UK companies must be getting sick of all this corporate governance talk; while they’re trying to get down to the business of business, best practice codes just keep popping up. Make no mistake, in the UK, corporate governance is the hot topic du jour – just as it has been all year. And the year before. And the year before that. In fact corporate governance has been hot for a couple of decades now, rarely dipping below the lukewarm level and frequently straying into the scorching zone. This year governance goes white hot as a frighteningly vast batch of policy statements, consultation documents, guides and initiatives are thrust into the UK corporate landscape, scaring the living waste out of companies with dodgy governance. To be sure, this groundswell of good governance will impact on every UK company. But then, as pointed out by Alan Rubenstein, chairman of the National Association of Pension Funds investment committee, ‘Well run companies have nothing to fear.’
Fair point. And besides, it’s not as if the UK is being dragged kicking and screaming into the 21st century from the dark ages of corporate governance. Rather it is widely seen as a leading light in the area, standing at the very vanguard of best practice. ‘In terms of market development, I’d say we’re second in the world behind the US,’ opines Alan McDougall, managing director at UK corporate governance advisory service, Pension Investment Research Consultants (Pirc).
Taking issue
One Edinburgh-based investment professional even takes issue with the runner-up status. ‘I’m not sure the US is any better than the UK,’ he says. ‘The UK has less activism than the US but that’s a different thing. In the US they campaign very actively against poison pills, for example, but we just don’t let them arise in the first place.’ Bob Monks, vice chairman of Hermes Lens Asset Management (and an American), also believes that UK governance is at the top, publicly stating, ‘This is a place where the UK has got it right.’
Peter Butler, chief executive of Hermes Investment Management, believes that the UK is top dog – ‘The UK remains ahead of the US in corporate governance; it has been for years,’ – and with good reason. He points to Leading corporate governance indicators 1999: An international comparison, a survey conducted on an annual basis by Newton, Massachusetts-based Davis Global Advisors. It finds that, when judged against certain good governance principles (criteria such as executive pay disclosure, non-executive directorships and accounting standards), the UK leads the way, and has done for at least the past four years.
And yet, as McDougall accepts, 2000 ‘is an especially busy year’. So why the governance push? How can a country at the cutting edge of corporate governance maintain its momentum? ‘I think it just so happens that all our efforts have come together at the same time this year,’ reckons David Gould, director of investor services at the National Association of Pension Funds. ‘And that comes after frantically paddling underwater for a couple of years.’
Butler, similarly, believes that the UK has entered a period in which it is tying up loose ends. ‘There was a lot of activity in 1998 and 1999, what with the Hampel report and the Combined Code,’ he comments. ‘I think the developments this year are building on that. A period of modernization is needed when you haven’t had one for a while.’
Sticking an oar in
That probably explains the abundance of corporate governance discussion at the moment. The NAPF has recently published its new policy document, Towards better corporate governance, incorporating the recommendations of the Hampel Committee and the London Stock Exchange’s Combined Code. Likewise, the Chartered Institute of Management Accountants has piped up with its own ‘comprehensive guide’: Corporate governance – history, practice and future.
The political climate must have played a part. The development of company law – which Gould describes as ‘a pretty slow moving beast’ – has been aided somewhat by the stance of the UK government. For a start, the Labour administration has embraced corporate governance as part of its jurisdiction: Kim Howells has been handed the new post of minister for corporate social responsibility, which covers competition, company law and corporate governance as well as consumer affairs.
‘This government is more responsive than the last [Conservative] one,’ argues McDougall and Gould agrees, remarking that, ‘Stephen Byers [the minister for trade and industry] has been taking an active interest in UK corporate governance.’ Unfortunately, that could be taken as damnation by faint praise, especially when Gould adds that Byers ‘has really just been cheering things on from the sidelines.’
Sitting on it
Indeed, while many observers acknowledge that the government is prepared to roll its sleeves up and get stuck in, the majority consider that Tony Blair’s administration still lacks enthusiasm and decisiveness on key issues. ‘They have been slow to respond to the executive pay document,’ says Gould. ‘They’ve been sitting on the review for a year now and here we are in June, and we’ve still heard nothing.’
