched to cope with demands for cash. (Bower 1991: 490)

Maxwell still yearned to be a billionaire global publisher, and was constantly looking for new acquisitions, the logic of which was highly questionable:

Given that he had no money, that his core company was generating little profit, that his share price was unsteady, that he had wasted millions on failed projects, that he had frittered away millions more on small purchases, that he had consumed yet more millions on legal bills, not to mention his grandiose lifestyle, this was ambition without reason (Greenslade 1992: 83)

Having failed to secure Harcourt Brace Javanovich, Maxwell made a determined $2 billion bid for the Macmillan US pub- lishers, which was again rejected by the company, who called in Kohlberg Kravis Roberts (KKR), specialists in defending companies against hostile bids. KKR engaged Maxwell in reckless competitive bidding: when interest in Macmillan was first ex- pressed the share stood at $50, Maxwell’s original offer of $80 was viewed by analysts to be at least $10 more than the company was worth, but he ended up paying $90.20, a total of $2.6 billion for a company whose assets were worth $1.65 billion. Five days earlier he had paid $750 million to Dun and Bradstreet for Official Airline Guides. Maxwell had in one wild week taken on $3 billion in debt. (Bower 1991: 479-487; Greenslade 1992:

88-90) He had not considered the conse- quence of his actions:

On board his Gulfstream call sign VR-Bob, flying back to London, Maxwell was un- concerned by two uncomfortable truths: that his company now owed bankers more than it was actually worth; and that his businesses were not producing enough money to pay off the loans. Debts, Max- well reasoned, were not problems but challenges to overcome. (Bower 1991: 488)

Maxwell did not have a strategy for dealing with his immense indebtedness, just to win the next deal, and he continued his acquisitions, paying €134 million for AGB a British market research business, and f60 million for Panini, an Italian printers. Maxwell had claimed that the printing companies BPCC and BPNC were an “integrated core business.’’ Now he made them disposable, ”Maxwell Communications” he announced on 4 November 1987 ”is placing all its printing plants up for sale. I am a publisher and not a printer . . . I have been working on this strategy for years.” Six days later Maxwell issued a statement that 40% of the printing plants would be retained, and the rest of the companies sold to their management. (Bower 1991: 486)

For Maxwell turbulence was an escape from his problems, though by no means a solution. In 1990 he engaged in the expensive business of the launch of The European newspaper, which limped on as a further drain on his resources. In March 1991 he embarked on his final, and most impetuous foray into the newspaper world, acquiring the New York Daily News, from the Chicago based Tribune company. The Daily News, plagued with difficulties, was losing $700,000 a day, an amount Maxwell could ill-afford to sustain. Tribune offered him $60 million to take it from them, if he assumed responsibility for pension and redundancy liabilities. This last, irresponsible acquisition focused the attention of the American media upon Maxwell, and flattery soon gave way to investigative scrutiny. Business Week claimed to have documents proving Maxwell’s private companies owed $1.5 billion in addition to the $3 billion MCC debt, and that these “private investment vehicles borrow extensively and use their shares in MCC as security.” The “pig on pork” reference, prompted the Wall Street Journal to begin research, an ominous development in a country where markets are regulated more severely than the UK.

At last Maxwell seemed to wake up to the seriousness of the crisis facing his companies:

Maxwell did not have a strategyfor dealing with his immense indebtedness, @st to win the next deal

