The ongoing saga of the governance of Britain’s Railways

A case in Corporate Governance: Principles, Policies and Practices (Network Rail case 3.2, page 80) raises some interesting philosophical questions about the appropriate relationship between individuals, enterprises, and the state. The people in this case are British train travellers and taxpayers; the enterprises are the state-controlled Network Rail and private train-operating companies; the state is the UK government. Where should power and accountability lie? What is the most appropriate governance structure – a nationalized entity like the previous British Rail, individual private, profit-orientated train operating companies as now, with Railtrack plc responsible for the tracks, stations and signalling selling its services to the operating companies, or a re-classified state-owned corporation, with the national Treasury responsible for its debt?

The case quotes the then leader of the UK’s Labour opposition party, Ed Miliband, saying that when he returned to power at the 2015 election, he would consider re-nationalising the British railways system, re-establishing British Rail and taking over the privatised train operating companies. In the event the Labour party lost that election.

In June 2015, the Government suspended work upgrading two of the country’s most congested rail lines – Mainline Midland and the TransPennine route – because of cost overruns and missed targets. The decision came from the Treasury, which took over responsibility for Network Rail funding and therefore its debt after Network Rail was reorganized into a state-owned company.

Three months later, the rail regulator, the Office of Rail and Road, warned that the company might be in breach of its licence after they found flaws in the way it handled major projects. But the Government refused to release a critical report, which spelt out serious problems with Network Rail and might have undermined Government pledges, because of pending elections.

In July 2015, the Government replaced the Chairman of Network Rail, Richard Parry-Jones with Sir Peter Hendy. The Government also appointed Nicola Shaw, head of HS1[1] (the company known as High Speed 1, which runs the successful Channel Tunnel Rail Link) to draw up plans for Network Rail’s structure and funding. “Network Rail is not working,” she said, “There was a big change last year when its debt (then £38bn) was taken over by the Government. When you have a big change you ought to think about what you want to do from here.” The options she is considering include:

  • government continuing to fund the operation;
  • auctioning various routes (sections of track) as concessions to pension funds and sovereign wealth funds;
  • privatising the entire operation through a public listing.

Shaw said that she would stop short of considering reuniting track and train operations, as was the case under the previously nationalised British Rail. In September 2015, government ministers moved closer to a break up and sell off of Network Rail with plans for a radical overhaul of operations, shifting decisions on track maintenance and new projects to regional line managers. By February 2016, Shaw was suggesting spinning off individual lines to investors and introducing an agency to oversee the industry at arm’s length from government.

While waiting for the Shaw proposals, it seemed that the Chief Executive of Network Rail, Mark Carne, was being overseen by a civil servant, Philip Rutnam, permanent secretary at the Department of Transport, who was previously a merchant banker.

In October 2015, the Regulator issued a damning report naming ‘systemic failings’: a third of railway upgrades – new stations, extra track capacity, electrification of lines – were running late, and key project costs were spiralling out of control. In November 2015, the regulator fined Network Rail £2 million for delays and cancellations that constituted a breach of its licence. By November 2015, Network Rail admitted that train punctuality was not good enough as its debts mounted and six-month pre-tax profits fell by 23% to £246 million while operating costs rose by £88 million.

Meanwhile, Jeremy Corbyn, unexpectedly elected leader of the Labour Party in May 2015, put forward detailed proposals for the re-nationalisation of the fifteen independent train operating companies. Citing the continuing increase in rail fares, he said that bringing the entire network, including Network Rail, back under government control, had widespread support. Legal experts pointed out the potential difficulties, not least European Union law which requires member states to open up their transport networks to cross-border competition, which would rule out UK nationalisation. But in June 2016, the electorate decided in a referendum (Brexit) that the UK should leave the European Union.

Meanwhile the problems of the British railway system continue unabated. Blaming labour disputes, old rolling stock, and track delays, the Southern Railway network cut over 300 trains a day claiming this would make their services more “resilient”. Plans to re-route the new high speed line from London to the North ran through a newly built housing estate. Delays to rail, signalling, and electrification upgrades led to further late running and cancelled trains.

