Sunday, 5 February 2012

The end of the 1990s

Something is definitely going on in corporate governance in the UK. On the surface it looks like our model remains the same. If anything one might conclude from the noise around the Stewardship Code that a shareholder-focused governance model was becoming ever more entrenched. The ideas floated by the Coalition about executive pay reform also seem to take for granted that really this is a matter for boards and shareholders.

And yet the evidence that some sort of shift is underway is all around us. As I have mentioned previously, the role of the FSA is worth a look. For example, last week Sky's Mark Kleinman got another nice story, this time about the FSA telling the heads of the UK-listed banks that they should try and clawback bonuses from an executives involved in the PPI mis-selling debacle. If any mainstream asset manager has had a conversation like that with the banks I would be very surprised. Of course the FSA has an interest due to the Remuneration Code, but if all companies are supposed to introduce clawback in the future this is exactly the sort of thing that asset managers will need to do if the thing is going work.

It's just the latest in a string of developments that demonstrate very clearly that the FSA is willing to intervene in financial services companies. And remember that it wants more power (to block hostile takeovers, for example). I've called this a regulatory turn, maybe I'm wrong, but there is something going on.

Of course, we have also seen that the Government is willing to get stuck in over bonus policy at the banks (and perhaps others). Thus far it's clearly been a kneejerk reaction to opposition pressure, and no doubt this is because the Tories in particular don't want to end up on the wrong side of public opinion. The impact in turn on the banks could be, incredibly, that the state-owned, or part-owned, banks will move away from bonuses. The greater emphasis could be on LTIPs, which wouldn't be a 'win' in my opinion. But still, political pressure is there in a way it hasn't been before.

As I've blogged recently this has also led Labour to push its thinking on a bit. This was always inevitable a) given that our existing position didn't go much beyond existing best practice and b) once the Coalition demonstrated its willingness to go further, within the existing model. So I'm very interested to see a number of Labour figures make some simple but important points about bonuses - they have become an expectation rather than a reward for exceptional performance, the evidence that they work to motivate is limited etc.

Meanwhile there seems to be a sense of incomprehension within the investor governance community. A combination of regulatory an political intervention is starting to make the views of institutional investors about pay at the banks a bit irrelevant. At the same time they seem unable to shift away from what they've always done. The reaction to the ideas floated by Vince Cable is a case in point - I think BIS probably got the message from most investors (and their representative bodies) that nothing much needed to change. So they have been left looking well off the pace with the Government coming out in favour of binding votes etc. Similarly I've been banging on about the flaws in performance-related pay for two or three years now, and it does seem that scepticism is growing. It wouldn't surprise me if this took off in the public policy world, yet investor bodies don't event seem aware that the idea of tying cash/shares to performance might be a bad idea in essence, rather than because of flawed implementation.

The thing is, if the investor community is in a bit of a mess over remuneration, what are they actually good at challenging companies over? I think the average vote against a remuneration report was about 6% last year, whilst the average vote against a director was around 2% and against an auditor appointment about 1%. It gets worse when you consider that voting at UK companies is becoming distorted by overseas investors with their own priorities. Last year the average vote against a company seeking authority to hold meetings on short notice was waaay higher than the average vote against a director. Already this season we see that overseas impact - look at the Compass AGM last week. Or Imperial Tobacco. In what world is holding meetings on short notice the most important issue?

That in turn will add to the pressure from corporates to regulate the proxy advisory sector. I'm not inherently opposed to this, but I do think the pressure for it is coming from the powerful business lobby in the US. Inexplicably some in the UK are now parroting lines from the US. Whatever you might think about proxy advisers a) it's up to the investor ultimately to decide how to vote and b) more pressure on the sector is only going result in less challenge to companies. It's hardly the case that the UK is littered with cases of directors being voted off boards because of the advice of proxy voting advisers - so what problem are we seeking to address.

At the same time people are getting nervous about what cases like Aviva and Henderson (and Insight) mean. Aren't we supposed to be in an era when shareholders take their wider responsibilities seriously? Well obviously, even after all the noise about mainstreaming responsible investment, it turns out that asset managers think that it's a relatively painless cut to get rid of ESG specialists. According to Aviva they don't get the money in to justify the expense. .

Add all this together and I think something significant is going on. What I actually think we are seeing is the end of the 1990s model of corporate governance. The policy prescriptions that went with it - transparency and disclosure, beefed up shareholder powers, executive pay aligned with shareholder interests, principles-based approach - no longer seem up to the task. The changing nature of the shareholder base of UK companies only adds to the confusion.

It's safe to say that there is no clear alternative. As I've blogged previously, it's more likely that more state and regulatory intervention is the defining theme. We hear more often these day about John Lewis, co-ops, mutuals etc, but it's not clear how serious politicians are about actively promoting such alternatives rather than just saying they like the idea of other ownership models. We are already seeing some renewed interest on the British left in something like co-determination, but again it's not clear that this has momentum yet (it's interesting that some businesses might like it more than some trade unionists).

But even though where we go next isn't entirely clear, I do think we look to be moving on. It looks like the 1990s is finally coming to an end in UK corporate governance.

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