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| GlaxoSmithKline's China crisis: why it changes the rules of engagement | GlaxoSmithKline's China crisis: why it changes the rules of engagement |
| (2 months later) | |
| It's China, what did you expect? Its healthcare system is a pit of corruption, the result of underfunding by a government that prefers skyscrapers to hospitals. That seems to be the City's relaxed view of the bribery allegations made against GlaxoSmithKline's Chinese operation. Analysts coolly conclude that a country accounting for 3% of group sales can't inflict any serious damage. The share price has barely budged since the storm broke. | It's China, what did you expect? Its healthcare system is a pit of corruption, the result of underfunding by a government that prefers skyscrapers to hospitals. That seems to be the City's relaxed view of the bribery allegations made against GlaxoSmithKline's Chinese operation. Analysts coolly conclude that a country accounting for 3% of group sales can't inflict any serious damage. The share price has barely budged since the storm broke. |
| The City's view is too breezy for at least three reasons. First, reputation matters to drug companies these days – and matters in particular to chief executive Sir Andrew Witty. He has been on a clean-up campaign during his five years in charge. Last year, when GSK paid a $3bn fine for mis-selling drugs in the US, Witty said he was dealing with "echoes of the past" and announced his determination that such events would never happen again. | The City's view is too breezy for at least three reasons. First, reputation matters to drug companies these days – and matters in particular to chief executive Sir Andrew Witty. He has been on a clean-up campaign during his five years in charge. Last year, when GSK paid a $3bn fine for mis-selling drugs in the US, Witty said he was dealing with "echoes of the past" and announced his determination that such events would never happen again. |
| Nobody should doubt his sincerity but the Chinese allegations, if they are proved, would represent a serious failure of management. As far one can tell, GSK put in audit controls that it thought were sufficient for China; it may have been bamboozled by a sophisticated internal scam that was hard to spot without access to private bank accounts and emails. But that would be an explanation of failure, and won't help GSK on the image front. Witty the unwitting is poor branding when you are dealing with governments around the world. | Nobody should doubt his sincerity but the Chinese allegations, if they are proved, would represent a serious failure of management. As far one can tell, GSK put in audit controls that it thought were sufficient for China; it may have been bamboozled by a sophisticated internal scam that was hard to spot without access to private bank accounts and emails. But that would be an explanation of failure, and won't help GSK on the image front. Witty the unwitting is poor branding when you are dealing with governments around the world. |
| Second, GSK will probably have to rethink its entire model of doing business in China and other "high risk" countries. That signals disruption ahead as internal compliance controls are overhauled yet again. | Second, GSK will probably have to rethink its entire model of doing business in China and other "high risk" countries. That signals disruption ahead as internal compliance controls are overhauled yet again. |
| Third, even after any fines are paid in China, GSK will have to arrive at a working arrangement with a central government that appears to have a twofold agenda of running an anti-corruption drive and getting more funding into its dysfunctional healthcare system. If you're an optimist, greater opportunity for GSK could emerge from the mess – profit margins of drugs might fall but the reward could be greater volumes and a better-regulated market. But, to judge by the current aggressive rhetoric in China, the road to that position could be very long indeed. The story is still developing, but the City looks to be underplaying it. | Third, even after any fines are paid in China, GSK will have to arrive at a working arrangement with a central government that appears to have a twofold agenda of running an anti-corruption drive and getting more funding into its dysfunctional healthcare system. If you're an optimist, greater opportunity for GSK could emerge from the mess – profit margins of drugs might fall but the reward could be greater volumes and a better-regulated market. But, to judge by the current aggressive rhetoric in China, the road to that position could be very long indeed. The story is still developing, but the City looks to be underplaying it. |
| • The most useful service Lord Davies could perform in his interim report on London runways, which is due at the end of this year (the final report comes after the 2015 election), is to give a view on whether the UK actually needs a single "hub" airport. If this vexed question could be settled, the fog around the great airport debate might start to clear. | • The most useful service Lord Davies could perform in his interim report on London runways, which is due at the end of this year (the final report comes after the 2015 election), is to give a view on whether the UK actually needs a single "hub" airport. If this vexed question could be settled, the fog around the great airport debate might start to clear. |
| The "hub" notion is presented by the owners of Heathrow as their trump card. The theory says the best way to secure flights to far-flung cities – the places that are supposed to be critical to our prospects as a trading nation – is to make lots of passengers gather under one roof. More planes to Bangalore and Beijing become viable when potential passengers include both locals and transit passengers from many countries, goes the theory. This logic is endorsed by supporters of the Boris Island and Isle of Grain plans – they want to close Heathrow and build a new hub in the east. | The "hub" notion is presented by the owners of Heathrow as their trump card. The theory says the best way to secure flights to far-flung cities – the places that are supposed to be critical to our prospects as a trading nation – is to make lots of passengers gather under one roof. More planes to Bangalore and Beijing become viable when potential passengers include both locals and transit passengers from many countries, goes the theory. This logic is endorsed by supporters of the Boris Island and Isle of Grain plans – they want to close Heathrow and build a new hub in the east. |
| So, if a hub really is vital to the UK, the choice of poison becomes clearer. We can opt for the gruesome prospect of more planes over London by expanding Heathrow; or we suffer the delay and £30bn-plus cost of building in Kent and bet that the multinationals gathered in the M4 corridor will stay in the UK; or perhaps we turn Stansted into a new hub. | So, if a hub really is vital to the UK, the choice of poison becomes clearer. We can opt for the gruesome prospect of more planes over London by expanding Heathrow; or we suffer the delay and £30bn-plus cost of building in Kent and bet that the multinationals gathered in the M4 corridor will stay in the UK; or perhaps we turn Stansted into a new hub. |
