Wednesday, 22 June 2011

Shareholders and nominations committees

Here is the key proposal Lord Myners floated in his speech at the ABI today. Interested to hear from investor types if they think this is desirable and/or workable. Nils Pratley likes the idea.
We simply need to recognise that the principal failure [in relation to executive pay], if there has been failure, is one of agents and to rectify this by putting responsibility back into the hands of or closer to principals or owners. This could be simply achieved by shareholders becoming members of the board Nomination Committee. This should not strike us as odd. After all company law makes it very clear that shareholders have ultimate responsibility for board membership. And yet most boards are significantly self-perpetuating with the chairman playing a very significant role. I doubt that it comes as a surprise to many in this room if I suggest, from my experience, that many chairmen seek out candidates who will “fit in well” rather than candidates who will be powerful advocates of shareholder value or willing to “take a stand” on executive remuneration. There is a natural bias in the appointment process towards conformity.

I am not suggesting that the chairman be taken out of the process of board appointment but I am proposing that we give serious consideration to adding to the Nominations Committee three or four owner representatives. The Nominations Committee would take primary responsibility for selecting non-executive candidates to be placed before shareholders for vote and would also oversee the review of board and committee effectiveness – including the effectiveness of the Remuneration Committee.

This would seem to me to address one of the key anxieties in this space – can investors trust boards and committees to make wise and sensible decisions as agents and to put the interest of the company and its owners before all others?

Shareholder representatives on the Committee would be named and would expected to sit on the Committee for a number of years provided the firm they represented remained a significant shareholder. I have no hard and fast views on how these people should be chosen although there may be a role here for the Institutional Investor Council, with the Financial Reporting Council acting as a standard setter, reviewer and back stop on corralling participants. Such a move is entirely consistent with the underlying ethos of the Stewardship Code – I am simply taking it further. I would start with FTSE100 companies and all significant banks and financial firms. I would review progress after five years to establish whether a case existed for wider application.

Shareholder representatives would be paid for their work on the Nominations Committee, just as the chairman and other members of the current committee are currently paid. Appropriate “Chinese Walls” would need to be set in place to ensure that price sensitive information would not be used inappropriately. Fund managers may need to re-skill their organisation to ensure that they employ or have access to the right people for this task.
He was also lukewarm on Ed Miliband's ideas on exec pay (pay ratio disclosure, employees on rem comms), though this section of the speech caught my eye...
Employees may have more “skin in the game” in respect of their dependence on the with employer than many shareholders have as an owner of the company but there seems to me to be little constitutional case for employee membership of the Remuneration Committee (although I think it would make good sense in many cases for the Committee to seek workforce input as one of the multiple sources used to inform the thinking of the Committee and dilute the influence of the benefit consultant).
Personally I'm in favour of employee involvement in remuneration policy, for various reasons. I think initially it will be a challenge (are there enough people willing/able to do the job well?) but I think that over time a network could develop, a bit like the the trustees network run by the TUC. Would be interesting to see how unions with co-determination network their people.

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