Shareholder Committees

In a previous blog post, I discussed the Department for Business, Energy & Industrial Strategy (BEIS) Green Paper on Corporate Governance Reform issued in November 2016.

One of the options suggested in the Green Paper in relation to shareholder engagement on pay, was to ‘Establish a senior “shareholder” committee to engage with executive remuneration arrangements’. According to para 1.36, ‘A complementary or alternative way to enable greater shareholder engagement on pay might be to establish a senior Shareholder Committee to scrutinize remuneration and other key corporate issues such as long term strategy and directors’ appointments. The full implications of adapting any such model in the UK, however, would need careful consideration given its potential impact on our long-established unitary board structure.’

The idea of a shareholder committee received support from some organisations including a joint response to the Green Paper from The UK Shareholders’ Association (UKSA) and the UK Individual Shareholders’ Society (ShareSoc).  Both of these organisations represent the interests of private shareholders who invest directly or indirectly via nominee accounts in public companies or in other forms of equity-based investment.

Their joint response stated ‘We strongly support the concept of Shareholder Committees, provided that they represent the interests of all shareholders, including private investors and investors in employee share plans.’ They are of the view that ‘Shareholder  Committees  are  a  core  part  of  the  solution  to  the  problems  of  corporate  governance. There are many  other elements of governance and control that can be improved and we have commented  in  our  response  on  those  where  we  have  specific  knowledge.  However, without Shareholder  Committees,  and  concomitant  reform  to  restore  the  rights  of  individual  shareholders, other changes to corporate governance are unlikely to produce meaningful change.’

However, certain organisations, for example, Tomorrow’s Company, are wary of widening the scope to include issues such as remuneration.  Tomorrow’s Company’s website states that ‘The original idea proposed by Tomorrow’s Company in 2010 was for a Shareholder Committee which would involve shareholders large (and small) in the most important single governance decision – who represents them on boards. Later variants, like this one and that by Chris Philp MP, have widened the scope to involving investors in discussions about remuneration.’ Tomorrow’s Company then points out that ‘The risk of this more complicated approach is that it compromises the clear leadership responsibility of the board.’

 

Royal Bank of Scotland

A case in point is that of the Royal Bank of Scotland (RBS).  With over 70% ownership by UK taxpayers, there is a very real argument that its governance is of interest to the public more generally.  Aime Williams in her article ‘Shareholders clash with RBS’, (1^st April 2017, Financial Times) reports that ‘About 160 individual investors are pushing RBS to form a shareholders’ committee, which would allow retail investors to have a formal say on RBS proposals, such as executive pay, company strategy and director appointments.’

However, RBS’ preference is for a stakeholder committee which would allow a wider stakeholder group to have a voice and air any concerns to directors.  A key difference though, is that a stakeholder panel would have less power and therefore would likely be less effective than a shareholder committee, which would be able to wield more influence.

The RBS Annual General Meeting will be held on 11th May 2017.  It will be interesting to see the outcomes of various resolutions, especially on potentially contentious issues such as executive remuneration, and whether a shareholder committee is established in the future.

 

 

Chris Mallin

April 2017

Developing a shareholder strategy

A survey of shareholder communications in more than 400 companies listed on the Hong Kong Stock Exchange (HKSE) was published recently by the Hong Kong Institute of Chartered Secretaries (HKICS).   Since the HKSE ranks third equal with the Singapore Stock Exchange in world rankings (behind London and New York), it is likely that the findings have a wider significance.

The report, which I drafted, suggested that effective shareholder communications rest on an understanding of the shareholder base and their information needs. A key conclusion was that whilst some listed companies recognize that shareholder communications are vital, the majority do not and have some way to go to be effective.

Some of the key findings in the study were that:

• A sizeable proportion of listed companies did not know much about their shareholders – the survey results showed that a third of respondent companies did not know who their shareholders were. They did not regularly or routinely monitor their shareholder base.
• Some listed companies were not even bothered to find out – 5% of respondents said that they felt that they should be routinely monitoring who their shareholders were but did not: and a further 15.5% said they should be monitoring them on an ad hoc basis but did not.

• The majority of listed companies lack a shareholder communication strategy

–  58.3% of respondents recognized that their communications with their shareholders were inadequate or ‘somewhat inadequate’.  Most saw the need for improvement.  But 8.6%, although they recognized that their communications were inadequate, saw no need for change. Only 33.1%% thought that their shareholder communications were adequate.

