Prospect and MSCI Inc, the provider of indexing and research services to investors, recently convened a roundtable meeting on corporate governance entitled, “Corporate Governance: the key driver of the UK’s industrial strategy?”. With corporate governance reform once more on the government’s agenda, the meeting brought together governance practitioners, investors, academics and policy makers.
In her first speech as Prime Minister last year Theresa May put a review of corporate governance as being amongst her top priorities and the new Department of Business, Energy and Industrial Strategy has recently launched a green paper gathering views on this topic. While the PM’s earlier, more radical, call to put workers on the boards of listed companies seems to have been watered down, it still looks as though change is in the air. The government seems eager to tie the reform of how companies are run to its wider industrial strategy. The roundtable was addressed by Sir Win Bischoff, the chair of the Financial Reporting Council, who are currently conducting their own review of related issues.
Baer Pettit, the Chief Operating Officer of MSCI Inc, argued that the UK’s existing system of corporate governance was widely regarded around the world but that more could be done to meet public concerns.
It was widely agreed by participants that while corporate governance was not “the” key to a wider industrial strategy, it certainly was “a” key area with an important role to play.
An early topic for discussion was, “what exactly is the aim of corporate governance reform?”. Was this simply about making the existing system work better and ensuring that shareholders could exercise their rights? Or was the aim something grander, to rewire how companies operate and help overcome a supposed issue with short termism amongst companies?
It was generally thought that the existing system in general works relatively works most of the time, with the occasional lapse that was brought business as a whole into the public eye in a negative light. Pay setting was seen as a key issue and it was widely acknowledged that some recent pay deals may have been in correct to the letter of the law but had failed the public “smell test”. Many of those at the roundtable believed that this was an issue as much for boards as for shareholders to consider. Howard Sherman of MSCI noted how much the industry has moved on over the past few years, with more and more investors beefing up their corporate governance functions and engaging seriously with governance concerns.
This lead on to a wider discussion as to whether the aim of reform should be to give shareholders new powers to help reign in what could be seen as excessive rewards for some or whether the priority should be to get shareholders to make better use of existing powers? The general belief was that existing powers were probably sufficient but that there were (understandable) reasons why shareholders were reluctant at times to use them. Publicly voting against management for example could reduce an investor’s access to them and damage future relationships.
While many institutional investors were far more actively engaged in corporate governance than a decade previously, this was still not universal. It was noted that for many large investors, they could easily be holding stakes in several thousand firms and that the costs of engaging properly in the corporate governance of each would be huge in terms of staff time and resources. Anita Skipper, Corporate Governance Advisor at Aviva Investors, noted that Aviva and many other institutional investors now devoted much more resources at corporate governance and engagement than in the past. Equally, simply counting the instances of voting against management proposals is often a poor indicator of corporate governance engagement. True engagement is about more than just the annual general management and is a year round process. This was an argument emphasised particularly by Daniel Summerfield, the Co-Head of Responsible Investment at the Universities Superannuation Scheme.
Perhaps the biggest question in UK corporate governance is whether it needs to be widened from its current – and historical – focus on shareholders to bring in wider stakeholders such as employees, customers and the supply chain.
While Patrick Woodman of the Charted Institute of Management noted that a recent survey of their members had shown support for giving workers more of a voice, the general feeling was that a board seat was not required.
Many participants – including Sir Win Bischoff – noted that the most successful companies already take into account the interests of customers and employees and indeed, that a long term focus on all stakeholders was likely to yield long term better results for shareholders.
Much of the discussion focussed on section 172 of the Companies Act 2006. That states that:
- “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 (amongst other matters) to—
- the likely consequences of any decision in the long term,
- the interests of the company’s employees,
- the need to foster the company’s business relationships with suppliers, customers and others,
- the impact of the company’s operations on the community and the environment,
- the desirability of the company maintaining a reputation for high standards of business conduct, and
- the need to act fairly as between members of the company.”
That clause is often seen by campaigners as a fig leaf in UK company law, something was inserted into the law for those who wanted an end to shareholder dominated governance but which effectively left shareholders – rather than wider stakeholders – as the real drivers of decision making.
However, David Pitt-Watson, formerly of Hermes Investment Management and now London Business School, argued that this was an actual law that was often widely ignored by directors. Indeed in many of the most recent cases that have brought business into dis-repute a case could be made that directors had ignored this duty.
Sir Win Bischoff noted that at a recent meeting with a FTSE 100 Chair, it had been muted that the provisions of 172 could be extended from just directors to all shareholders, i.e. that shareholders would have duty to demonstrate that the decisions they took were in the long term interest of wider stakeholders.
This proposal – which effectively was about ensuring existing Company law was met rather than reforming it more widely – gained widespread support around the roundtable.
Corporate governance reform is an ongoing process and one that has the potential to contribute to better outcomes for the UK economy has a whole. The overall feeling of the roundtable was that the government was right to be reconsidering this issue and that getting it right could do a great deal to help smooth public concerns about the role of business.