Thursday, 18 June 2009

Another shareholder resolution - M&S

Another AGM to watch in July is Marks & Spencers. Last year the company announced (without prior consultation with shareholders) that Stuart Rose was going to become combined chair and chief exec - in clear breach of the Combined Code. The argument put forward was that this was necessary in order for succession-planning (ie next chief exec after Rose). However not a single investor I have spoken to about this issues believes this. The consenus seems to be that it's a power grab and/or ego trip on Rose's part.

However, most investors want him to stay on as chief exec. At last year's AGM about 22% of votes were not cast in favour of his re-election, though the overwhelming majority of this protest was made up of abstentions. Amongst those abstaining were the likes of BGI, L&G, Co-op, Hendersons etc. A few investors also voted against the report and accounts as a protest.

This year the Local Authority Pension Fund Forum has filed a resolution calling on the company to appoint an independent chair - ie split the roles - by July 2010. It is focused purely on the governance issue, and the LAPFF is not going to push for a vote against Rose. So in theory this ought to give investors who have a problem with the governance situation, but still have faith in Rose, a safe outlet for their concerns.

It will be very interesting to see which way fund managers vote on this one for several reasons.

1. Most investors own corporate governance/shareholder voting guidelines makes specific reference to not supporting combined roles unless the circumstances are execeptional. Yet, as mentioned above, no-one I have spoken to accepts the company's formal argument - that this is necessary in order for effective succession planning - so you would expect this to be a no-brainer. So it will be interesting to see what reasons managers give for not following their own guidelines (as I have no doubt that some will take this route).

2. The resolution has been filed by fund managers' clients - the pension funds, or 'asset ownwers' to use one of the tedious bits of jargon of my bit of the world. There is no doubt that LAPFF will be looking at which way managers jump, and many of these managers have LAPFF members as clients. The ISC's recent statement said that clients need to tell managers if they want them to be active on governance issues. I would say this resolution is a pretty clear message from a significant group of fund managers' clients.

3. The policy background to this is important too. As I've blogged numerous times, the spotlight is firmly on shareholders now, with the expectation that they need to demonstrate that they can play the ownership role effectively. Again bear in mind that no-one really believes that the combined roles at M&S are necessary. This is a classic example of a needless governance breach, and a potentially ower-powerful chief exec dominating a board. So what is the right course of action for a responsible owner in this environment?

4. Final point - look out for behavioural/cognitive biases at play in attempts to defend the indefensible. Status quo bias is the most obvious one to watch out for - arguments along the line that of course we don't like the situation, but challenging it could upset the balance/destabilise the company etc. This is a classic example of the default assumption that the status quo is not risky, and that trying to move away from it is. But in reality in this case accepting the current status quo maybe the risky option, because of the resulting concentration of power. The other one to watch out for is herding - I suspect this happens as much with corporate governance issues as with other investment decision-making. Managers will try and assess the consensus of other investors' views before sticking their neck out.

The AGM is on 8th July.