A UK Conservative politician has put forward proposals for corporate governance reform that seek to empower shareholders and put an end to the “ownerless corporation”, with a modified version of the Swedish model of a shareholder nomination committee one of the suggested measures.
Chris Philp, a UK MP and member of the Treasury Select Committee, made the proposals in a paper co-ordinated with the High Pay Centre, a think tank campaigning against excessive executive remuneration.
In the paper, the politician called for mandatory publication of pay ratios, annual binding shareholder votes on executive pay, and mandatory shareholder committees.
Some of the proposals are similar to corporate governance reforms outlined by Theresa May shortly before she became the new prime minister in July, although the High Pay Centre noted that Philp “started pursuing this long before” May made her speech.
The annual binding vote on pay that Philp proposed would be a retrospective vote on actual pay awards; shareholders of UK listed companies already have a binding say on remuneration policy, although this vote is held every three years.
The shareholder committee envisaged by Philp is based on shareholder nomination committees in existence in Sweden. It would consist of the top five shareholders based on holdings over more than 12 months, with the next largest shareholders joining the committee in the event that one declines.
According to the paper, a list of shareholders declining to take up a position on the committee would be published, “so that their own investors or clients could seek an explanation as to why the opportunity had been declined”.
The chair of the board and an employee representative would be non-voting members; Philp specifies that the employee representative should not be from a trade union.
Under Philp’s proposal, the shareholder committee would replace the nomination committee in recommending the appointment and removal of directors to an annual general meeting (AGM).
It would also have other powers, which combined “will re-empower shareholders and make boards more accountable”, according to the paper.
’Provocative agenda’
Reactions to the MP’s reform plan were mixed.
At the UK’s Pensions and Lifetime Savings Association (PLSA), Joe Dabrowski, head of governance & investment, said that the association welcomes Philp’s proposals as ”a valuable contribution to the debate about how to make companies more accountable for their top pay awards”.
He struck a measured tone in assessing the specific proposals.
“Giving shareholders and other stakeholders a greater say over the companies they are invested in is certainly a sensible recommendation,” said Dabrowski. ”It is important, however, that an appropriate balance of rights is struck across all shareholders.”
The proposed shareholder committee, meanwhile, should be made up of “engaged investors, rather than simply the largest investors, and it is important that this point is not lost through an arbitrary selection process.”
PIRC, a proxy and engagement advisory company whose clients include pension funds, welcomed the “attempt to re-boot corporate governance reform” following prime minister May’s speech in July.
Alan MacDougall, managing director at PIRC, said that although the High Pay Centre report is to be welcomed “there are still challenges”.
He suggested some tweaks on the proposed shareholder committees, including that these also comprise pension fund trustees, and more than one employee, who should also be able to come from trade unions.
“Shareholder committees have been successful in Sweden, but are untried in the UK,” he said. “Expecting the top five shareholders in a company to embrace serious reform will require considerable preparation and potential conflicts must be recognised if they are to succeed.”
The report by Philps featured supportive statements from Paul Myners, a former FTSE 350 chairman, City Minister and the author of an influential report on institutional investment in the UK, and Neil Woodford, head of investment at fund manager Woodford Investment Management.
Myners said Philps “has produced a provocative agenda to rectify the weakness at the core of modern corporate ownership”.
Myners noted that although the development of the role of non-executive directors has helped address the “fragmentation” of ownership of major companies, most non-executive directors “remain detached from shareholders”.
“They are elected with North Korean-like majorities by uninterested shareholders, selected through a process led by the chairman which would also be familiar to those in Pyongyang,” he said.
Implementation of Philp’s agenda “would represent a transformational change in the democratisation and accountability of ownership”, according to Myners.
Woodford, meanwhile, noted that Philp’s proposals reflect some of the best practices already in effect around Europe.
By adopting these, he said, “we can help boards become more accountable for their long-term performance with, I believe, meaningful benefits flowing to shareholders and the broader UK economy”.
But not everyone agreed that the measures outlined by Philp will encourage long-termism.
Mike Fox, head of sustainable investment at Royal London Asset Management, criticised the pay proposals as the wrong approach to ensuring that “executive pay remains tied to long-term, sustainable business performance”.
“We believe that imposing an annual binding vote could be detrimental, forcing shareholders to focus on shorter performance periods when evaluating whether performance has merited the remuneration paid to senior executives,” he said.
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