The Times in an editorial wrote that: ‘Thirteen years after its creation, Network Rail remains a byword for botched corporate governance. Without shareholders, ministerial oversight or direct contact with passengers, it is accountable chiefly to itself. It carries an unsustainable £38 billion debt burden but as a public body it has little incentive to pay this down or force on its staff the efficiencies that would cut costs.’

This has to be one of the longest running, unresolved corporate governance cases in the world.

[1] HS1 is owned by the Canadian investment funds Borealis Infrastructure and the Ontario Teachers’ Pension Plan.  It has a 30 year concession to run the Channel Tunnel rail link.

Bob Tricker, July 2016

Aggressive Tax Avoidance

The use of tax havens and other devices by international corporations, which was waiting in the wings when the third edition of Corporate Governance: Principles, Policies and Practices was written in 2015 (page 404), has now come centre stage.  The corporate governance debate on the topic of, so-called, aggressive tax avoidance seems to have consolidated into two main strands.

On the one hand are those directors and their professional advisers who argue that their role is to maximize their shareholders’ wealth in the long-term, running their organizations while keeping within the regulation and law of each country in which they operate. ‘Tax strategies such as transferring profits from high to low (or no) tax regimes by moving head office domicile, re-routing orders, or charging licence fees, are completely legal or we do not use them’, they say. ‘If governments and regulators do not approve of such strategies, they must change the regulations or the law.’

On the other hand, a growing school of thought argues that the board of a company owes a duty to a wider range of stakeholders than just their shareholders. If a company shifts profits out of a country in which it has earned those profits, the taxpayers of that country are denied the tax benefits that should accrue from the revenues they have generated. Though such a transfer may be legal, it is not fair and could be considered unethical.

In the UK, both the business and popular press have highlighted cases in which large companies and wealthy individuals have failed to pay UK tax. For example, London jeweller Mappin and Webb, holder of the silversmith warrant from Her Majesty the Queen, was shown to have paid no tax for five years on profits of £66 million. It transpired that Mappin and Webb was bought in 2013 by US private equity firm Aurum, which has a base in Luxembourg, a pivotal tax avoidance hub, even though a member of the European Union. Cadbury, the chocolate maker, was also shown to have paid no UK tax in 2015, although it generated over £2 billion in revenues. Cadbury had been sold to US corporation Kraft. The UK tax authorities have also challenged a number of schemes designed by tax accountants and lawyers to reduce or eliminate income tax for rich individuals, including sports stars, media personalities, and business people.

In the United States the Foreign Account Tax Compliance Act (FATCA) is intended to detect tax evasion by US citizens who hide money outside the US. The act requires all financial institutions, wherever they are, to report on the existence of all accounts and financial transactions of US citizens. This call for greater transparency has had unexpected consequences: some UK financial institutions now refuse to accept US clients, because the reporting requirements and the penalties for non-reporting are too great, and some American expats have begun the long process of renouncing their citizenship.

But tax havens are usually far more than vehicles for reducing tax. In fact it would be more appropriate to call them safe havens. Some companies incorporate in safe havens legitimately, even though they have no operations there, to reduce regulation and filing requirements, thus keeping their ownership and financial details unobtrusive. The majority of Hong Kong based companies listed on the Hong Kong Stock Exchange are incorporated in safe havens, many in the BVI. But others, of course, use safe havens as a bolt hole to hide the proceeds of crime or to launder money. Then, of course, there are those who use safe havens to reduce or avoid tax. So, some safe haven users are legitimate and legal; others suspect and, possibly, cloaking illegal activities.

The following table lists most of the significant safe havens. There are a few more minor ones.

Tricker post table

The classic safe haven has been Switzerland, with its banking secrecy laws. Although in recent years, Swiss banks operating in some countries, including the US and the UK, have been pressurized to provide information. Panama has recently come into prominence because of the leaked ‘Panama Papers’ from law firm Mossack Fonseca, which gave explicit details of many firms and individuals involved in offshore financial arrangements. The US state of Delaware provides no protection from US federal taxes, but does have a business friendly court and is less bureaucratic than many other states, which is why so many US corporations are incorporated there.

The British safe havens that are Crown Dependencies or British Overseas Territories have the Queen of England as Head of State and their final court of appeal is the UK Privy Council. Most are also members of the British Commonwealth, as are the Bahamas and the Cook Islands.

