It struck me t'other day that the two principal arguments against annual elections for directors are contradictory. One is that investors already have the tools they need to remove directors if necessary, the other that annual elections will create short-termism. These can't both be true if taken at face value, can they? I mean if investors can already achieve what annual elections are intended to enable them to do (hold directors accountable, including removing them is necessary) then presumably the short-term pressure resulting from such accountability must already be present?
Now one can make the case that annual elections would make it too easy to remove directors, compared to existing rights, and thus it would increase short-term pressure on boards. But that is to concede that existing rights grant less power to shareholders than the proposed reform (ignore for now whether more power is a good or bad thing). Alternatively one can claim that really the existing system is just as good as annual elections, in which case the potential for directors to be removed is already in place and presumably therefore already resulting in a short-term mindset.
In fact, if one accepts the 'we already have the necessary rights' argument, then it's difficult to see why annual elections would make any noticeable difference to board behaviour. Investors have demonstrated that they don't use the rights they have irresponsibly, so what's the problem with making the right to vote out directors a standing item.
The argument might come back that actually yes the existing system is more of a pain for investors to use than simply voting against a director, and as such prevents people making mischief. But then, again, we circle back to an argument in favour of restricting shareholder power. And it also leaves unanswered the question of why investors who currently don't act irresponsibly would start doing so if they were granted an annual vote (this also looks like a version of Hirschman's 'jeopardy' argument).
The arguments don't seem to stack up to me. Happy to post up a response from anyone who disagrees.
2 comments:
The annual election of directors won't change a thing. When was the last time a director was voted off a board? The issue again is what is the combined code for? The letter written by Hermes, Railpen et al misses the point. irrespective of short termism (and there may be some!)The combined code is not a rigid rule book and companies can dis-apply the rule for annual election of directors if they believe there is a legitimate reason for doing so. i.e. turnaround phase etc. Furthermore in the UK only L&G, Blackrock, Fidelity, Capital and maybe JP Morgan have the significant presence in the UK stock market whereby their vote against could potentially trigger a director removal. So so long as boards engage with these shareholders its hard to see what they have to fear.
Hi Rob
To be fair, I think that's the argument in the letter isn't it? That they will be open to explanations from companies that don't adopt annual elections.
I agree I don't think annual elections will change anything for the vast majority of companies, most of the time. Which is why I think the short-termism argument is not plausible.
I also agree that it will only be the big institutions that will usually be able to remove a director. That then raises the further question of why they would use the power to make boards more short-termist.
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