In the pursuit of better corporate governance, the drastic shortening of CEO contracts is welcome. But we cannot afford to content ourselves with that: much more needs to be done.
Cue the recent guide on corporate governance from the UK’s pension association, NAPF. The guide brings together existing rules and guidelines on corporate governance and sets out good practice for company boards and shareholders. It makes clear the rights and responsibilities of shareholders and of the directors of the companies in which they invest.
At first glance the principles underlying the guide seem to be nothing new. One reads: “Shareholders as owners should recognise that they have responsibilities to monitor and normally to support the work of the management of companies in which they invest. Good corporate governance is about dialogue and the promotion of success.” Isn’t that obvious?
“There are some boards that behave as if these principles were not true,” says Geoff Lindey, NAPF’s strategic adviser on corporate governance. “If they were adhering to the principles we wouldn’t have had many of the corporate governance problems that we have.” He adds: “Rewards for failure is the obvious example of a misalignment of management and shareholder interests.
“Pension fund trustees should be holding their investment managers accountable for corporate governance by asking detailed questions about how they have voted, and how they have engaged with companies. I can count on the fingers of one hand the number of times that has happened in my career in hundreds of meetings. And yet all it takes is a small change in behaviour – five minutes at the end of a meeting, for example.”
The logic is that if pension fund trustees ask their investment managers about the corporate governance of the companies they’re investing in and the investment managers don’t know, they will go back to their analysts and put pressure on them. In turn the analysts will go back to the companies and ask these questions. “So the focus will change,” argues Lindey.
One model of accountabilty which the NAPF recommends is that the trustees choose a voting policy as a benchmark. This could be the trustees’ own tailored policy or more probably the policy of a respected body. Naturally Lindey would like to see the NAPF’s new policy being used as the benchmark but recognises that there are other valid policies in the public arena. The trustees would then allow their investment managers to vote as they see fit but every quarter they would have to submit a report which would not only list all their votes on behalf of the trustees but would also highlight the cases where their policy had led them to vote in a manner which differed from that of the benchmark policy. “They would then have to explain the differences,” says Lindey. “This will completely change behaviour.”
But first the behaviour of the trustees needs to change. “I’ve been on a mission talking to all the major investment consultants, saying that nobody is going to advise the trustees to do this unless they do,” says Lindey. “If that doesn’t happen then pressure will probably be applied by the DTI. But I think consultants do realise that only they are in a position to influence behaviour.”
The fact that progress in the direction of accountability has been good so far gives us cause to be optimistic. “CEOs used to have rolling contracts of three to five years,” says Lindey. “When I was on the Greenbury Committee we recommended that the term should be reduced. Now almost all CEOs have one-year rolling contracts. This is a huge change for the better.” He adds: “Furthermore, the structure of nomination and remuneration committees is also far better than it used to be. The whole trend is improving dramatically. So I am very optimistic: accountability will improve.”
With pensions in crisis and the obvious need to improve overall investment performance, one would expect the NAPF’s new guidelines to be well received. “The government’s reaction has been favourable,” says Lindey, “although there has been very little response from companies.”
The NAPF’s broad remit facilitates the task of gaining broad acceptance for the guidelines. “This could be misconstrued as a confrontational approach, but as the NAPF’s members are drawn from industry and also as trustees invest in it, bodies like the CBI respect what we’re doing and realise we’re trying to promote the better working of the system,” argues Lindey.
But if there still are so many cases of misalignment, will a mere code be sufficient? Lindey stresses that the additional weight of legislation would be too inflexible: “If unintended consequences arise from a code we can change the code quite easily. If they arise from a law we’re stuck. We need to be able to put things in place which can be reviewed from time to time without causing too much heat.”