One interesting fact highlighted by the Financial Times today was the impact of the proposed new UK Corporate Governance Code on company Chairmen. It pointed out that the change in the Code to limit the length of service of directors will include their time as Chairmen and will mean dozens of long-standing Chairmen may need to retire.
The FT suggests 67 of FTSE-100 chairmen will be affected, and there will be another 48 chairmen of FTSE-250 companies according to an analysis by the FT and Manifest. The reason for the 9-year rule for non-executive directors is simply because they cannot be considered “independent” after that length of time.
One aspect that the FT did not mention was the prevalence of such long-standing chairmen on the boards of investment trusts. Without doing a formal check, I found two in my holdings very easily. Anthony Townsend who actually “rejoined” the board of Finsbury Growth & Income in 2005 and John Scott who was on the board of Scottish Mortgage for 16 years until he retired in June. Investment Trusts seem to exhibit this symptom of permitting investment world grandees to serve for many years both as chairman and ordinary non-executive directors quite often. This has been condoned by the AIC (a trade body for investment companies) who seem to believe that length of service is no handicap. They have even suggested that such companies are not bound by the UK Corporate Governance Code in this area in the past. Will they try to take the same stance on this issue one wonders?
Will this change in the Code, if adopted, lead to a loss of highly experienced directors to the disadvantage of investors? Not likely. I suggest it will just result in a game of musical chairs where they simply move to another company when the clock would be reset. But it might at least give a hint to those too long in service to consider retirement.
It is surely a positive change as I have seen too many directors hang around for too long. They may not show actual signs of dementia (although one of the Chairmen of one my holdings did before retiring), but they are not always as sharp as they could be. Regrettably the generally aged shareholders who turn up at the AGMs of companies are averse to voting against such directors even when the issue is raised. So perhaps the boards affected by this problem of the Code change might simply choose to ignore it on a “comply or explain” excuse – I can volunteer the words they could use because I see them regularly. But that would be a pity.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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One thought on “Stale Directors and the UK Corporate Governance Code”
Thank you, Roger, for sharing your thoughts. In the context of the 9-year rule, “independent” does not mean not dependent on another. Of course, non-executive directors will know the company and their people. It refers more to the position of the “critical” friend which mean here, NED would express a view free from outside control. You should not mix the governance rule and the wisdom of the people who apply it. We believe the 9-year governance rule is at least questionable.
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