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on 24 March 1991 he announced he was re- signing as chairman of MCC to make way for a “senior City figure,” and four days later announced the sale of Pergamon Press for $440 million to Elsevier, a Dutch publisher. However the loss of Pergamon alerted the financial world to the scale of his debts. Next came the public flotation of Mirror Group Newspapers, delayed for several months, due to the difficulty in finding a merchant bank willing to take the f12 million fee to handle the tainted operation; the ridiculous fl billion price Maxwell initially put on MGN; his determination to keep the majority shareholding, and the investing institutions suspicions of what this might entail; his public statement that the Mirror’s f 100 million Holborn office was included in the sale, when in fact it was not; and the confusion surrounding the ultimate ownership and control of MGN which went back through Robert Maxwell Holdings, to a Liechtenstein trust. Further doubts existed over the claim there was a f 149 million surplus in the MGN pension fund, since 80% of the funds had been taken over by a Maxwell company BIM. An executive of the Association of Mirror pensioners had written to IMRO the regulatory authority insisting the pension funds were at risk. Few major British institutions were prepared to contemplate the shares, and the launch was rescued by Salomon Brothers who unloaded many of the shares in the US, some to Maxwell privately. (Bower 1991: 517-523)

Maxwell’s denoument

In July 1991 the irretrievable financial dis- solution of Maxwell’s empire had begun. Gambling in stocks, gilts and currency had not helped. Maxwell’s rapacious require- ments for continuous loans to service the hundreds of millions of pounds of interest on his existing debts, caused him to penetrate the “ring fence” erected by Samuel Montagu around MGN’s funds, and to pledge several hundred million of the pension fund shares as collateral for his loans. Similar manoevres with the finances of MCC meant it was impossible for Peter Walker to assume the chair- manship of the company, and it was the prospect of his safe pair of hands which had been sustaining the MCC share price. Both MGN and MCC shares began to inexorably slide. Peter Walker had stated, “I would wish to run the business on a conventional basis with monthly board meetings and financial accounts.” (Greenslade 1991: 277-8) But from this point the behaviour of the execu-

tives of MCC was anything but conventional: Robert and Kevin Maxwell were dealing in the international currency spot market, and not paying up immediately, to sustain an unofficial loan on a daily basis of the order of El00 million. The financial haemorrhaging was by now out of control, and it was only a matter of weeks before the banks realised how deeply they were exposed.

Days before this occurred, Robert Maxwell had made his farewell. The efforts of Kevin and Ian Maxwell to rescue the situation were impeded by the fact they had been kept in ignorance of some critical aspects of their father’s corrupt dealings. The attempt to sell Berlitz for $265 million to a Japanese company Fukutake, collapsed when it was discovered that 1.9 million of the 10.6 million MCC shares were missing, having been pledged to raise loans for the Maxwell private companies. It was soon found how mercilessly the assets of the pension funds held by BIM had been pillaged: f248 million of assets had been sold to finance an illegal support operation for MCC shares; while f206 million had been used to secure loans to Maxwell private interests. Neil Cooper the liquidator accountant, brought an action against the Maxwell brothers in the High Court on a f400 million claim for negligence and breach of trust. The debts of the Maxwell companies vastly exceeded their assets: the private companies owed f800 million to the banks with total debts of f1.4 billion, with creditors facing a total loss of around El billion. MCC owed approximately f1.5 billion to the banks and MGN f360 million. A total of 21 banks had been taken for an expensive ride, including NatWest (f280 million); Lloyds (f180 million); Barclays (f150 million); and Midland (f140 million). (Financial Times, 10 December 1991) A search by the liquidators for the Maxwell Trust assets began immediately, though even if the wall of secrecy surrounding these were successfully penetrated as the trustees prom- ised, the total Trust assets would not repay more than a fraction of the f 1.4 billion owed to the banks, pension funds, MCC and MGN.

The chairman of the Maxwell Pensioners Action Group insisted that the banks and financial institutions holding f 217 million in securities belonging to the pension fund which Maxwell had illegally used as collateral, should return the shares to their rightful owners, but the banks at first refused saying their primary duty was to their own shareholders interests. But the pension trustees in the form of the liquidator argued that “if they had asked the questions they should have asked, they would have known.” Not only should the banks have been curious about

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how Maxwell had come up with so much money and shares so suddenly, their suspicions may reasonably have been aroused by the fact the shares had "BIM" stamped on the top of them. (Financial Times, 10 June 1992) As the Trustees of the MCC works scheme pension fund, from which f 109 million was missing, were given Court permission to reduce the pension to 3,640 pensioners by 31% for the next 5 years; and it was realised the government emergency fund of f2.5 million to top up the pensions would be exhausted within one year; it seemed the administration and liquidation of the Max- well companies would disappear in a dense quagmire of disputes and litigation. At this point Sir John Cuckney was appointed by the government to campaign to raise funds for the Maxwell pensioners, and coordinate the global search for any remaining Maxwell assets.

