Interview: Sir Michael Rake, BT Chairman

Enough reflecting on the past, we must address Europe’s future

FEW things raise Sir Michael Rake’s ire more quickly than the unctuous utterances of leaders, both political and professional, who won’t speak the plain truth.

The City grandee, who was in Scotland last week hosting a lunch in his role as chairman of BT, has heard plenty of late on the causes and cures of the financial crisis now lumbering into its fifth year amid renewed concerns over the eurozone. Rake, who describes himself as an “eyes wide open” pro-European, says it is now time for a more measured approach to the world’s increasingly complex economy.

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He says: “We have to make sure that the pendulum doesn’t swing so far back in the other direction that we damage the people we are claiming to protect.

“Many people were at fault in terms of what caused this crisis – partly politicians, partly regulators who loosened capital requirements, and others – and there are many reforms still to be done. But it is time to stop talking about revenge, and to reflect calmly on how to move ahead.”

It’s as close as he gets to commenting directly on the fresh pay row at Barclays, where Rake is senior non-executive director.

There is talk of a shareholder rebellion at the bank’s annual meeting on 27 April, with a number of institutional investors reportedly considering voting against chief executive Bob Diamond’s £17 million-plus pay package.

Investor advisory group PIRC is also advising shareholders to vote against the re-election of Rake, who chairs Barclays’ audit committee, as part of PIRC’s campaign against accounting rules which it says allow banks to overstate their profits.

Rather than providing a “true and fair” view as required by the UK Companies Act, PIRC argues International Financial Reporting Standards (IFRS) take a “backward look” at assets and liabilities.

It is an issue that also concerns Rake. A career accountant with what is now KPMG – where he was chairman during his five final years, to 2007 – Rake has also served on the board of the Financial Reporting Council. He spent four years with the financial watchdog before stepping down at the start of January.

While he praises the introduction of IFRS in bringing more uniform financial reporting to nearly everywhere outside the United States, Rake says the standards are still lacking. He says accounts remain overly complicated, while “fair value” rules bump up the worth of rising assets too quickly, and cut that of flagging assets too slowly.

“When I was chairman of KPMG I made it clear that I did not think IFRS was moving in the right direction,” he adds.

If the seat in a bank boardroom has been uncomfortable of late, so too has Rake’s chairmanship at EasyJet, where founder and largest shareholder Sir Stelios Haji-Ioannou has waged a long-running campaign against the strategy of the executive team, led by Carolyn McCall.

Stelios argues that EasyJet, which he controls 38 per cent of, is spending too much on new aircraft and expansion during a prolonged recession. In its defence, the budget airline has pointed to rising profits, share price and passenger numbers.

Rake – who easily survived a bid by Stelios to block his re-election at February’s annual meeting – says board members of publicly-listed companies must accept that shareholders will sometimes have differing views. However, he adds that the executive team must be given space to do its job.

“You can’t do more than perform, and if some shareholders still want to complain, then I guess you have to accept that,” he says, but adds that the situation remains “disappointing”.

Working life is at least rather less contentious at BT, which is expected to post adjusted core earnings of more than £6 billion when it announces full-year results on 10 May.

The telecoms giant has been steadily recovering from the lows of 2009, when it made a loss of £134m. Since then, cost-cutting under chief executive Ian Livingston has allowed BT to stay ahead of flat to slightly falling revenues.

Rake says: “The management team has done a fantastic job during the last three years, but now we have got to look at growing revenues in what has been a hugely competitive environment.”

The one bright spot for sales has been broadband, where BT has been gaining share in the retail market amid demand fuelled by the growth of social media. Rake expects ongoing investment in both BT’s residential and corporate infrastructure to yield higher sales, though “none of this is going to happen in the next two or three quarters”.

A “realistic pro-European” who ranks among the members of Business for New Europe, Rake predicts a positive outcome to the continent’s continuing sovereign debt crisis, though this will likely take a couple of years to fully materialise.

“It has taken a while for some of the major countries to realise that the markets were not going to live long-term with anything other than a permanent solution,” Rake says. “What the eurozone is now getting to is a pretty much unanimous view that these issues must be dealt with.”