City Voices Fury At Board 'Kitchen-Sinking'

The City's most powerful fund management body has hit back at the growing number of troubled blue-chip companies which downgrade profit forecasts and slash shareholder payouts shortly after new executives are parachuted in to transform their fortunes.

Sky News has learnt that the Investment Association is to mount a campaign over so-called 'kitchen-sinking' exercises by some of the biggest names in corporate Britain.

In the last few months, the likes of Centrica (LSE: CNA.L - news) , Tesco (Xetra: 852647 - news) and Balfour Beatty (Other OTC: BAFBF - news) have unveiled savage dividend cuts while making it easier for new bosses to land multimillion pound packages from future share awards.

The issue is regarded by a number of top City fund managers as one of the most important confronting them as they attempt to exercise effective stewardship of their shareholdings in some of the UK's biggest companies.

While the practice of 'kitchen-sinking' - when recently appointed chief executives announce substantial writedowns and other impairment charges within months of taking over - is not new, fund managers have been struck by the deluge of companies undertaking them in recent months.

The Investment Association, whose members manage trillions of pounds of assets, is now warning that it will scrutinise independent non-executive directors more closely when such writedowns are announced.

Speaking exclusively to Sky News, Andrew Ninian, The Investment Association's director of corporate governance and engagement, said: “Long-term investors feel they’ve been misled when new management sets out the state of and prospects for a business that are fundamentally different from previous management's guidance.

"This raises serious questions about a board's oversight of the previous management and why issues had not been addressed earlier.

“Naturally, it’s important for boards to make management change when needed, but investors will hold independent directors to account if there is a significant revaluation of assets, profit expectations and dividend policy within months of the appointment of new management.”

Mr Ninian declined to criticise individual companies.

Tesco this year announced one of the biggest losses in UK corporate history when Dave Lewis, it's new chief executive, slashed the value of its property estate, leading some shareholders to question why the writedowns had not been taken sooner.

At Centrica, the owner of British Gas, Iain Conn cut its dividend by 30% within weeks of taking over, despite the fact that it had been increased by his predecessor, Sam Laidlaw, just months earlier.

One fund management source named Balfour Beatty, G4S (Copenhagen: G4S.CO - news) , RSA, Rolls Royce (LSE: RR.L - news) and Serco among other blue-chip companies which had irritated investors by taking similar steps.

"If there is an effective board who 'decides' the long term prudent dividend policy? Where were the audit committee and the chief financial officer? The board should take responsibility," the source said.

Another City source said the practice of 'kitchen-sinking' had also highlighted the lack of effective stewardship by institutional investors.

"There is an element of defensiveness about this - often, shareholders are simply not asking the right questions."