Maxwell's business methods

"Enslaved by egotism with delusions of omnipotence . . . This allowed him to believe he could do anything and created the culture - fantastic, absurd, domineering, lawless, chaotic and paranoid - that made the fraud possible," was Bronwen Maddox of the Financial Times, considered view of Maxwell. Peter Jay, in the same report added, "He was not just disorderly, he actively abhorred order." It was this "whirling chaos" which Maxwell created around him which obscured the truth and ultimately allowed him to commit his crimes undetected. (15 June 1992) Maxwell's desire to be involved in every detail, his refusal to delegate or deal through committees, his insistence on signing every cheque, meant that every day a long queue of people would wait vainly to see him (many of whom would be senior executives of his companies), while he held several meetings on different subjects in adjacent rooms, and the telephone rang incessantly. Important memos were scattered anywhere, and he had always commenced another project before completing the last one. Towards the end it appeared to be activity without reason: "Maxwell's ceaseless foreign travel, and incessant involvement in obscure foreign projects, to which pockets of money would be committed without any discernible return - confirms the view of Maxwell company directors that he lost his judgement up to three years before he died." (Financial Times, 16 June 1992)

His rule was a tyranny which many people could not stand. Roy Greenslade who en-

joyed a notably brief editorship of the Mirror, said, "As far as Maxwell was concerned there were staff who did what he said and stayed - at least until he tired of them - and those who would not do what he said and went. . ." (1992: 139) One Pergamon manager portrayed the full tragedy of this style, "It always seemed that Maxwell regarded any able em- ployee as a competitor to be driven out rather than an ally to be encouraged." (Thompson and Delano 1988: 25) The key to Maxwell's absolute control was compartmentalisation. The wry comment of an administrator survey- ing the map of MCCs total of 400 companies and the 400 Maxwell private companies was, "When you think of it, 800 companies run by a man and a boy." (Financial Times, 18 June 1992) He was not troubled by any qualms concerning his manipulation of other peoples' money, as Coutts insisted, "Maxwell has an ability to sublimate anything that stops him getting what he wants. . . There is no question of morality or conscience." (Thompson and Delano 1988: 180) This explains Maxwell's cavalier interpretation of the responsibilities

tives explained, "His problem was that he couldn't distinguish between his own interests and the interests of others. He saw himself as autonomous and not as a trustee of shareholders interests." (Bower 1991: 99)

But Maxwell must have possessed some real business abilities to have come so far, and survived so long. When asked he responded that his business methods were based on the tank warfare he had learned as a young man: "I move fast. When there is an object in my way I smash it down, or race around it." If lacking in any subtlty Maxwell had the bottomless energy of the tireless salesman who never would give up until he had closed the sale. (Bower 1991: 142, 181) But Maxwell was basically a merchant who traded in businesses, not someone who built them up, "Never start a business" he would say, "always buy a going concern." He was by no means infallible, he was often out- witted by business people more cunning than he was; he remained, always in the shadow of Rupert Murdoch; and finally he came crashing down having failed to read the warning signals of a reversal in the business cycle which were public knowledge. A full year before Maxwell's crash, an article in the Guardian had examined the reasons for the sequence of collapses of many of the glam- orous entrepreneurs of the 1980s such as Alan Bond, Donald Trump and the Saatchi brothers, "The speed with which such companies grew sowed the seeds of their down- fall. Such expansion made it difficult, if not

cavalier of

of a company director, as one of his execu- the responsibilities OfU Company director