Just before being replaced, UK Prime Minister David Cameron held an international conference in May 2016 in London, which brought together many (but not all) of the safe havens with representatives of major economies. The main conclusion was of the need for more transparency, including information about the ultimate owners of companies resident in tax havens.

Bob Tricker, July 2016


Executive remuneration

For many years executive remuneration has been one of the ‘hot topics’ in corporate governance. Each year there is a furore around executive remuneration with the remuneration of CEOs often being a particular area of contention. This year we have seen the spotlight focussed on the remuneration of CEOs at high profile companies such as BP and WPP resulting in much shareholder comment and media attention.

There has been a lot of shareholder dissent this year over the executive remuneration packages at FTSE 100 companies. David Oakley, Michael Pooler and Scheherazade Daneshkhu in their article ‘UK companies switch to listening mode as heat rises on top pay’ (13 May 2016, Financial Times) state ‘Some of Britain’s largest companies are preparing for a summer of tense consultations on executive pay after one of the biggest waves of shareholder protests since votes on remuneration were introduced in 2002’. They highlight the top ten protests of 2016 (measured by % votes cast against remuneration packages) with BP, and Smith & Nephew receiving the highest levels of votes against, followed by Shire, Anglo-American, Devro, Aberdeen Asset, Lakehouse, SDL, Bunzl and Thomas Cook.  However, the votes against were in the majority only at BP, and Smith & Nephew, though the level of dissent was significant and sufficiently high to give concern to boards and remuneration committees at all of the companies listed in the top ten protest votes.

The interesting case of Lloyd Blankfein, Chairman and Chief Executive Officer at Goldman Sachs, gave rise to corporate governance concerns on two fronts. Firstly, Blankfein has held the roles of Chairman and CEO since 2006 and secondly concerns over the executive remuneration packages for the CEO and other executive directors. Alistair Gray, in his article ‘Goldman investors revolt over executive pay’ (20 May 2016, Financial Times), reports that shareholders and corporate governance advisors, such as Institutional Shareholder Services (ISS), were concerned that the costs of a multi-billion dollar legal settlement relating to mis-sold mortgage-backed securities before the financial crisis were not taken into account when determining executive remuneration. He highlights that ‘about a third of votes were cast against the remuneration of top managers……[and] a proposal to separate the roles of chairman and chief executive after Mr Blankfein steps down received a similar level of support’. Nonetheless, around two thirds of shareholders supported the executive remuneration plan; the fact that Mr Blankfein and other top executives each took a 1$million pay cut in 2015 may have influenced this voting outcome.

Of course, there is also concern over executive pay in many other countries. For example, recently the French government has taken action to give shareholders more power over executive pay.  Anne-Sylvaine Chassany’s article ‘French shareholders win say on executive pay’ (10 June 2016, Financial Times) highlights how a dispute at Renault between shareholders and the board of directors over executive pay contributed to a ‘UK-inspired provision in the Socialist government’s anti-corruption bill [which] will allow shareholders to vote on the pay packages of chief executives when they are hired or when the structure of their compensation changes. But it goes further than the UK say-on-pay approach by also allowing them to turn down the variable part, which is tied to companies’ annual performance, every year’.

It is clear that concern over executive remuneration packages will continue to generate shareholder dissent. The increasing emphasis on shareholder engagement should contribute to institutional shareholders in particular taking action against executive remuneration packages which are seen as over-generous – especially in cases where companies are underperforming.

Chris Mallin, June 2016

Shareholder communication

Some ongoing corporate governance concerns

It has been a while since I contributed to OUP’s corporate governance blog, which I share with Professor Chris Mallin. So I thought that, rather than focusing on a single theme, I would comment on issues that are currently concerning directors and their professional advisers around the world.

In particular I will address shareholder communication, shareholder engagement, executive compensation, cyber security, and the challenges of cronyism and corruption.

Shareholder communication

Listed companies need to communicate with their shareholders. Market analysts, potential investors, regulators, and others in the market also need ongoing knowledge about the company.  Formal requirements for such information are found in company law and stock exchange rules.  But companies need to go beyond these regulatory, financially-orientated demands.

