The Financial Reporting Council (FRC) has published the responses to its recent consultation on the UK’s corporate governance code. A total of 117 responses have been made available, of which 37 are from quoted companies directly and 14 from investors directly. The overwhelming majority have been sent from either trade association or professional groups. Overseas representation is thin on the ground with just the Council of Institutional Investors and ICGN making their views known. Investors speaking for themselves read as the who’s who of active ownership in the UK and further afield:
- Aviva Investors
- BlackRock Investment Management (UK) Ltd
- The Co-operative Asset Management
- F&C Investments
- Fidelity International
- Governance for Owners
- Hermes Equity Ownership Services
- Jupiter Asset Management Ltd
- Legal & General Investment Management
- Railpen Investments
- Royal London Asset Management
- UBS Global Asset Management (UK) Ltd
- Universities Superannuation Scheme Ltd
Standard Life made a joint submission with its plc parent
Responses range from pithy single paragraph emails to the voluminous 200 pages plus.
Probably the most hotly debated issue in the consultation is that of annual board elections. Even with a brief skim of the responses, it’s clear that there is no consensus. Alternative options proposed include:
- All directors every year
- Chairs of key committees every year, otherwise every 3 years for other directors
- Maintain the status quo and let companies opt in
There are strongly argued points for and against all possibilities. Many pointed out that it was a solution in search of a problem. Unlike the US where a single vote can elect an unopposed director, it is perfectly practical for UK plc owners to remove one or all board members through either a requisitioned resolution or general meeting by simple majority. The City has also been well known for its ability to encourage a failing director to “spend more time with his family” and avoid the need for a public humiliation at the ballot box.
Mandatory election of all directors every year would, in Manifest’s view, be a pyrrhic victory for box tickers. The net result will be a quadrupling of voting workload for director election resolutions – typically 12-14 per meeting instead of 3 or 4. Given the accusations of mindless voting levelled at shareholders, it’s not clear where the extra resources are going to come from to achieve the high quality dialogue and stewardship that would be called for. Doing more is not the same as doing well.
Our prediction is that the FRC will propose an opt-in regime and leave it as a matter of debate between owners and management, which is surely the spirit of comply or explain. Investors who are sufficiently committed to annual elections can propose resolutions at the next available AGM to change the articles of association and let their fellow shareholders decide through through the ballot box. BOFIs may be singled out for special treatment, but there is no clear evidence that the remaining UK quoteds have suffered for the lack of an ability to ginger up their boards.
Many of the governance reforms that have been mandated through centralised policy hubs over the past 20 years could have been achieved by similarly democratic means. For example, separation of chairman/CEO powers could have been arranged via changes to company articles of association. Instead we have seen long drawn out grand-standing debates which have diverted attention from getting on with the business of maximising long-term shareholder return. It is surprising, and perhaps just a little disappointing that so little use has been made of powers which other jurisdictions eye with such envy.