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impossible, to keep their businesses under control. . , .” (15 October 1990) The H a m r d Business Review commented that the takeovers of the late 1980s “were not merely overpriced; they were structured completely wrong, from the point of view of aligning the interests of managers, owners and creditors.” (January 1992)

If Maxwell himself was incapable of preventing his headlong rush towards disaster, could he have been stopped? The Investment Management Regulatory Organisation (IMRO) is responsible under the Financial Services Act to decide which fund management companies are “fit and proper” to do business, and is responsible for f300 billion of pension funds. The Securities and Investment Board’s (SIB) report on the affair, stated that “IMRO did not regard the findings of the DTI inspectors as sufficient grounds for refusing the application of BIM. But the insight into Maxwell’s business methods contained in the report did not receive sufficient recognition in IMRO’s subsequent monitoring activities. ” (Sunday Times, 21 June 1992). The conclusion of the Financial Times on the role of IMRO was compelling:

could he have been stopped?

The affair. . . provides a salutory reminder for all Financial Services Act regulators that the day-to-day operational activity of regulation - authorisation, reviewing re- turns by regulated firms, monitoring visits, dealing with queries - requires a continuous high alertness to any indicators that cast doubt on a firms fitness and prop- erness (honesty, competence, solvency), a willingness to probe until satisfied that the full picture is known and understood, an alertness to information in the public do- main, (including in the media), and an application of a spirit of critical inquiry in relation to assurances or information given. (10 July 1992)

Similarly the other directors of Maxwell’s companies, however eminent, seemed power- less to resist his will. The “ring fence” erected around MGN to prevent Maxwell shuffling its assets back and forth with his private companies “In the end Maxwell stepped ef- fortlessly over and the non-executives could do little to stop him. He continued to act as if he were the sole owner of MGN.” (Sunday Times, 14 June 1992) Once again, the DTI, having failed to act when something positive could have been achieved, appointed inspectors under sections 432 and 442 of the Companies Act, John Thomas QC and an accountant Raymond Turner, to investigate the circumstances of the MGN flotation, at

the recommendation of the Serious Fraud Office.

Implications for corporate governance

The immediate aftermath of the Maxwell saga saw an urgent call for a tightening of the regulation of the management of pension funds. “There is a widespread problem that directors have considerable discretion over the deployment of pension scheme assets in circumstances that involve severe potential conflicts of interest vis-a-vis the beneficiaries. The government must recognise that legis- lation cannot wait. A ban is needed on all dealings between companies and their pension funds.” (Financial Times, 20 June 1992) A government inquiry was announced into the pensions industry and Trust Law, by Professor Roy Goode QC, prompted also by the Commons Select Committee on Social Security. The basis of existing pension fund operation did not take into account that the interests of the trustees may be at odds with the interests of the beneficiaries; did not require representatives of scheme members to be on the pension boards of trustees; and did not have sufficient safeguards to prevent pension fund managers using scheme assets for their own benefit. The thorniest issue was the ownership of assets, since employers had seized upon pension fund surpluses to take contributions holidays, and could even with- draw huge sums from their pension fund surpluses without sharing those benefits with employees and pensioners. “It emerged during the Select Committee hearings that Robert Maxwell was able to strip more out of the pension fund surpluses of companies he acquired than he had paid for them in the first place.” (Financial Times, 10 June 1992) Finally a compensation scheme was called for to assist pensioners who had been swindled.

“Corporate Governance is not solely concerned with wealth creation. It is also concerned with wealth retention. Institutional investors are interested in wealth creation, but they are also interested in hanging on to it, ” Clive Gilchrest the vice-president of the National Association of Pension Funds has argued. A question many posed, was what is to stop another Maxwell emerging in the next bull market? The Director has responded, “A determined crook cannot be stopped, but if Maxwell makes us realise that a system that provides for statutory and comprehensive disclosure and legal protection to those who seek to know the truth is better than one based on trust, some good may emerge.”