In the original model of the joint-stock, limited-liability company shareholders were individuals, their numbers small, and their needs for information tended to be similar. Directors could communicate quite easily with them; indeed in many cases they knew them personally. But that was 150 years ago!

Today, shareholders are no longer homogeneous. The shareholders of a listed company could include institutional investors actively involved in the company’s corporate governance issues, passive institutional investors, such as index-tracking funds with little interest in corporate information, dominant investors, perhaps the company’s founders or their family trusts, hedge funds, private equity investors, state owned corporations, sovereign funds, and of course retail shareholders – individuals, usually with relatively small holdings.

Clearly, the expectations of such investors, their levels of business sophistication, and their need for information differ. However, company law and stock exchange rules seldom recognize such differences.

Moreover, some listed companies may not be sure who some of their shareholders actually are. In the old days, details of a new investor were duly recorded in the share register and a hand-written share certificate provided. But in today’s scripless system, holdings are recorded centrally and may be deposited with brokers. So the shares may be held in the name of the broker or custodian participant, with the actual investor not registered as the shareholder. Ownership information can also get buried in the string of intermediaries.

So what information should a company provide?

In many jurisdictions today, the call is for narrative information to supplement the classical, financial reports. For example, the Hong Kong Companies’ Ordinance, which came into effect in March 2014, calls for the publication of a directors’ report for the financial year containing a business review including:

  • a review of the company’s business;
  • a description of the principal risks and uncertainties facing the company;
  • particulars of important events affecting the company that have occurred since the end of the financial year;
  • an indication of likely future development in the company’s business.

Further, to assist the understanding of the development, performance, and position of the company, a business review must also include:

  • an analysis using financial key performance indicators, which are factors that effectively measure the development, performance or position of the company’s business;
  • a discussion of:
    • the company’s environmental policies and performance;
    • the company’s compliance with the relevant laws and regulations that have a significant impact on the company;
    • an account of the company’s key relationships with its employees, customers and suppliers and others that have a significant impact on the company and on which the company’s success depends.

In the United States and the UK, calls are also continuing for more information on companies’ environmental, social, and governance policies and performance (frequently referred to as ‘ESG issues’).

However, the decision on exactly what information to provide and in what detail is challenging. Too little and commentators might register disapproval; too much and the company’s competitive position could be eroded or ongoing negotiations, for example over an acquisition, could be jeopardized. The danger is that, in meeting the regulatory and other expectations, companies’ statements contain more public relations commentary than hard fact.

The Hong Kong Institute of Chartered Secretaries (HKICS) is currently undertaking a survey (in which I am involved) exploring shareholder communications in companies listed on the Hong Kong Stock Exchange. The results are due to be published later this year, and will be linked to this blog in due course.

The HKICS published guidance notes in 2009, emphasizing the discretionary opportunities available to companies to communicate with their investors and the market. They cited press releases, corporate websites with dedicated investor relations pages, company presentations, group briefings, and meetings ‘one-on-one’ with individuals. Such opportunities could be used, the notes suggested, to ‘provide background to support the already publicly disclosed information, as well as to articulate:

  • long-term strategy;
  • organization history, vision, and goals;
  • management philosophy and the strength and depth of management;
  • competitive advantages and risks;
  • industry trends and issues;
  • key profit drivers in the business’

But there is an inevitable dilemma in discretionary communication. One-on-one communication is fraught with difficulty. To protect the integrity of their market, stock exchanges require information which might affect share prices to be given to the entire investment community at the same time. So, can meaningful information be given to one, or a few, shareholders without giving them undue advantage by disclosing price-sensitive information?

Companies need policies on the conduct of meetings with analysts and how to respond to questions about future earnings, if necessary correcting forecasts they might have made about the company and its prospects. Companies could consider publishing their formal disclosure policy, which needs to be in line with their overall corporate governance strategy.

Bob Tricker, May 2016
(for more on Professor Tricker’s publications and videoed lectures see

On shareholder engagement

Some ongoing corporate governance concerns

It has been a while since I contributed to OUP’s corporate governance blog, which I share with Professor Chris Mallin. So I thought that, rather than focusing on a single theme, I would comment on issues that are currently concerning directors and their professional advisers around the world.

In particular I will address shareholder communication, shareholder engagement, executive compensation, cyber security, and the challenges of cronyism and corruption.

