Tuesday, 20 April 2010

Fear of power

I did wonder recently, as I read through responses to the FRC's consultation on the Corporate Governance Code, whether some investors are actually afraid of exercising their potential influence as owners. Why are there asset managers arguing against annual elections for directors, for instance? Are these investors lobbying to move to a three-year cycle in the US? And where is the actual evidence for this assertion that it would lead to a short-termist mindset on the part of directors? Is there any at all?

Don't get me wrong, I understand companies making these arguments. They don't want to face the challenge. And when they say that in an extreme case it could lead to an entire board being voted off there are two simple points to make. First, what does this say about your expectations of your own shareholders (and why then do institutional shareholders - the only ones who make such an outcome a reality - parrot the same line)? The evidence to date does not support the idea that shareholders use what powers they have to destabilise their own companies. And second, if it really is an extreme case, why shouldn't shareholders have that option? However you cut it not introducing annual elections maintains a restriction on shareholder power - of course many boards will like that, by why investors?

That isn't to say that there aren't some good arguments against. Like performance-related rewards, annual elections represent a clear attempt to impose external control. That might not always send the best signals about trust in the management (though surely this would dissipate once the reform had been in place for a few seasons). But no-one seems to be making this argument.

There's a real difference in willingness to exercise power between markets too. UK-based investors that never - and I mean never - vote in favour of shareholders resolutions at UK companies, back them at US ones, even on ESG issues! I know resolutions are a more-established part of the engagement process there, but they could be here too - if investors got over their traditional hostility. I can think of investors who voted against the LAPFF resolution at M&S last year, but back resolutions seeking exactly the same outcome (split chair and chief exec) at US companies. A little inconsistent I would argue.

I see a similar problem on remuneration. There was a big surge in the average vote against remuneration reports last year - still only 5 got voted down though and plenty of very generous policies get nodded through. I still don't think we know if shareholders could get executive remuneration under control because I don't think enough investors are trying. To be clear, some simply don't care. Others do take governance issues a bit seriously, yet most fight shy of taking a stand over the size of rewards (or 'quantum' as it is dubbed in the CG microcosm). Again there seems to be such a fear of the 'unintended consequences' of cracking down on excessive rewards, that they duck out. For example, the most common theme I could see in investors responses Myners about pay at the banks was that being too tough would lead the talent to leave the UK.

If we are going to make this model of ownership work better something will surely have to change. At the moment there still seems to be far too much conservatism.

1 comment:

robwalker said...

I'm not sure that I agree with your point regarding inconsistencies between US & UK voting. There are legitimate reasons for supporting the continued election of CH & CEO at M&S versus supporting a shareholder resolution to split the roles in the US. The combined code (in my view) was not designed to be a rule book that is just applied to all companies. In my view well informed investors who are happy with the performance at M&S may view combined roles at the top of the company as justified so long as the company continues to make a good case for why it considers it to be necessary. The issue in the US is slightly different where the rights of shareholders over the appointment process is weaker although this will change going forward.