• The vast majority did not think that all shareholders should be treated equally – Whilst respondents strongly believed that shareholders should be engaged more effectively, only a few (92) felt that all shareholders should be involved, whilst the majority (269) felt that engagement should only be with institutional investors and long-term shareholders. However, respondents believed that these investors had a stewardship role to proactively engage with the company.
• There is little accountability for shareholder communications at the CEO or board levels – Many companies (172) report information on their shareholder profile to senior management, the board, or board committees. But more companies (241) did not report the data or did not know how it was used.

• The company secretary is a source of help on investor relations – profiling the shareholder base in 52.5% of the companies responding, followed by the Head of Investor Relations (21.0%). Companies reported devoting more resources to investor relations activities including shareholder communication and engagement, with increasing significance for an investor relations function.

Five ‘imperatives’ were developed to give practical and effective guidance to the board of directors and senior management to enhance shareholder communications and investor relations for listed companies, namely to:

1. Develop an investor relations strategy within the corporate strategy
2. Know and regularly review the shareholder base
3. Formulate and regularly review shareholder communication policies
4. Formulate and regularly review shareholder engagement policies
5. Review the responsibility and accountability for investor relations

‘The full report can be read at: https://www.hkics.org.hk/index.php?_room=10&_action=detail&_page=3

(Click for the English or Chinese versions)

-Bob Tricker, 2017

 

A new idea in corporate governance – Shareholder Senates

Around twenty years ago I wrote that while the twentieth century had been the era of management, with its new management schools, management consultants, and management gurus, the twenty-first century would be the era of corporate governance.   Corporate governance has certainly now moved centre stage. Google has 52 million references to the phrase.

Interest in corporate governance has flourished. The late Sir Adrian Cadbury wrote the first corporate governance code – the UK’s Financial Aspects of Corporate Governance (1992).  He always emphasized that his report was not a comprehensive approach to corporate governance, but focused on the financial aspects. Nevertheless, he made proposals that are still pertinent ̶ the creation of board level audit committees, remuneration committees, and nomination committees, with independent outside directors; the separation of the board chairman from the CEO; and public reporting that the company had complied with the code or explaining why it had not.

Since then, corporate governance codes, often as stock exchange requirements, cover almost all listed companies around the world. But despite countless amendments, revisions, and rewrites most corporate governance development has been piecemeal. There has been relatively little original thinking. Most codes still adopt Cadbury’s voluntary ‘comply or explain’ approach. The principle exception is in the United States, where regulation and legislation are used to oversee the governance of corporations.

The development of corporate governance practice has almost always been in response to corporate failure or economic malaise. In the United States, the Securities and Exchange Commission (SEC) was set up in 1932–3, after the stock market crash of 1929 and the great depression that followed. The Cadbury report responded to concerns about corruption found in UK Government inspectors’ reports on failed companies including the collapse of Robert Maxwell’s’ corporate empire.

The US Sarbanes-Oxley Act (SOX 2002), was a response to the failure of Enron, Waste Management, and other companies, followed by the folding of the ‘Big Five’ accounting firm, Arthur Andersen, reducing the big five to the even bigger four. Unfortunately, SOX did not prevent the global financial crisis, starting around 2008, in which US companies such as Lehman Brothers failed and American International Group, Fannie Mae, Freddie Mac, and others were bailed-out by the US government. The result was further federal legislation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, called by some SOX 2, attempted to improve American financial regulation and the governance of the US financial services industry.

As yet, no over-arching theory of corporate governance has emerged. New thinking and new ideas are badly needed in the governance of organizations. A fundamental governance question for the modern public company, for example, is: What role should the shareholders play in corporate governance?

In the original mid-nineteenth model of the joint-stock limited liability company, the shareholders were mostly individuals–aristocrats and members of the newly forming affluent middle class. These shareholders appointed the directors who reported to them on their stewardship of the company. The directors may have known their shareholders personally. Shareholder meetings and votes were the way boards of directors were held to account. Indeed, in the original model accounts were audited by an audit committee, elected from among the shareholders themselves.

But today, individuals running their own portfolios form only a small part of the shareholder base. These ‘retail shareholders’ typically have relatively small holdings and little influence. They might also include directors, executives, and other employees of the company.

