Outlook: King not yet a gloomster, but he'd much prefer to be boring

Gordon v Higgs

"My ambition in life", Mervyn King said yesterday, "is to be as boring as possible, and I am continuing to try to live up to it". The Bank of England surprised almost everyone when it cut short-term interest rates last week, and although the next governor of the Bank of England was robust in his defence yesterday of a decision he almost certainly voted against, even he was forced to admit that it was a "matter of regret" that it had caught the City so much on the hop.

Central banks are meant to be boring and predictable in their decision making. When they start springing surprises, it frightens the horses and the policy action can easily end up having the opposite effect to the one intended. But when Mr King said it was a matter for regret, he wasn't so much apologising as expressing surprise that the City so misread the signals. He didn't think upbeat comments about the economy made by Sir Edward George, the present Governor, in a recent radio interview in the least bit incompatible with the downward revision in the outlook for growth detailed in yesterday's Inflation Report.

It was an important point that Mr King was making, for while nobody disputes that prospects for growth are deteriorating, few professional economists yet expect a recession, let alone the "slump" that some newspaper headlines point to. In castigating the economic "gloomsters", Sir Edward was only asking for a sense of perspective and reality. The economy grew by 2.2 per cent last year and the Bank of England continues to believe it will be close to trend of about 2.5 per cent this year too. That's hardly a slump, Mr King rightly points out.

It's easy to be gloomy, particularly now with the threat of a deeply unpopular war hanging like a cloud over people's general sense of well being. In all my years as a financial journalist I've never known a time when the economy wasn't said by the media to stand at some kind of defining watershed, for it is the job of economics writers and commentators to talk up their subject matter and make a generally dull old subject interesting and significant. They are not paid to be sanguine.

To use the old joke, newspapers have been guilty of predicting all 20 of the last two recessions. The point is that usually things turn out to be perfectly all right, despite the doom-laden warnings of calamity to come, and perhaps the wisest policy is just to stop worrying and get on with things.

Having said all that, you don't have to be a newspaper columnist or a member of the Monetary Policy Committee to know that the threat to growth is greater now than it's been in ages. That's why the MPC cut interest rates last week, and although Mr King was right to defend the general thrust of Sir Edward's anti-gloomster comments, the fact is that even on the Bank's central projection, annual growth falls to just 2 per cent by the end of next year. That's significantly worse than the Bank was predicting in the November Inflation Report. Moreover, the Bank thinks there is an outside chance of growth disappearing altogether or even turning negative.

Confidence is an extraordinarily fragile flower. We already know it's crushed to bits in the business community. There is as yet virtually no sign of the green shoots of regeneration which should by now have been showing through. The big question is how much longer it can continue to flourish among consumers. The official figures continue to show a labour market which is as tight as tight can be, with rising earnings and rising house prices, but the anecdotal evidence is of a seeping away of confidence and a gathering gloom.

The picture is quite similar, actually, to what happened in business during the latter stages of the technology bubble, when there was a general realisation among more forward-looking business leaders that things couldn't carry on as they were and a growing determination to start addressing costs and balance sheets in preparation for the slowdown to come.

Mr King is right to insist that a quarter-point rate cut doesn't mean the Bank has joined the economic gloomsters. A central banker's job is not to warn of the dangers of what might happen, but to focus on what it thinks most likely to happen. Even so, the prevailing wind is one of sharp deterioration, and it's a racing certainty rates have further to fall before they start rising again.

Gordon v Higgs

Donald Gordon, chairman of Liberty International, is the feisty no nonsense chairman of Liberty International, a property company he rules with a rod of iron and has taken to great heights. It should come as no surprise, then, to learn that he doesn't much like the Derek Higgs proposals on non-executive directors. Indeed, he believes them "unrealistic, impractical" and likely to be "seriously detrimental if fully implemented".

Mr Gordon is an exceptional property magnate. He owns 20 per cent of Liberty and it is as hard to imagine Liberty without Mr Gordon as it is British Land without John Ritblat. According to Mr Gordon, Mr Ritblat from time to time suggests a merger between the two companies, to which Mr Gordon's answer is: "Only two problems. One of them is you and the other is me". You could argue that it is precisely for autocratically run companies like these that the Higgs reforms are being proposed, but actually it is because of companies like Liberty that the reforms aren't being made compulsory.

Mr Gordon virtually controls Liberty, so within reason he can do what he likes. It is only when he fails that he'll be out on his ear. But the vast majority of publicly quoted companies aren't like that. Chief executives and chairmen who rail against the iniquities of the Higgs report would do well to heed one rather important fact. They don't own the company, shareholders do, and most institutional investors think the performance of their companies would be greatly enhanced by these reforms.

Now they could be wrong about this. We are going through a bear market of virtually unprecedented duration, and it's easy to see why in such circumstances investors should, in their search for scapegoats, hit upon poor corporate governance as a possible cause. There is a real danger of over reaction.

But the truth of the matter is that the link between poor corporate governance and poor performance is indisputable. That doesn't mean all companies that ignore the political correctness of the codes are going to come a cropper. But some of them will and it has to be true that disciplined and independent oversight might have spotted problems in the making before it was too late.

Chairmen and chief executives should not be kicking against their investors in this way, indeed they have no right to do so. The campaign to keep Higgs at bay amounts to little more than an unwarranted attempt to keep shareholders out of the companies they own, so that powerful autocrats can carry on running them as they did before, surrounded by their own fawning courtiers and friends.

Mr Gordon's insistence that it takes five years for non-executives to get to know the business is patent nonsense, as is his claim that the most useful non-executive is the one who knows most about the industry he's working in. If Mr Gordon needs these people at all, he should be employing them as consultants. The proper role of a non-executive should be as a watchdog, not a business associate or lunching partner.

Sir Robin Biggam, a non-executive director of BAE Systems, was yesterday prevailed upon to say publicly that he had complete confidence in Sir Richard Evans and other members of the executive team at Britain's largest defence contractor. It is in the nature of such statements that they usually mean the reverse but, in any case, BAE is a good example of what can go wrong at companies with poor corporate governance. Sir Richard has presided over a wholly unnecessary corporate road crash. BAE makes the case as well as any for the urgency of introducing the Higgs reforms.

jeremy.warner@independent.co.uk