On shareholder engagement

Few institutional investors in the United States involved themselves directly in the governance of companies in which they invested prior to the failure of Enron, Waste Management and others in the early 2000s, and the collapse of Lehman Brothers and the bailout of financial institutions a few years later. Subsequently many felt the needed to be more committed. Many commentators also urged them to do so.

Involvement by shareholders in corporate matters can take many forms, for example:

  • submitting resolutions for decision at shareholder meetings;
  • rigorously voting shares at every opportunity;
  • campaigning on company matters though the media;
  • lobbying corporate regulators on company issues;
  • initiating a dialogue with the company.

Recent topics for shareholder engagement in the US and the UK have included:

  • alleged excessive levels of executive compensation;
  • executive incentive schemes that emphasize short- term performance;
  • de-emphasizing quarterly earnings to swing the strategic focus from short-term to longer-term;
  • calling for information on longer-term corporate strategies;
  • separation of the roles of chief executive and board chairman (still combined in some US corporations);
  • the composition and diversity of the board.

Recent surveys by IRRC, the Investor Responsibility Research Center in the United States (2011, revised 2014) reported that the level of engagement between investors and publicly-traded U.S. corporations had reached an ‘all time high.’ By ‘engagement’, the IRRC survey meant ‘direct communication between the corporation and investors on specific topics’.

Companies, it seemed, tended to view shareholder engagement as a series of discrete conversations. Investors, on the other hand, saw it as an ongoing process whose success depended on subsequent concrete action by the company.

Companies said they were devoting more resources to shareholder engagement, often through an executive team, with investment relations officers and representatives of the CFO and the Corporate Secretary. In some cases, directors were personally involved, including the board chairman, the senior outside (non-executive) director, and the chairmen of the board’s audit or compensation committees.

The IRRC report concluded that ‘evidence suggests that overall engagement levels will continue to trend upward, as investors seek to better understand, and mitigate risks at companies they intend to hold for the long term, while issuers seek to win support for company proposals, ward off activists, and keep shareholders happily invested in the stock.

A recent development (press reports March 2016) has been major institutional investors, such as Blackrock, Fidelity, and Schroders forming an Investment Association to engage with companies, challenging poor performance, excessive pay deals, or calling for information on longer-term corporate strategies rather than emphasizing quarterly results. This potential of ‘collective engagement’ increases the power of large shareholders to hold companies to account.

The pioneers of shareholder engagement were radical groups and religious organizations who used their shareholder votes to encourage change in corporate policies such as trading in weapons, tobacco, or alcohol. The movement to encourage corporate social responsibility followed, seeking to align business practices with desirable societal expectations in the interest of all stakeholders affected by the business activities.

Some writers argue that the more a company engages with its stakeholders, the more socially responsible it must be and the better its chances of long-term sustainability and improved shareholder value. However, research[1] on the topic has challenged that notion. More reporting does not necessarily lead to better relationships. Many other factors influence interactions between companies and their investors.

[1] Greenwood, Michelle, Stakeholder Engagement: beyond the myth of corporate responsibility, Journal of Business Ethics (2007) 74:315-317, Springer

Bob Tricker, May 2016
(for more on Professor Tricker’s publications and videoed lectures see

Executive compensation

Some ongoing corporate governance concerns

It has been a while since I contributed to OUP’s corporate governance blog, which I share with Professor Chris Mallin. So I thought that, rather than focusing on a single theme, I would comment on issues that are currently concerning directors and their professional advisers around the world.

In particular I will address shareholder communication, shareholder engagement, executive compensation, cyber security, and the challenges of cronyism and corruption.

Executive compensation

Alleged excessive director level rewards remain one of the most contentious issues in corporate governance. Shareholder demands for a ‘say- on-pay’ have increased, although such intervention continues to be exhortatory rather than binding on companies.  A growing disparity between the wealth and rewards of the few at the top of society and the rest has swung the focus onto executive compensation. The subject also provides a flash point for activists challenging the role of capitalism society.

