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Taking stock of a long career

By Ian Fraser

The Herald

January 6th, 2007

SATURDAY INTERVIEW – JOHN CHIENE

The man who kicked life into Wood Mackenzie and the UK broking industry reminisces with Ian Fraser.

JOHN Chiene is a larger-than-life character who can talk for Britain. He also effectively reinvented institutional stockbroking in the UK. Long before the US bulge bracket firms arrived in the City of London in the mid-1980s, Chiene, now 69, had transformed Edinburgh-based Wood Mackenzie from a sleepy private client stockbroker into an institutional powerhouse that shook up the cosy ways of the City of London.

By the time it was sold to Hill Samuel, just before Big Bang, Wood Mackenzie was handling 9 per cent of the trades on the London Stock Exchange, more than any other stockbroking firm at the time. Staff numbers had grown from eight to about 800 under Chiene’s leadership, while revenues had risen from £24,000 to more than £6m (about £20m in today’s money).

The constituent parts of the business Chiene created have gone on to dominate their respective fields. The WM Company (now owned by State Street) remains a leader in measuring pension fund performance, while Wood Mackenzie (now backed by Candover) has become one of the world’s leading oil and gas consultancies.

The core stockbroking business has had a slightly more chequered history, having been successively owned by TSB, NatWest, Bankers Trust and Deutsche Bank since its sale to Hill Samuel in 1984.

Chiene was a pioneer in many ways. First, he had the far-sighted notion that in-depth research would be critical to the future of stockbroking. Secondly, he pioneered the use of computers to produce a wider range of services than other firms of stockbrokers at the time. And thirdly, from 1973 he pioneered in-depth research into the North Sea oil and gas sector, which was sold to industry rather than just being made available to investors in exchange for dealing commission.

When Chiene joined Wood Mackenzie in 1962 the firm had just one partner, Charles McQueen, and eight employees. It had been a founder member of the Edinburgh stock exchange, but had failed to move beyond servicing private clients. Armed with a degree from Cambridge and a training with Scottish Investment Trust, Baillie Gifford, SG Warburg and Kitkat & Aitken, Chiene had a remit to build its business with institutions, and became a partner two years later. He was managing partner by 1969, at the age of 32.

The firm started producing in-depth research into individual companies which went far beyond what other stockbrokers were producing. Chiene recalls a 1969 report on the Distillers Company (now part of Diageo), which made senior executives at the whisky giant choke on their porridge.

The report was openly critical of Distillers’ management, telling them they should become more active in US distribution and stop allowing their brands to compete with one other.

Chiene, speaking at his Chelsea home, said: “We also revealed that DCL’s top six brands were making the entire group profits. They did not like that sort of thing being broadcast and “excommunicated” us for a number of years.”

However, Chiene admits that even producing the best research in the world is”no good to a broker unless you’ve done a trade, because you are only paid on commission”.

If a client was benefiting from masses of “free” research but failing to use Wood Mackenzie to trade shares, Chiene would be upfront, threatening to cease providing so much research unless more broking work were channeled the firm’s way.

He says: “The idea that a labourer is worthy of his hire was regarded in some circles as positively indecent. It didn’t make us terribly popular.”

The appointment of Dugald Eadie – who went on to run Henderson Global Investors – as Wood Mac’s head of IT, and the opening of a London office in 1973 were further transformational moves. Eadie’s skills as a computer programmer enabled Wood Mac to branch out into areas such as the daily pricing of unit trusts, measuring pension fund performance and calculating life insurers’ surplus assets, and to ride out the 1974 stock market crash better than its rivals.

Overall, Chiene says that Wood Mackenzie’s revenues grew at the compound rate of 35 per cent per annum in the 20 years up to 1984. So why did he and his fellow partners decide to sell the firm that year?

He argues it would have been impossible for Wood Mackenzie to have retained its independence after Big Bang, which wiped away the antiquated division between brokers and the jobbers who actually “made markets” in shares. He says: “We didn’t feel that [starting to make markets ourselves] was a sensible strategy . . .”

After unfruitful courtships with SG Warburg, Kleinwort Benson, Morgan Grenfell and Citigroup, Wood Mackenzie accepted the takeover offer from the merchant bank Hill Samuel in November 1984. But soon afterwards Hill Samuel, of which Chiene became joint chief executive, lost its independence to the Trustee Savings Bank, which had no interest in making markets in shares.

Further nuptials were called for and, after talks with JP Morgan collapsed at the 11th hour, Chiene agreed to sell the entire Hill Samuel/Wood Mackenzie securities combine to NatWest. The timing was unfortunate as, soon afterwards, NatWest became engulfed by the Blue Arrow scandal in which 10 County NatWest employees were charged with misleading the market over a rights issue.

Chiene was not implicated in the affair but admits it had severe repercussions for the merged business. “It was a terrible period; we were losing up to £2m a month.”

After an unhappy spell as chairman of County NatWest Securities and as deputy chairman of investment bank County NatWest, Chiene quit the City in early 1990. “For all sorts of reasons to do with commitments given and not met, I packed it in.”

One factor was the arrival of US investment banks, which he alleges have transformed the City for the worse.

He has since held several non-executive directorships including of Gartmore investment trusts, and his charitable activities include raising funds for the Royal College of Obstetricians and Gynaecology.

However the high point in Chiene’s career came during Guinness’s takeover of Distillers in 1986.

After hearing the drinks company, then led by Ernest Saunders, was intending to renege on certain promises it had made in its offer document (notably the merged group’s first chairman would be Sir Tom Risk, the governor of Bank of Scotland) Chiene decided Wood Mackenzie had no choice other than to resign as Guinness’s joint brokers.

The move created a big financial hole for Wood Mackenzie, but it was a hugely reassuring move for anyone who believes that business and ethics can co-exist. One source close to the matter said: “Johnnie is a man of the utmost integrity, and came out of the affair whiter than white.”

Go to The Herald’s website

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