Tuesday, 25 September 2012

Corporate governance whodunnits

Anthony Bolton at Fidelity was occasionally called the silent assassin for his role in taking out leaders of underperforming companies. Events of this season, and in particular the emerging picture of asset manager voting behaviour, have reminded me of this label.

Whilst most of the attention focused on the 'shareholder spring ' (bleurgh!) has concerned remuneration issues, we've also seen a number of chief execs forced out - at Aviva, Astrazeneca and Trinity Mirror, for example.In all the three cases I mentioned, the departure of the chief executives was announced around the time of the respective company's AGM. In other words, there was an opportunity to use a formal right - the vote - both functionally (adding to a collective majority vote against the director) and as a signal (even if a majority wasn't achieved a high vote could make the director's position very difficult).

It didn't happen. Only in the case of Sly Bailey at Trinity Mirror was there a significant vote against the chief executive, and it was still well short of a majority. At Aviva and Astrazeneca the votes against were tiny. At both Trinity Mirror and Aviva there were big votes against the remuneration report. Aviva was, of course, defeated and I think I'm right in saying at Trinity Mirror the oppose votes and abstentions were greater than the votes for, but on a straight for/against split it squeaked through. The argument for this focus is that concerns about the chief exec were combined with those about rewards despite poor performance. Hence some shareholders used the rem report vote to take out their frustrations, and the chief execs went anyway. Job done. Right?

But a couple of things about this leave me uncomfortable about this, and I'm interested in whether other people are bothered too. First, what is the point of having votes on director appointments if they aren't going to be used? I accept the point that much engagement around board issues takes place well away from the AGM. But in these three examples, based on the timing of departures, it is clear this wasn't the case. Although concerns dated back further, the pressure came at the time of the AGM. The right to vote could have been used, but wasn't.

What troubles me is that the formal signal that large shareholders - stewards if you want - sent via their vote was that they supported the chief executive. Just to be clear - large majorities voted FOR these directors. Investors didn't actively abstain, or just not vote, they voted in favour. If these shareholders did not wish to see the directors concerned continue on the board then, in my opinion, their actions subverted the signalling function of voting. Other market participants will have got the impression that the directors enjoyed overwhelming support, when actually they were being knifed. This, surely, totally hollows out voting? Why have it if it gets used in a way that sends the opposite signal of the shareholders' actual views?

In addition, this means that the 'assassins' hands are clean. I, and I am sure many others, know who some of asset managers were who pushed the directors out, but do their clients? If all they get is a quarterly report with voting decisions and a bit of narrative I suspect they might not do. The client will see the vote FOR recommendation on the relevant resolution. Unless the manager also reports that they met with the board and told them the chief executive had to go their fingerprints won't be on the knife. There will be no formal trace of the intervention (to remove a couple of FTSE100 chief execs), rather the formal record will suggest the opposite.

What also bothers me about this is that 'stewardship' is being presented as both a public policy solution to some issues, and being sort of undertaken in the public interest. It's a bit convoluted but the argument runs that savers are, broadly, the public and stewardship by asset managers helps fund their pensions by improving company performance. But if this quasi public interest role is being attributed to asset managers, shouldn't the public be able to know more about how it is being carried out?

If no-one is comfortable disclosing the fact that they pushed out a CEO (though I am in two minds about whether this is necessarily an inherently bad idea), shouldn't the punters at least be able to expect that the votes asset managers cast on their behalf reflect their actual views? After all we are talking about the removal of the heads of our largest public companies by organisations who only have the power to achieve this because they have control of other people's money.

It somehow feels fundamentally wrong that only those that work in the City know whodunnit.

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