Huge response to BEIS Select Committee
The UK’s Parliament’s Business, Energy and Industrial Strategy (BEIS) select committee has reported a larger than usual response to its request for written submissions to its corporate governance inquiry. Responses by the main industry bodies and interest groups, firms – including Manifest – together with individual submissions from academics and fund managers have been published on the committee’s website.
Manifest calls for open access shareholder voting for all investors
Manifest has submitted a detailed response to the Inquiry covering the full range of issues. In particular, Manifest has called on the committee to review of the levels of disenfranchisement of asset owners, a direct consequence of the use of pooled nominees by custodian banks and other intermediaries.
Manifest states that, “Effective shareholder democracy, if it is to be worthy of that label, requires the involvement of asset owners who are able to cast votes without impediment. While levels of voting have increased, their quality has not always matched their volume. Retail investors keen to exercise voice rather than exit are swamped by institutional investors who feel compelled to vote at all costs but do so unwillingly and so resort to “political voting”.”
In response to the committee’s questions on board composition Manifest expressed concern at the decline of executive directors on British boards – where increasingly boards only include the chief executive and finance director alongside non-executive directors which follows the approach taken in the US.
Manifest stated that: “There is strong evidence from the sphere of a sociology and organisational psychology which tells us that powerful CEOs find it much harder to capture boards when surrounded by their immediate peers – after all, at the board table they are all equivalent in their responsibilities.”
However, Manifest notes that not all investment managers are not yet fully engaged in the stewardship process, a point echoes by Hermes Investment Management. The submission points out that as executive pay structures have become dominated by long-term incentive plans shareholders in UK companies have had the right to vote down these proposals and they have not done so. Using Manifest’s 20 year database which contains every component of quoted company pay, the evidence is that the problems of excessive pay can largely be attributed to the use of long term incentive plans and is almost exclusively a large cap outlier problem which has a distorting effect of averages.
Clarity over directors’ duties
A strong theme in the responses has been the need to clarify directors’ responsibilities. Manifest is calling for an explicit fiduciary duty of directors and an overhaul of the currently vague language. The Financial Reporting Council (FRC), which oversees the UK’s corporate governance code, suggests that company boards should should report on how directors have discharged their responsibilities under Section 172 in respect of both shareholders and wider stakeholders.
More duties for remuneration committees?
The Investment Association (IA), which represents UK fund managers, suggested that reform should focus on how the current corporate governance system could work better. It believes that there should be better information provided to directors, for example on the views of employees, consumers and other stakeholders, so that they can make more informed long-term decisions and fulfill their legal duties.
The IA believes that the recently implemented binding policy vote is working but investors favour approaches which penalise those companies that are consistently receive a high level of votes against their remuneration reports as occurs in Australia. Echoing the ‘spill vote’ concept used in Australia, the IA suggests that those companies that have received over 25% dissent on their remuneration report could be subject to further requirements, such as a policy vote triggered earlier than normal or the next policy vote requiring a super-majority.
The FRC also suggests that remuneration committees should have a wider responsibility for scrutinising the pay and conditions of the company’s workforce as a whole. Specifically remuneration committees should report on the link between the remuneration structure and strategy. The regulator also believes that the government should review the enforcement framework. This would establish an effective mechanism for holding directors and others in senior positions to account if they fail in their responsibilities.
The deadline for written submissions has now passed. The next step in the Select Committee process will be oral evidence presented by invited participants.