The traditional solution of the board-level remuneration committee, made up of independent, outside, non-executive directors, does not seem as effective as it was when the late Sir Adrian Cadbury included the idea in the first corporate governance code (1992). For one thing, those outside directors may well be executives from other companies, with their own interests in setting high remuneration levels. For another, industry norms for total remuneration seem to have been rising, thus setting bench-marks for levels needed to attract and hold the best people. Professional firms offering pay level advice tend to reinforce high levels industry-wide.

But new approaches have been appearing. The relationship between reward and performance has come under the spotlight, particularly where the reward seems to be unrelated (or worse inversely related) to performance. Some companies have adopted ‘claw-back’ terms that penalize top earners if they fail to meet set performance goals in the longer term. In Canada, institutional investors have called for the idea to become governance best practice. Other companies have used peer reviews of reward systems in their business sector.

Remuneration decisions should not be made piecemeal. Boards need to establish the underlying basis of their remuneration policy. Moreover, that policy needs to be disclosed to shareholders and other interested parties. Whilst maintaining an appropriate level of individual privacy, decisions on top level remuneration benefit from transparency.

Bob Tricker, May 2016
(for more on Professor Tricker’s publications and videoed lectures see

Cyber risk and security

Some ongoing corporate governance concerns

It has been a while since I contributed to OUP’s corporate governance blog, which I share with Professor Chris Mallin. So I thought that, rather than focusing on a single theme, I would comment on issues that are currently concerning directors and their professional advisers around the world.

In particular I will address shareholder communication, shareholder engagement, executive compensation, cyber security, and the challenges of cronyism and corruption.

Cyber risk and security

It is now widely recognized that strategies for identifying corporate vulnerabilities and managing risk are part of the corporate governance responsibility of every board. Although some boards could usefully spend more time assessing the potential of strategic risks faced throughout their group.  (BP’s Deepwater Horizon oil rig disaster and the Fukushima Daiichi power station disaster for Tokyo Electric Power come to mind). An interesting idea adopted by a few boards is the creation of ‘play-books,’ which develop scenarios of possible strategic risks and chart the company’s planned response should they arise.

The growing risk of cyber attack or IT system breakdown is recognized by many boards but cyber governance is still in its infancy. Cyber warfare could strike a company in a number of ways, for example through:

  • communication failure between parts of the business or its supply chain;
  • loss of service to customers;
  • espionage to extract confidential information or trade secrets;
  • hacking to obtain personnel or customer records;
  • intentional destruction of records or communication systems;
  • fraud to divert funds from the company or hide fraudulent transactions;
  • deliberate destruction or falsification of records;
  • destruction of company correspondence files.

No doubt a thoughtful board will identify other possibilities, not least the risk of providing the board papers online. To ensure that they fulfil their fiduciary duty, boards need to ensure that their risk management strategy fully covers the risk of cyber attack and IT systems breakdown. Supporting policies covering, for example, stand-by facilities, back-up data storage, and recovery systems need to in place, tested, and regularly reviewed.

In an ever-interconnected business world, dependent on the internet and modern telecommunication, the threat of significant loss to profits, markets, or indeed to survival is real. Cyber governance is an increasingly significant part of a board’s corporate governance portfolio. It needs to have the right tools in its corporate governance tool kit.

Bob Tricker, May 2016
(for more on Professor Tricker’s publications and videoed lectures see

Cronyism and corruption

Some ongoing corporate governance concerns

It has been a while since I contributed to OUP’s corporate governance blog, which I share with Professor Chris Mallin. So I thought that, rather than focusing on a single theme, I would comment on issues that are currently concerning directors and their professional advisers around the world.

In particular I will address shareholder communication, shareholder engagement, executive compensation, cyber security, and the challenges of cronyism and corruption.

Cronyism and corruption

Most major companies operate through subsidiary and associate companies, with supply chains, business operations, and marketing systems around the world. For the board of the holding company in, say, New York or London that can present a significant challenge.

Of course, boards expect those around the world who report to them to stay within the laws and regulations of their respective countries. But cultures and business traditions differ. The way business is done and the expectations of key players may be significantly different from Western norms. Government contracts may traditionally be awarded only after the decision makers are rewarded. Cronies may get preferential treatment. Buyers or sellers may expect bribes or look for reciprocal rewards.