Significant shareholders are more likely to be:

• active institutional investors, such as mutual funds, pension funds, and financial institutions, closely interested in the company’s affairs who may be actively involved in corporate governance matters; and

• passive institutional investors, such as index-tracking funds required by their constitutions to invest in a given range of securities, using computer algorithms to make investment decisions, with little interest in corporate governance issues. The shareholder base could also include:
  • hedge funds gambling against the market and selling short, with real short-term interests in the business, but not in longer-term corporate governance;
  • private equity investors seeking short term strategic opportunities;
  • dominant investors, perhaps the company’s founders or their family trusts, who are closely interested in, and possibly actively involved in company affairs. Though they might hold only a minority of the voting equity, in some jurisdictions they can maintain ownership power through dual-class shares;
  • state-owned corporations, perhaps with a minority of their shares traded publically, and possibly influenced by state economic and political interests; and
  • sovereign funds, using state capital to invest, possibly with political or economic implications as well as financial interests.Concerns over corporate behaviour, such as allegedly excessive director remuneration, unclear or over-ambitious corporate strategies, or the lack of board diversity have led some politicians and other commentators to call for shareholders to exercise their duty to oversee board behaviour more fully. This has led to the emergence of proxy advisers; firms that study issues facing companies and advise institutional investors on voting decisions.

But votes in shareholder meetings are advisory; exhortatory at best. Shareholders’ votes do not bind the board. Directors do not have to follow them. Energetic efforts by some institutional investors, including grouping together, have not changed the underlying power structure.

Bob Monks, in his book Corpocracy (New York: Wiley, 2007), showed how power had moved over the years from owners to directors. Concerned by what he saw as an abuse of power, he co-founded Institutional Shareholder Services (ISS) in 1985 to wage proxy warfare on companies. These proxy battles continue to this day. However, the fundamental question remains: In the modern public company what should the role of shareholders be?

Is it, on the one hand, to preserve the nineteenth-century legal concept of the corporation–that the shareholders own the company and are expected to play a basic role in its governance by electing the directors and holding them to account. Or is it, on the other hand, for the shareholders to accept a corporate stakeholder role providing finance, just as suppliers provide goods and services, customers produce sales revenues, and the employees provide the work force?

I have just completed a study on shareholder communication for the Hong Kong Institute of Chartered Secretaries, which will be published shortly and duly noted in this blog. In a survey Hong Kong’s listed companies gave overwhelming support for the idea that shareholders should exercise a stewardship role in the governance of listed companies. In this they are in line with the opinions of many authorities around the world–regulators, legislators, and corporate governance commentators.

Had the alternative view been taken, that shareholders are just one of the various stakeholders in a corporation, appropriate governance models could be developed. The German supervisory level two-tier board could provide a start; members are nominated to represent both labour and capital (the employees and the investors). Representatives of other stakeholders could be added.

Such a development would reflect a change in the UK Companies’ law in 2006. Prior to that company law in the UK required directors to act in the best interests of the company, which effectively meant in the interest of the shareholders, in other words, by attempting to maximize shareholder value in the long term. But the Companies Act 2006 specifically spelled out a statutory duty to recognize the effect of board decisions on a wider public. For the first time in UK company law, corporate social responsibility (CSR) responsibilities were included among the formal duties of company directors:

‘A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to:

(a) the likely consequences of any decision in the long term

(b) the interests of the company’s employees

(c) the need to foster the company’s business relations with suppliers, customers, and others

(d) the impact of the company’s operations on the community and the environment

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.’

Thus UK company law now requires companies to consider employees, suppliers, customers, and other business partners, as well as the community and the environment, in their decisions.

However, if shareholders are to continue to be a responsible part of the corporate governance mechanism, how might that be achieved? If shareholders are really to affect corporate governance in the companies in which they invest, they need more power. New corporate governance models will have to be devised. One idea might be a Shareholder Senate.

Shareholder Senates

A Shareholder Senate would be a new governance body set mid-way between the company and the body of shareholders. Members of the Senate would be nominated by long-term institutional investors and elected by all the shareholders.

The Senate would meet formally with the board’s remuneration committee, its nomination committee, and its audit committee with the auditors. Periodically, it would have discussions with the Chairman and the entire board. It would also meet independently to formulate reports and make recommendations to shareholders.

The overall responsibility for the company and its management would remain with the board of directors. The Senate would have the authority to question, to advise, and to influence the company on its strategies, operational performance, and financial matters. For example, a Senate could question and challenge levels and methods of executive remuneration, the adequacy of risk assessment systems, the balance of skills, experience, and adequacy of the directors, and confirm that succession plans existed for all senior executives.

