Why Development Bank of Wales executives shouldn’t be allowed to personally invest in Welsh firms

Should executives at the Development Bank of Wales be able to invest in Welsh firms in a private capacity?

Before opining on that, as it stands they can, and its chief executive Giles Thorley has made equity investments into two firms in leisure attraction venture Zip World and more recently tech start-up Lovetovisit.com.

Just to clarify Mr Giles has done nothing wrong in investing for minority equity stakes in two Welsh firms with high-growth and job creation prospects.

For his investment into Zip World, he first secured approval from the board of the development bank to invest and to become the Gwynedd-based firm’s chairman. His appointment was also approved by the Welsh Government, which wholly owns the development bank.

However, for this most recent investment into Cardiff-based Lovetovisit, he didn’t get prior board approval from the development bank’s board before investing.

In a statement it said: “Giles Thorley has been an active angel and SME investor for over 15 years with an interest in tech, hospitality and tourism. Earlier this year he completed a very small, passive seed investment into Lovetovisit.

“Colleagues are not required to obtain approval before undertaking personal investment, but are required to take all reasonable steps to identify and manage conflicts of interest and in this instance, the chair of the board has been informed. The company has not applied for funding from the Development Bank of Wales.”

They clarified that chairman, Gareth Bullock, was informed after Mr Thorley made the investment.

So, what appears to be the case (and for the record Lovetovisit did explore investment from the development bank before pursuing other funding options) is that Mr Thorley was judge and jury on an assessment of any conflicts of interest on his own investment.

Regardless of the fact that the development bank is not a current investor in Lovetovisit, one would have expected the corporate governance of the bank to be far tighter. If I was a board member, I would have expected Mr Thorley to have first disclosed his plans to invest, as he did with Zip World. After all, the board is there to scrutinise, support and advise the executive team. So, they should have been given the opportunity to consider Mr Thorley’s request to invest and then to decide whether to approve or not.

What some might find surprising, given the current furore over politicians’ second jobs, is the Welsh Government’s seemingly ‘shrug of the shoulders’ response to Mr Thorley’s private capacity investment activities.

All they would say was: “As a limited company the Development Bank of Wales is governed by and operates within the requirements of the Companies Act.”

Yet, the development bank isn’t a private venture fund where directors are expected to invest their own ‘skin the game’ money to support investments into firms. It is wholly-owned by the Welsh Government as its only shareholder. Its funding to invest into Welsh firms, both debt and equity, is also now completely funded by the Welsh Government, which also provides interest free loan and subsidy support for its operational activities. Some staff have public sector pensions and in the last financial year, to the end of March, 2021, Mr Thorley had a total remuneration of £216,264, compared to £208,235 a year earlier.

In terms of his private capacity investments, how do you separate knowledge acquired as being chief executive of the development bank with that from his own personal networks? Yes, we all want to get more angel investors backing Welsh firms, but that is something that Mr Thorley, who has worked previously in private equity, shouldn’t be – and this applies to any staff member – doing regardless of any conflict of interest assessment.

There can be plenty of opportunities for such investment activities after staff leave, while there could be an argument for allowing them to invest, subject to prior board approval, into firms with no links to Wales in their current roles. The development bank said no other executive had made personal investments into Welsh firms.

Wales plc is a tight ecosystem with many funding and support sources leading to the Welsh Government. For example Zip World secured Welsh Government backing during the Covid pandemic and has also had a £4.5m loan from the City Deal for the Cardiff Capital Region, a deal that is being supported by both the Cardiff Bay administration and the UK Government. It also received a short-term loan back in 2016 from the development bank’s predecessor Finance Wales.

While Zip World is well capitalised for expansion with equity backing from LDC, one could never rule out the company at some future stage seeking finance from the development bank and more support from the Welsh Government. The same goes for Lovetovisit.

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Would a Welsh Government civil servant be allowed to invest in a Welsh firm while overseeing business support? I think we all know the answer to that question and whatever its trading status I consider the development bank as being indivisible from the Welsh Government.

Its board should now seek to tighten its corporate governance on personal investments as a matter of urgency.