| But is the hub theory rubbish? Yes, say Gatwick's owners, who argue that BAA, when it had a monopoly on London's main airports, was fixated on Heathrow. Plenty of big cities, like New York, get along with several airports. | But is the hub theory rubbish? Yes, say Gatwick's owners, who argue that BAA, when it had a monopoly on London's main airports, was fixated on Heathrow. Plenty of big cities, like New York, get along with several airports. |
| The suspicion here is that Gatwick makes a fair point. Airbus and Boeing are building planes designed to go point-to-point and Heathrow still looks to be stuffed with short-haul tourist flights that don't need to be there. | The suspicion here is that Gatwick makes a fair point. Airbus and Boeing are building planes designed to go point-to-point and Heathrow still looks to be stuffed with short-haul tourist flights that don't need to be there. |
| Lord Davies can't deal in suspicions, of course. His commission's job is to produce a detailed economic case, weigh probabilities and gaze into the future of air transport. But the hub is the heart of the debate. If the advantages of a single mega-airport are overblown, the Heathrow gorilla can be faced down and the Kentish spectaculars put on file for a few more decades. Gatwick or Stansted – the least disruptive places to add a runway in the south-east – would then be the logical places to look. | Lord Davies can't deal in suspicions, of course. His commission's job is to produce a detailed economic case, weigh probabilities and gaze into the future of air transport. But the hub is the heart of the debate. If the advantages of a single mega-airport are overblown, the Heathrow gorilla can be faced down and the Kentish spectaculars put on file for a few more decades. Gatwick or Stansted – the least disruptive places to add a runway in the south-east – would then be the logical places to look. |
| • A moment in history? Well, it's not every day that the Organisation for Economic Co-operation and Development (OECD) says co-ordinated action is needed to avert "global tax chaos". For good measure, the organisation's top tax official said that "the golden age of 'we don't pay taxes anywhere' is over" for multinationals with over-complicated, tax-minimising corporate structures. So, look out, Amazon and Google. | • A moment in history? Well, it's not every day that the Organisation for Economic Co-operation and Development (OECD) says co-ordinated action is needed to avert "global tax chaos". For good measure, the organisation's top tax official said that "the golden age of 'we don't pay taxes anywhere' is over" for multinationals with over-complicated, tax-minimising corporate structures. So, look out, Amazon and Google. |
| We should applaud the OECD and G20, which commissioned the study, for getting this far. Current international tax regimes are clearly ill-suited for the age of the internet, globalisation and intellectual capital. Multinationals have exploited last century's rules ruthlessly. Reform is overdue. | We should applaud the OECD and G20, which commissioned the study, for getting this far. Current international tax regimes are clearly ill-suited for the age of the internet, globalisation and intellectual capital. Multinationals have exploited last century's rules ruthlessly. Reform is overdue. |
| A word of caution, though. Before we can welcome an era of peace, love and international tax co-operation, there's an awful lot of politics to be played out. All that has been agreed so far is a set of principles. When hard rules start to be thrashed out potential winners and losers will emerge and the already-visible cracks between nations are likely to widen. | A word of caution, though. Before we can welcome an era of peace, love and international tax co-operation, there's an awful lot of politics to be played out. All that has been agreed so far is a set of principles. When hard rules start to be thrashed out potential winners and losers will emerge and the already-visible cracks between nations are likely to widen. |
| The UK, Germany and France have driven the debate this far. How many compromises will the US be prepared to make? Its politicians are less than impressed by the UK's tolerance of tax havens; as for Germany, it thinks the UK's "patent box," one of the coalition government's proudest boasts, is an underhanded tactic; the list goes on. There is potential for the OECD's study to trigger a very big deal indeed – but, for now, it is just potential. | The UK, Germany and France have driven the debate this far. How many compromises will the US be prepared to make? Its politicians are less than impressed by the UK's tolerance of tax havens; as for Germany, it thinks the UK's "patent box," one of the coalition government's proudest boasts, is an underhanded tactic; the list goes on. There is potential for the OECD's study to trigger a very big deal indeed – but, for now, it is just potential. |
| Bonus pay Off the rails | Bonus pay Off the rails |
| If Tim O'Toole, chief executive of FirstGroup, expected applause for turning down a £592,000 bonus, he was wrong. Some 30% of votes were cast against the bus and rail firm's remuneration report this week. The rebels were right not be deflected. FirstGroup's shares have collapsed in value, the dividend has been axed and the company has just whacked its investors with a three-for-two rights issue to raise £615m. It doesn't matter that the bonus was waived – it should not have been awarded in the first place. Prof David Begg, chair of the pay committee, is the man responsible. He needs to know that bonuses are discretionary. You don't have to obey the bonus calculator when it produces weird results; you are allowed to use common sense. The professor escaped with a 10% vote against his re-election and should count himself fortunate. | If Tim O'Toole, chief executive of FirstGroup, expected applause for turning down a £592,000 bonus, he was wrong. Some 30% of votes were cast against the bus and rail firm's remuneration report this week. The rebels were right not be deflected. FirstGroup's shares have collapsed in value, the dividend has been axed and the company has just whacked its investors with a three-for-two rights issue to raise £615m. It doesn't matter that the bonus was waived – it should not have been awarded in the first place. Prof David Begg, chair of the pay committee, is the man responsible. He needs to know that bonuses are discretionary. You don't have to obey the bonus calculator when it produces weird results; you are allowed to use common sense. The professor escaped with a 10% vote against his re-election and should count himself fortunate. |
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