The Senate would not have the power to block the board’s decisions, nor could it hire and fire directors (as the German supervisory board can). But it would have the responsibility to liaise with the shareholders, and the power to recommend how they vote on specific motions. It could also introduce motions for shareholder meetings. Over time, Shareholder Senates would supplement and probably replace the work of proxy advisers.

Shareholder Senates would become a fundamental component of companies’ corporate governance structures and processes. Accordingly, members of the Senate would have fees and expenses reimbursed by the company, just as non-executive, outside directors have. The company would be responsible for publishing Senate reports and other communications with investors, just as it publishes other corporate reports.

Concern might be expressed that members of Shareholder Senates would receive unfair insider information. But Senate members could be placed in a similar position to directors who may not trade shares prior to the announcement of results. In fact, Senate members would be in a less exposed position than a nominee director elected by a major shareholder, because they would not attend board deliberations.

In fact, it would not be difficult to introduce a requirement for shareholder senates into companies’ legislation or to include them in corporate governance codes, operating on the ‘comply or explain’ principle.

The proposal for Shareholder Senates will not be welcomed by most directors and their boards, because they would inevitably mean a shift of power away from the boardroom back to the owners. However, there was plenty of antagonism in British board rooms to the original Cadbury Report proposals: many thought independent outside directors were an unnecessary imposition and an infringement of executive directors’ right to run their own companies.

There is little doubt that Shareholder Senates will not be achieved without legislation and regulation. Such developments could be prompted by the ongoing dissatisfaction with the governance of the modern corporation. The newly appointed British prime minster, Theresa May, following the UK’s referendum vote to leave the European Union, mentioned problems with the governance of British companies in her inaugural statement.

Corporate governance evolves. Dissatisfaction exists over the present corporate governance model. Some boards readily accept a responsibility to engage with their shareholders. Others do not. Some companies are run for the benefit of their owners. Others are not. Criticisms multiply of board-level excess, particularly over board-level remuneration. Shareholder Senates would provide an opportunity to re-establish owners’ rights. They would give investors a more effective say in the governance of their companies. Power would no longer be abdicated by the owners to the directors.

 

Bob Tricker

September 2016

Voting – Having a Say

Voting ones’ shares is seen as one of the main tools of corporate governance.  In recent times, votes have been cast against adoption of the annual report and accounts, against the appointment, or re-appointment, of certain directors, and against certain proposed strategies.  Votes can also be used via the ‘say on pay’ to signal displeasure at executive remuneration packages.  Although the ‘say on pay ‘ (discussed in more detail in this blog on 6^th April 09) is an advisory vote, it may nonetheless be quite effective at making boards think twice about the proposed pay packages for executive directors. 

However companies do not always take as much notice of the votes cast as one would like.  For example, the recent annual general meeting of Marks and Spencer is a case in point as regards the use of voting as a (vociferous) voice.  Andrea Felsted and Samantha Pearson (FT Page 17, 9^th July 09) in their article ‘M&S chief defiant amid revolt by investors’ highlight that nearly 38% of votes cast backed a resolution seeking the appointment of an independent chairman within the next year.  Sir Stuart Rose, who has been the centre of much criticism since taking on the roles of both chairman and chief executive, did not seem overly bothered by the investors’ views on this matter.  There was also much shareholder dissent over the re-election of the chairman of the remuneration committee and over the adoption of the remuneration committee report.

Withheld votes

Whilst the importance of the vote is universally accepted, let us consider what happens in the UK when a vote is withheld.  A withheld vote may signal that an investor has reservations about a resolution, or it may be a stronger expression that an investor is unhappy about a resolution, whilst falling short of actually voting against the resolution.  However when the ‘vote withheld box’ is ticked on proxy forms in the UK, the withheld votes are not counted as part of the votes cast. 

