Staffing a company board is many times more an art than it is a science. Appointments largely seek to balance sector specialisation with wider business experience, length and breadth of experience, and softer skills such as communication and advocacy. Other aspects, such as gender diversity, are of growing importance, as seen in the UK’s 30% Club and in Scandinavian countries that have minimum appointment figures for women.
Remuneration remains a contentious point and it is no news that average executive pay in most sectors has increased many times over in recent decades, while the stipends of non-executive directors and supervisory board members often remain limited.
However, the role of shareholders in holding boards to account is one of the main areas of investigation in the EC’s green paper, ‘The EU Corporate Governance Framework’. It also poses questions on the role of boards themselves, and on the role of comply-or-explain rules, such as those pioneered for companies in the UK.
Investor behaviour around shareholder voting and engagement has evolved in recent years, as have financial markets. Where institutional investors once controlled a much higher proportion of their domestic stock markets in terms of voting power, the international diversification of portfolios means this power is greatly diluted.
Commensurately, however, engagement activity has risen and there is a wider acceptance of UK-style collaborative engagement - as opposed to US style shareholder engagement, which is often more confrontational.
The EC’s green paper says there is evidence that most shareholders “are passive and often only focused on short-term profits”. But there is plenty of evidence that pension funds and similar long-term institutions do not belong to that group.
The Church Commissioners, who are charged with the investment of the £5.3bn (€6bn) investment portfolio of the Anglican Church, are one of Europe’s longest established institutional investors and one with a stated ethical investment mission.
Just before Easter 2011, the Commissioners announced a new dimension to their corporate governance policy. Now, they have reportedly informed companies in their £3.5bn equity portfolio that they will not support bonus remuneration of much more than three times base salary.
This policy is unlikely to have any major effect but there are many examples from the from the institutional investor world of proactive and positive engagement, and Europe’s pension funds have been leaders in promoting the positive impact of their responsible investing and shareholder engagement policies.
The green paper’s few words on asset manager contracts are more worrying. Here, the paper contends that the agency relationship between investor and asset manager can lead to short-termism and mis-pricing.
In reality, pension funds use the investment markets in different ways to make investment returns for their beneficiaries. One of these may involve using managers, including hedge funds, who specialise in identifying (short-term) pricing anomalies. But pension funds should be free to use the strategies of their choice to meet their goals and the European Commission should recognise the enormous heterogeneity of investment approaches available to investors now and not seek to generalise about short-term and longer-term investment styles.
The green paper also contends that asset managers are selected and remunerated based on short-term performance, which can lead to herd behaviour. Sometimes this is true, but many pension funds have sought to develop longer-term remuneration models based on three year rolling performance, for example.
Pension funds and their beneficiaries will be much better off if the funds are left alone to develop best practice.