Wednesday, 7 October 2009

Annual elections - what is the big deal?

I've got to say I'm a bit perplexed by some commentary today from some UK institutions about the idea of annual election of directors. Such as:
"Annual re-elections are potentially distracting to the board, (and) create instability and additional work for the shareholders without any material benefit. So it's not a good idea," said Colin Melvin, chief executive of Hermes Equity Ownership Services.

Eh? But some companies already have annual election of directors, just a few off the top of my head - BP, Pearson, Vodafone, Unilever. Are all these companies 'unstable' because of it? The benefit of annual elections is that if there is a problem at a company that arises in the short-term, you use your vote to express concern at a particular director's role, or even ultimately vote them out. That is not possible when they are on a three-year cycle - see for example the current ITV debacle. It is no extra work for shareholders (unless you consider voting 'work'), but it does mean that you can hold directors accountable immediately if necessary. In practice I think it would be very rarely exercised, but it should be there.

Now you could argue that the vote isn't that important, and that actually shareholders can remove directors without resorting to voting them out. True but a) it is not always the case that director will just roll over and b) follow this through logically - what is the point of voting rights in the first place then?

My personal view is that opposition to what seems to be a perfectly reasonable reform stems from an unfortunate direction the institutional share-owner culture has taken in recent years. In the understandable desire to avoid being seen as 'radical', 'political' or 'gadflies' some shareholders bend over backwards to demonstrate their support for management. I understand this - we shouldn't start from the position that companies are 'wrong' and that shareholders need to 'do something'. But I think this tendency has now gone too far in the other direction.

This can be seen in the utterly unimpressive voting record of most big institutions on remuneration - even though they know claim it is obvious that pay policies were flawed, and can tell you exactly what the flaws were. Well why didn't you use your voting rights to challenge them then? And don't claim that you were active behind the scenes, because we all know that we have failed to tackle executive pay inflation.

It can also be seen in their default position of management support when a union or NGO takes an issue to shareholders (again check out the voting records on shareholder resolutions raised by such groups). Now once again you can make the case that this is the 'responsible' thing to do - not supporting a challenge to management. But I personally fundamentally disagree, and I believe that institutions that routinely oppose shareholder resolutions effectively legitimise management complacency on some important issues. And having been involved in several such campaigns, I can tell you that from the proponent's point of view it simply feels like you have been stabbed in the back - especially when it's an institution that talks a lot about ESG issues (and there are several guilty parties here).

ho hum.

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