For example, after its annual general meeting in May 2009, Shell published the voting results on its website.  On Resolution 1 : Adoption of Annual Report & Accounts, there were:  ‘votes for’  3,301,631,965, ‘ votes against’  3,394,595, and ‘votes withheld’ 16,026,721.  However when indicating the percentage split of the votes, ‘votes for’ are shown as 99.90% and ‘votes against’ as 0.10%.   The votes withheld were nearly 5 times that of the votes against but nowhere are they reflected in the percentage totals of votes cast.  Similarly, on Resolution 4 : Re-appointment of Lord Kerr of Kinlochard as a Director of the Company, there were ‘votes for’  3,161,974,849, ‘votes against’  77,443,311, and ‘votes withheld’ 77,876,289.  The percentage allocation indicated 97.61% ‘votes for’ and 2.39% ‘votes against’.  The ‘votes withheld’ which again exceeded the ‘votes against’ were not reflected at all in the percentage totals.  It should be said that Shell does clearly state that “a ‘vote withheld’ is not a vote under English Law and is not counted in the calculation of the proportion of the votes ‘for’ and ‘against’ a resolution.”    http://www.shell.com/home/content/investor/shareholder/agm/annual_general_meeting.html

The Combined Code on Corporate Governance (2008) under Code provision D.2.1, states that  ‘For each resolution, proxy appointment forms should provide shareholders with the option to direct their proxy to vote either for or against the resolution or to withhold their vote. The proxy form and any announcement of the results of a vote should make it clear that a ’vote withheld’ is not a vote in law and will not be counted in the calculation of the proportion of the votes for and against the resolution.  However it’s interesting to note that a decade ago, the Report of the Committee of Inquiry into UK Vote Execution (1999), published by the National Association of Pension Funds, stated that whilst it was initially attracted to the idea of adding a third box (being an ‘abstention’ or ‘vote withheld’ box), it then decided that there were several arguments against the inclusion of such a third box.  Firstly it might provide investors with an ‘easy option’ so that rather than voting against, they withheld their votes; and secondly since withheld votes are not counted, and have no legal effect, then it could drive down the level of recorded votes. 

However as we have seen, the Combined Code (2008) does advocate the inclusion of a ‘vote withheld’ box on the proxy form.   Therefore, it could be that in practice the addition of a third box which allows a withheld vote but which is not counted, may lead to the understatement of the level of dissatisfaction with some resolutions.  Given that institutional investors are coming under more and more pressure to be seen to be active owners of shares, it may be that a ‘vote withheld’ will increasingly become seen as sitting on the fence, rather than taking a decision to vote against.

In the US, it would seem that abstentions do have a legal effect under a majority voting system.  For example, in a director election if there were more votes withheld than were voted for the candidate, then the candidate would not be elected, hence the abstentions (votes withheld) would have a legal effect.

Broker votes

Turning to US issues, the SEC has recently made some important changes to proxy voting.  Weil, Gotshal and Manges (2009) report that ‘the SEC approved a change to NYSE Rule 452, eliminating broker discretionary voting of uninstructed shares in uncontested director elections, which will have the effect of reducing the number of votes cast in favor of the board’s nominees in the election of directors and strengthen the influence of institutional investors and activist shareholders.’ http://www.weil.com/

Blank votes

However James McRitchie http://corpgov.net/news/news.html has brought to our attention the problem of blank proxy votes which go to management.  He highlights that fact that the broker vote issue that the SEC took care of is ‘where retail shareowners don’t submit a proxy (or voter information form) at all.  When that happens, the broker or bank can vote within 10 days of the meeting. The “blank vote” issue arises when the shareowner votes at least one item on their proxy but leaves some other items blank……..[the voting] platform for institutional investors doesn’t allow submission of blank votes, [but the] platform for retail holders does and the SEC allows them to fill in the blanks as instructed by brokers and banks (always with management)’.  Furthermore he states that ‘As shareowners who believe in democracy, we have filed suggested amendments to take away that discretionary authority to change blank votes, or non-votes, as they might be termed. We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.’

Concluding thoughts

Clearly the area of voting is a complex one and changes are being brought in over time to remove barriers to voting and to help ensure that votes are cast in a way which fairly reflects the owners’ intentions. A decade ago it would have seemed highly unlikely that many institutional shareholders would publish their voting levels in individual companies and on individual resolutions  but many institutional shareholders now do this.  In the US a number of institutional shareholders have gone a stage further and disclose their voting intentions prior to a company’s AGM.  Hopefully institutional shareholders in other countries will adopt this approach in future.

Chris Mallin 10^th July 2009.

A Grilling for Directors

– in which Bob Tricker continues his call for a radical rethink of the way power is exercised over companies by society.

In a previous blog, I argued that the relationship between auditors and directors, in which directors de facto appoint the auditors who then report to them, was too close. I proposed that auditors should be appointed by and report to regulators and, through them, to other interested stakeholders. In this blog I explore the way directors communicate with their shareholders and again develop a radical alternative to accepted practice.

