New Corporate Governance Code – It Could Be Improved

I commented briefly earlier on the public consultation on a new UK Corporate Governance Code (see here: https://roliscon.blog/2017/12/05/new-corporate-governance-code/ ). I have now submitted a detailed response to the public consultation which you can read here: http://www.roliscon.com/Roliscon-Response-Corporate-Governance-Code.pdf

The main points I made therein are:

  1. I supported the inclusion of Chairmen in the 9-year rule after which they are no longer considered independent. But I think that period should also apply to tenure to avoid directors sticking around for too long.
  2. I am concerned about the wording that promotes diversity of gender, social and economic backgrounds in new board appointments. It appears to conflict with the requirement in law not to show any bias in selection (and quite rightly). Positive discrimination is as just as illegal as negative discrimination.
  3. I doubt that appointing a non-executive director to engage with the workface would be nearly as effective as the other two suggested methods of improving engagement.
  4. I question the approach to executive remuneration. It still does not discourage aggressive bonus schemes such as LTIPs and the ability of boards to retrospectively review awards (e.g. when the pay-outs turn out to be excessive) I consider to be quite unlikely to be effective in practice. The changes in this area are unlikely to stop the ramping up of pay levels to excessive levels.
  5. It perpetuates the myth that when companies need to engage with shareholders they can simply contact a “few major shareholders” to get their views. This does not work in most public companies nowadays because of the very diverse shareholder base, and also ignores all the private shareholders who could be the largest bloc. It should have proposed a more formal process such as a Shareholder Committee and disclosure on who has been consulted.
  6. It does not introduce restrictions on the appointment of directors with no knowledge of the sector in which the company operates. It perpetuates the English preference for “amateurs” versus “professionals”, i.e. assumes those who know less might be wiser.
  7. Likewise, it does not impose restrictions on the number of roles that directors should have.

In summary there are some improvements in the new Code, but more could have been done to improve the Governance of companies and toughen up the Code. Although I do not object to the principle of “comply or explain”, as there are always exceptions that justify some anomalies, I suggest there should be a requirement to provide more specific justifications for such exceptions. The excuses we get at present are often way too weak.

Readers are welcome to submit their own responses to the consultation. The more they receive from individual shareholders, the better. Feel free to “copy and paste” from my own submission.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Stale Directors and the UK Corporate Governance Code

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 )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.