Corruption remains a basis of business in some places, as can be seen in recent corruption scandals in Brazil and Malaysia. China, India, and Nigeria also suffer from endemic bribery and corruption, although their respective leaders are making significant efforts to root it out. A recent study by UK law firm Eversheds (Times, 9 May 2016) found that almost two thirds of UK directors believed that their anti-corruption policies did not work, and recognized that this was an important issue for their company.

The moral compass of companies is set at the top. Establishing and maintaining the corporate culture is an essential part of the governance of every corporation. That means more than just publishing codes of business ethics and corporate procedures.   It is reflected in the decisions the main board itself makes. For example, what is the board’s attitude towards aggressive tax avoidance and the movement of group funds through tax havens?

An important corporate governance duty of every director is to ensure that the company sets appropriate standards of business behaviour and confirms that they are followed everywhere that the company does business. The chairman of the board has a vital leadership role.

Bob Tricker, May 2016

(for more on Professor Tricker’s publications and videoed lectures see

FRC Annual Report on Developments in Corporate Governance and Stewardship 2015

In the Introduction and Overall Assessment to its Annual Report ‘Developments in Corporate Governance and Stewardship 2015’ (, the UK’s Financial Reporting Council (FRC) highlighted that 2015 was a year of consolidation for the UK Corporate Governance Code (the Code) which had some significant changes made in 2014. Companies’ explanations improved in quality and there was a high level of compliance with the Code ‘with 90 per cent of FTSE 350 companies reporting compliance with all, or all but one or two, of its provisions’. The FRC’s ongoing strategy for 2016/19 is to give time for recent changes to embed and not to consider further changes – other than those arising from the implementation of the EU Audit Regulation and Directive – to the Code until 2019.

The importance of culture is recognised as the Code makes it clear that there is a role for the board in ‘establishing the culture, values and ethics of the company’ and in setting ‘the tone from the top’. The FRC plans to publish findings of a study looking at the role of boards in shaping and embedding a desired culture in the summer of 2016.

In relation to the Stewardship Code, the FRC intends to make a public assessment of the reporting of signatories – again in the summer of 2016 – as it is of the view that ‘the reporting of too many signatories does not demonstrate that they are following through on their commitment [to the Stewardship Code]’.

The next section of the Annual Report on the Governance of Listed Companies details how the UK Corporate Governance Code has been implemented during 2015 and provides an assessment of the quality of reporting on corporate governance. There is an interesting summary of the top 10 areas of non-compliance and ‘Code provision B.1.2, which states that at least half the board (excluding the chairman) should be independent, remains the lowest rated in terms of compliance among FTSE 350 companies’. In 2015, 42 FTSE 350 companies did not comply with this provision although the FRC note that ‘as with last year just under half had returned to having more than 50 per cent of the board as independent non-executive directors at the time their annual report and accounts was published. On the whole non-compliance was usually as a result of retirements rather than a specific wish not to comply.’ As well as overall compliance rates, this section of the Annual Report covers the quality of explanations for non-compliance; Code changes in 2012 including audit tendering, audit committee reporting, boardroom diversity, the ‘fair, balanced and understandable’ aspects of the company’s annual report and accounts; and Code changes in 2014 relating to risk management and internal control, remuneration, and shareholder engagement.

The following section of the Annual Report covers Stewardship and Engagement. The FRC points out that the quality of signatory statements varies considerably and that they would like to see improved reporting by all signatories across the seven principles of the Stewardship Code. The FRC will be contacting signatories individually to outline where their statements need to improve and will tier signatories publicly: ‘Tier 1 signatories will be those that meet our reporting expectations and provide evidence of the implementation of their approach to stewardship. We will pay particular attention to information on conflicts of interest disclosures, evidence of engagement and the approach to resourcing and integration of stewardship. Tier 2 signatories will be those where improvements are needed.’ As mentioned earlier, they will announce the outcome in the summer of 2016. This section of the Annual Report also covers engagement in the 2015 AGM season; company and investor expectations and reporting; collective engagement; proxy advisors; and voting and ownership.