The global financial melt-down and on-going economic explosion continues to expose weaknesses in corporate governance practices and, more importantly, attitudes. Giving wider powers to regulators and introducing more regulations, as is now being proposed, will have little effect if those regulators continue to be closely associated with, and often come from, the industry they are regulating. Long standing assumptions about the way things should be done need to be questioned not reinforced. Expectations and attitudes have to change.

Taking directors remuneration as a dramatic example, in recent years we have seen a massive increase in the ratio of CEO pay to that of their hourly paid workers, in many cases as their firms eroded shareholder value. The old legal concept of fairness, what a reasonable man would expect, has long been forgotten. As Barack Obama has written “what accounts for the change in CEO pay is not any market imperative. It’s cultural. At a time when workers are experiencing little or no income growth, many of America’s CEOs have lost any sense of shame about grabbing whatever their pliant, hand-picked corporate boards will allow.” [The Audacity of Hope, Crown Publishing Group (Random House), New York, 2007]

The director/shareholder relationship

At the heart of corporate governance are the relationships between shareholder-investors and top-management decision-makers. Shareholders’ ability to question directors and directors’ accountability to shareholders are crucial. In the 19th century that was relatively easy for the joint-stock limited-liability company. Companies were then smaller, less complex and licensed by the state to pursue a single aim, build a railway, run an iron foundry, supply a town with gas, for example. Moreover, the shareholders were individuals and could be counted in tens or hundreds. Institutional investors, mutual funds, and pension funds had yet to be invented.

How different today. Complex corporate groups, with hundreds of subsidiaries, associate companies and joint ventures in pyramids, networks and geared chains, with multiple shareholders – institutional investors including hedge funds, mutual funds, pension funds, insurance companies, even sovereign funds – not just individuals. The challenge is how to communicate with them, to listen to them, and be accountable to them.

The classical solution, of course, was to require meetings of shareholders so that the board could explain their stewardship of the corporate funds. That requirement still holds for the public company. But we all know the ongoing farce of meetings tightly organised by the company secretary, dominated by the chairman, with questions so restricted that communication is essentially one way, seldom providing an adequate opportunity for genuine dialogue.

Companies were also required by law to provide their members with regular written reports with information laid out in company law and stock exchange listing rules. Today, electronic mail and corporate internet sites supplement the printed word. But such reporting is still one-way: company to shareholders. The opportunity for investors to seek information about their directors’ activities is limited.

How can shareholders really find out what they want to know? How can they genuinely exercise power over the directors they have appointed to be stewards of their funds? Successive reports, including the British Myners Report, have called for institutional investors to play a bigger part in corporate governance. A few institutional investors, like CalPers in the United States and Hermes in the UK, together with some investor organisations, such as the Association of British Insurers have certainly made their presence felt. But others still prefer the option of ‘doing the Wall Street walk’ or voting with their feet as they say in Britain, avoiding the potential costs of getting locked-in should they get involved in governance issues.

A new approach

But there is another way. Anyone watching the recent grilling of directors of financial institutions by Congressional Committees in the USA and Commons Treasury Select Committees in the UK saw an alternative approach. Why should investors not be able to wield similar power? After all they actually own the companies.

Who would do the grilling? It would have to be representatives of the shareholders, who have not been captured by the company and its directors. Skilled representatives from institutional investors or perhaps a new breed of professionals come to mind.

In Australia, Shann Turnbull has proposed a corporate senate that might be adapted. He believes that “most corporations in the English speaking world are essentially corrupt because their unitary board structures concentrate on conflicts of interest and corporate power.” His alternative is a dual board structure with a corporate senate elected on the basis of one vote per shareholder, not per share. In his model the senate has no pro-active power, just the right to veto where it feels the board has a conflict of interest. Its members could certainly be trained to grill directors on behalf of the other shareholders.

Would directors readily agree to be grilled? Of course not! Self-regulation, exhortation, or listing rules requirements would not suffice. Legislation will be needed. Shareholders, who actually are the company, would need to be given power to carry out the level of grilling and transparency given to US Congressional and UK Treasury Select Committees. Proceedings would need to be public, probably carried live through the internet and available as a record on a web site.

Directors have a fiduciary duty to act in the interests of shareholders, not their own. Somehow this has been forgotten. Professional grilling by shareholders of their directors would move the original concept of directors’ stewardship, fiduciary duty, and accountability towards the reality of 21st century expectations and demands.

