A few more thoughts on the FRC's decision on annual elections last week. I know there is more in the revised Code than this proposal, so it's a shame to focus on it alone. However it was one of two key reforms that I know a few people were looking for (the other being vote disclosure), so I think it's worth spending a bit of time on.
1. Is this is victory for the mainstreaming of governance within investment institutions? It is notable that of those investors and related organisations that opposed the introduction of annual elections, many were those that have been most active on governance in recent years - USS, Railpen, Hermes, Governance For Owners etc. In contrast a number of those that were in favour of the reform were big mainstream investment institutions who haven't been noted for their burning interest in governance issues in recent years.
Ordinarily one might expect the FRC to listen more to the former and less to the latter. Is this a sign that the mainstream is finally getting governance and starting to do something about it? It's also worth noting that despite the opposition from those already active on governance, those in favour of annual elections are waaaay bigger. Put simply, if L&G and BlackRock are in favour that accounts for a large % of UK PLC. Perhaps that mattered a lot more this time.
I would be the first to criticise mainstream institutions for not doing enough in this area, but there does seem to be something of a change going on. A year or so back I saw Mark Burgess from L&G do a presentation on their engagement (in the broadest sense) the banks in the run-up to the crisis. It was a much more self-critical review than I have seen come from many of those in the governance community. Maybe something has shifted.
2. Simple point, but perhaps this was seen as a necessary quid pro quo. After all, investors are going to be expected to now adhere to their own best practice Code - the proposed Stewardship Code. Regardless of whether one thinks this will make a difference or not, this development makes sense within the context of an analysis of the crisis which pinpoints a lack of shareholder engagement as a significant contributory cause. If the way to address this is improved shareholder oversight, then shareholders need the right tools. No again, people might argue that annual elections aren't the right tools. But personally I think there is a lot of sense in granting shareholders a further extension to their rights at the same time as codifying their responsibilities.
3. Momentum. Again, a rather trivial presentational point, but I suspect it would have felt a bit odd if there wasn't some significant policy shift in the Code, given the scale of the crisis. That is obviously unfair to those non-financial firms who weren't anything to do with it, but you see the point. Maybe it was important to be seen to be doing something.
4. Maybe big names mattered. We know that David Walker, who took a much more in-depth look at the governance of banks and other financial institutions than any of us are likely to, came round to supporting annual elections. I would be surprised if Lord Myners wasn't of the same view. And I know there are other senior folks who supported this reform in private (and may have communicated as much to the FRC) but weren't able to say so publicly because of the nature of the organisation that they work for.
5. There was some daft "anti" lobbying. To repeat myself, I think the nature of the arguments used by opponents of this reform were the wrong ones and lacking in evidence. I don't expect annual elections to be a magic bullet, but nor do I expect the sky to fall in. Some of the argumentation against annual elections was knowingly over the top IMO.
But ultimately I think the direction of travel probably made some change of this type inevitable anyway. And as such personally I simply wouldn't have gone into bat on this one. If this reform is going to be a minor irritation (if that) to companies resulting in slightly more notional accountability to shareholders, then was it really expending reputational capital trying to fight it?
Based on research we did at work I have no doubt that most companies did not support this change, but even many of those who told us they opposed it clearly weren't that bothered. I think that was probably the best course of action - have a grumble, but take it on the chin because it could have been worse. In contrast making a lot of noise about this has made vocal opponents look ineffective and out of step with the current mood, whilst also calling their analytical powers into question if the predicted disaster doesn't come about.
As the man says, you gotta know when to hold 'em, know when to fold 'em.