McDougall is blatantly irked by the government’s protracted heel-dragging. ‘We’re upset that there’s been no response from the government to the consultation document on directors’ pay, even though it was the government that initiated it in the first place,’ he complains. ‘They’re probably doing it for political reasons – they don’t want to upset the business community.’ That causes serious concern for McDougall. ‘In this country the levels of directors’ pay are bizarre,’ he says. ‘They completely ignore shareholder guidelines.’
Things are happening elsewhere in the UK governance arena, though. The recommendations of the company law review, which were announced in March, provide the main action. Under the proposals, shareholders would have the right to sue company directors for damage caused to employees, the general public and other stakeholders, if the damage affects the value of the company. But the review also incorporates a whole raft of suggestions that have been warmly met by governance experts. ‘We’re currently looking at the company law review,’ says McDougall. ‘Broadly speaking, we approve of its shareholder-responsive tone but we’d like to see more meat on the bones. There’s still a debate to be had, for example, over the exact definition of what shareholder value is. And we are disappointed that there’s no push towards making shareholder voting easier.’ Despite these reservations, another investment professional describes the review as a ‘watershed’.
Slow-moving beast
‘Are we about to see some legislative recognition of corporate governance?’ considers Gould. ‘I don’t think it’ll be necessary. Our general approach to the company law review is that it should be enabling, with regulations that allow for flexibility. That’s the advantage of the UK’s corporate governance codes – they allow for consultation.’
The benefit of such an approach is obvious but it does tend to make company law an even slower-moving beast. As McDougall indicates, ‘It’s pleasing but it’s a bureaucratic nightmare.’
The electronic communications bill is another catalyst that’s shunting things in the right direction. ‘The bill encourages electronic voting,’ explains Gould. ‘And that encourages shareholders to vote.’ In fact, Gould sees this as one of the main features of this year’s governance drive. ‘At the end of the day, what we all want is to get shareholders voting frequently and responsibly,’ he says.
However, there are some criticisms to be leveled at the bill. ‘The electronic communications bill is a step forward,’ concedes McDougall, ‘but it’s still slightly frustrating that the role of corporate governance is ignored. There’s no clear system for the logging or receiving of proxies included in the bill.’
Still, any initiative that makes the actions of shareholders more efficient has to be encouraged doesn’t it? ‘We are concerned that the reforms enabling shareholders to be more active are not moving forward fast enough,’ says McDougall. And so this is at the forefront of Pirc’s campaign this year: ‘We’re really focusing on shareholder relations this year and we’re putting a lot of emphasis on operationalizing shareholder rights,’ he says. ‘In fact we’ve even recently launched a new European corporate governance service, a research service aimed at encouraging voting in each market.’
Easy does it
It’s a good thing that corporate governance campaigners are in good voice this year because listed companies are barely playing ball. Big companies seem to be making a slow start in adopting the corporate governance guidelines on the treatment of risk produced by the Turnbull committee. Research by Deloitte & Touche and the Institute of Directors suggests that only 13 percent of companies in the FTSE 250 say they are fully compliant with the guidelines, while nearly 50 percent say they are adopting a minimal approach to the rules. That said, companies have been given until December this year to fall into line, so no-one is breaking any rules. Equally disconcerting is the fact that many companies are not yet complying fully with the government’s combined code on corporate governance, according to research by Pirc.
Only 77 percent of companies have a wholly independent remuneration committee; just 51 percent have one-year contracts or less for all executive directors; and a mere 27 percent of companies say the board has considered whether to put remuneration committee reports to vote at the annual meeting. These findings come as a disappointment to the government, as many of the 468 respondent companies failed to comply with the recommendations laid out in its consultation document on corporate governance.
It’s lucky, then, that the institutional investment community is making a real effort on the issue. ‘I think we’ll see people getting down to the grassroots, pushing trustees to say what their investment principles are,’ says Gould. He suggests that the NAPF will really get involved this year. ‘Up until now, we have not really said what our principles are; we’ve just hinted towards them,’ he comments. ‘For the first time, we are really putting down a marker, giving our members a yardstick.’
And they won’t be alone – ‘I think you’ll see public funds in the UK becoming more active,’ says McDougall. ‘The Local Authority Pension Fund Forum (LAPFF) will become much more high-profile.’
That’s reassuring because at the end of the day it’s the investors who really hold the chips. And so long as the investors care about good governance, companies too will care about good governance.