Bob Tricker

Banks in crisis: failures of corporate governance?

Corporate governance has been gaining more predominance around the world over the last decade.  However the last year or so which has brought the financial crisis and the ‘credit crunch’ has seen an unprecedented interest in some of the areas that are central to corporate governance: executive remuneration; boards of directors, independent non-executive directors; internal controls and risk management; the role of shareholders.

However the focus on these areas has brought into sharp relief some of the failings of the present system whether these have been brought about by greed, naivity, or a lack of real appreciation of the risk exposures of banks.

Bankers’ bonuses
Whilst many would agree that bankers have received huge payouts, often for a seeming failing company, bonuses appear likely to be cut, possibly by around 40% or more.  Peter Thal Larsen and Adrian Cox (FT, Page 13, 07/08 Feb 09) in their article ‘Barclays bankers braced for bonus cut’ highlight that even much reduced bonuses are likely to be controversial given that feelings are running high amongst the public and politicians alike.

The generous remuneration packages of executive directors of some of the UK’s largest banks have caught the headlines day after day in recent weeks.  In their article ‘Former executives face bonus grilling’ (FT Page 2, 9^th Feb 09), George Parker and Daniel Thomas mention an interesting historical fact ‘in the early 18^th century, after the bursting of the South Sea bubble, a parliamentary resolution proposed that bankers be tied up in sacks filled with snakes and thrown into the River Thames’!  No doubt there are those who wish the same might happen today although a grilling before the Commons Treasury Committee may prove to be almost as unpleasant an experience!

Adrian Cox’s article ‘Barclays executives must wait longer for bonuses’ (FT, page 2, 11^th Feb 09) highlights that Barclays is trying to design a pay structure that retains staff whilst rewarding long-term performance at a time when banks have been urged to show ‘moral responsibility’ in their remuneration structures.  The pay restructuring will affect not just directors but also senior employees, and other banks including UBS, Credit Suisse, RBS and Lloyds are in a similar position.

Risk Management

‘Former HBOS chiefs accused over risk controls as bankers apologise’ was the striking head of the article by Jane Croft, Peter Thal Larsen and George Parker (FT, page 1, 11^th Feb 09).  Under questioning from the Commons Treasury Committee, Lord Stevenson, Andy Hornby, Sir Tom McKillop and Sir Fred Goodwin all apologised for what had happened at RBS.  Part of the questioning brought to light that a former employee had warned the board of potential risks associated with the bank’s rapid expansion.

Risk management is an area that is bound to gain a higher profile given the extent of the impact of the use of toxic assets which many feel were not well understood.

Where were the institutional shareholders?

Lord Myners, the City minister, has urged shareholders to challenge banks ‘Myners calls on shareholders to challenge reward cultures’ by Adrian Cox and Kate Burgess (FT page 3, 10^th Feb 09). Lord Myners, they state, said that’ institutional investors should look at the content of remuneration reports and ask questions if the data are complex or opaque’.

My view is that it is an ongoing debate as to what extent institutional shareholders should intervene in the affairs of the companies in which they invest (investee companies).  It is widely recognised that engagement and dialogue are useful and necessary for an institutional investor to monitor the activities of investee companies.  However there is a line to be drawn between what it is feasible – and desirable – for the institutional shareholders to do, and what might be seen as undesirable and restrictive.

Sophia Grene article  ‘Funds say they did all they could to warn banks’ (FT, page 9, 8^th Feb 09) highlights the view of the UK’s Investment Management Association that ‘fund managers did all they could to prevent banks hurtling to their doom, but under the current system, shareholders cannot shout loud enough to be heard’  The IMA also indicated a possible way forward for the future ‘investors can only do so much…..maybe we need to take a closer look at how investors and non-executive directors interact.  They’re privy to much more information than the investors’.

Walker Review of the Corporate Governance of the Banking Industry

Sir David Walker has been appointed to lead a review of the corporate governance of the banking industry which will look into remuneration and bonuses, risk management and board composition. The terms of reference can be found at:

http://www.hm-treasury.gov.uk/press_10_09.htm

Bankers abroad

In the US, President Obama has brought in reforms to limit the remuneration of executives to $500,000 at banks which have had a bail out.  Shares could also be given under incentive plans but would only vest once government support had been repaid, ‘Obama gets tough on pay for executives’, Alan Beattie and Edward Luce (FT page 1, 5^th Feb 09).
Chris Mallin