The penultimate section of the Annual Report covers Other Corporate Governance and Stewardship Developments including Audit Regulation and Directive; Lord Davies Report on diversity (highlighting that FTSE 100 companies now have over 26% of the directorships held by women, and that whilst in 2011 there were 152 all male boards in the FTSE 350, now there are only 15 companies left with all male boards, all within the FTSE 250); the European Commission’s recommendation on the quality of corporate governance reporting (the ‘comply or explain principle’); the review of the OECD’s Principles of Corporate Governance; the European Commission’s Shareholder Rights Directive; the European Securities and Markets Authority (ESMA) Call for Evidence; fiduciary duties; the ICGN Global Stewardship Code consultation; other Stewardship initiatives; and the Capital Markets Union.

The final section of the Annual Report summarises the Corporate Governance and Stewardship Work for 2016/17. As well as mentioning the main activities, the FRC points out that its work in the ‘areas of governance and stewardship overlaps with that of many others, and we continue to work closely with market participants, representative organisations, service providers, regulators and Government departments.’

The Annual Report therefore provides both an interesting position paper in terms of where we are now in UK corporate governance and also highlights areas which the FRC will be focussing on for improvement.

As the AGM season is upon us, it will be interesting to see how companies deal with corporate governance hot topics such as the perennial executive remuneration issues – now very much in the headlines at BP and WPP – and how investors respond in terms of their stewardship role.

Chris Mallin, April 2016

Move Away from Short-Termism?

There has been a long-standing debate about short-termism versus the longer-term, with companies often appearing to focus on short-term earnings to the detriment of the longer-term sustainable value of the firm. Seminal works such as Paul Marsh’s ‘Short-Termism on Trial’, published by the Institutional Fund Managers’ Association in 1990, pointed out that directors might focus on the short-term, believing, perhaps erroneously, that this is the focus that shareholders wish them to take.

Over two decades later, the ‘Kay Review of UK Equity Markets and Long-Term Decision Making Final Report (July 2012)’ published by the Department for Business, Innovation and Skills stated “Overall we conclude that short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain.”… “We must create cultures in which business and finance can work together to create high performing companies and earn returns for savers on a sustainable basis.”

Subsequently, David Oakley highlights how the UK’s National Grid had ceased to provide quarterly reporting of results in his article ‘John Kay’s battle against short-termism reaps rewards’ (February 1st 2015, Financial Times). Reporting on quarterly results could increase any focus on the short-term by shareholders.

Roger L. Martin writes an interesting article with a US perspective, ‘Yes, Short-termism Really Is a Problem’, (9th October 2015, Harvard Business Review), and states that “The executives I work with speak openly about the market pressures for short-term performance. Though my perspective might be colored [by] my empathy toward them, I would say that to a person, they want to ensure that their companies do as well as possible in the long run. But they believe the capital markets place unrealistic and unproductive constraints on them.”

Two recent articles, one in The New York Times and another in the Financial Times, mention the recent activities of Larry Fink, co-founder and chief executive of BlackRock. The New York Times (1st February 2016) article ‘Some Heresy on Wall Street: Look Past the Quarter’ by Andrew Ross Sorkin, details how Larry Fink wrote to 500 chief executives asking them to stop providing quarterly earnings estimates, stating that “Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need”. However, Mr Fink believes that companies should still report quarterly results which provide transparency (but not be so focussed on earnings per share). Moreover, he is asking CEOs and corporate boards to provide “a strategic framework for long-term value creation”. He is also asking companies to consider environmental, social, and governance (ESG) issues as core to their business rather than as an afterthought.

Brooke Masters in her article ‘Governance Rules Need to be Set by Objective Parties’ (6th/7th February 2016, Financial Times), highlights the involvement of Larry Fink in a meeting of large asset managers brought together by James Dimon, JPMorgan Chase’s Chief Executive, with the aim of producing “governance principles for public companies to encourage long-term thinking and reduce friction with shareholders”. However Brooke Masters points out that some of the asset managers in the meeting (BlackRock aside) were amongst the least likely to vote against management on contentious issues. She concludes that any governance principles produced should not weaken the power of activist investors and “more shareholder pressure rather than less would seem to be the solution”.

It remains to be seen whether CEOs and corporate boards are able to move away successfully from the short-term emphasis to one of longer-term sustainable value. However, a more long-term focus by investors is key to this, and directors embracing ESG as core to the business is another necessary step in this direction.

Chris Mallin, February 2016