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(August 1992) Strengthening the role of the auditors in fund management enterprises will help, and investing them with a legal duty to come forward. Regulation is badly in need of review: "Tough, hard-headed financial institutions constantly fighting for their commercial life, need a powerful regulator of whom they are scared - not a ramshackle series of overlapping groups which don't seem to talk to each other." (The Guardian, 10 July 1992)

The Maxwell revelations fuelled the debate around the Cadbury Report on The Financial Aspects of Corporate Governance published in May 1992. The report was widely welcomed as a timely expression of good sense, though among the critics was Owen Green, chairman of BTR, who argued, ". . . the statistically few failures stem from the quality of the participants rather than the quantity of the regulations." (Financial Times, 9 June 1992) But corporate crime is not a bolt from the blue which cannot be anticipated or prevented, appropriate checks and balances at board level can help, and where they fail, external regulation should be able to detect malfeasance, "A history of prior violations of the law can indicate that a firm engages in a pattern of wrong doing." (Baucus and Near 1991: 15) In a similar vein, Coopers and Lybrand (MGNs auditors) have summarised their recent experience of company failures:

The story is remarkably consistent and familiar but nonetheless worth reempha- sising: dominant executives not living up to their duties as stewards of a public company; over-ambition; failure to follow basic controls. An environment which allows this to happen inevitably also facili- tates dishonesty . . . Over-enthusiastic expansion and acquisition, backed by easy access to finance in a competitive lending market have left many companies with excessive gearing and assets worth less than the prices paid for them. (1992)

In the light of the Maxwell failure and accom- panying corporate disasters, the remarkable aspect of the Cadbury Report is that the Code of Best Practice for corporate governance is essentially a voluntary requirement.

References Baucus, M.S. and J.P. Near (1991) Can Illegal

Corporate Behaviour Be Predicted? Academy of Management Journal, 34; 1; 9-36.

Bower, T. (1991) Maxwell: The Outsider. London: Arum Press and Mandarin Paperbacks.

Clarke, T. (1991) "The Inspector Never Called Twice," New Statesman and Society, 13 December.

Clinard, M.B. (1980) Corporate Crime. New York: Free Press.

Coopers and Lybrand (1992) Corporate Governance and the Role of the Auditor, London: Coopers and Lybrand.

Greenslade, R. (1992) Maxwell. Simon and Schuster, London.

Haines, J. (1988) Maxwell. London: Macdonald. Hersh, S. (1991) The Samson Option. London:

Faber. HMSO (1971) Report on the Affairs of Znternational

Learning Systems Corporation Limited and Interim Report On the Affairs of Pergamon Press Ltd. London: HMSO.

HMSO (1972) Further Interim Report On The Affairs of Pergamon Press Ltd. London: HMSO.

HMSO (1973) Report On The Affairs of Maxwell Scien- tific Znternational (Distribution Services) Limited, Robert Maxwell and Company Ltd and Final Reports On The Affairs of Pergamon Press Ltd. London: HMSO.

Thompson, P. and Delano, A. (1988) Maxwell: A Portrait of Power. London: Corgi.

Thomas Clarke holds the DBM Chair in Corporate Governance at Leeds Business School. His research interests have focused upon the strategic direction of industry, and included analysis of different concep- tions of economic and industrial democracy; and the political economy of the media industries (when a fascination with the business practices and values of Robert Maxwell as a publishing and press pro- prietor commenced). Finally he has been engaged in an international survey of how the process of privatisation has transformed the objectives, constraints and priorities of enterprises. This work is about to be published in two edited volumes: The Political Economy of Privatisation, Routledge, 1993, (with Christos Pitelis); and Inter- national Privatisation: Strategies and Practices, 1993, Walter de Gruyter. He is currently establishing a major research programme on corporate governance in the UK.

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case study: robert maxwell: master of corporate malfeasance

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