UK - Pension funds and asset managers have expressed concerns over the introduction of annual re-elections of directors of FTSE 350 companies as part of the revised UK Corporate Governance Code.

The updated Code, published today by the Financial Reporting Council (FRC), has introduced a number of changes to the rules that company boards will need to adopt on a "comply or explain" basis.

Changes include new principles on the leadership of the chairman and the responsibility of non-executive directors, as well as guidelines on the composition and selection of the board. The Code also requires that the business model should be explained, and recommends increased dialogue with shareholders particularly at annual general meetings.

However in addition to other issues, such as rules on performance related pay, the UK Corporate Governance Code suggests that all directors of FTSE 350 companies should be put forward for re-election every year "to increase accountability".

It added: "All other directors should be subject to election by shareholders at the first annual general meeting after their appointment, and to re-election thereafter at intervals of no more than three years. Non-executive directors who have served longer than nine years should be subject to annual re-election."

However the £28bn (€32.9bn) Universities Superannuation Scheme (USS) and Hermes, the asset manager owned by the BT Pension Scheme, have both criticised the new rule.

USS said it was "disappointed" that the FRC had recommended the annual re-elections as it claimed this system could engender a short-term outlook among both shareholders and directors at a time when the focus should be on encouraging a longer-term approach towards stewardship.
Daniel Summerfield, co-head of responsible investment at USS, said: "Shareholders in UK companies already have the requisite tools to hold directors to account as they have the rights and means to remove a director from the board even if that individual is not standing for re-election in that year. The move towards annual elections therefore appears to be a solution to a problem that does not exist."

Meanwhile Hermes Equity Ownership Services (EOS), a part of Hermes that advises and represents pension funds and other long-term investors as good corporate owners, agreed the move could foster "short-termism

Paul Lee, director of Hermes EOS, said: "We believe that most UK pension schemes oppose the switch to annual elections because of similar concerns. It seems odd that in the context of a crisis driven by too much focus on the short-term, the most obvious change to the Code is to shorten the tenure of directors and potentially shorten the time-horizons over which they look."

He suggested there has been a shift in the Code's recommendations from a compliance framework to a performance framework, which he said "will hopefully change the mindset of companies when they are thinking about governance, and reporting on it to their shareholders. This should not be about the structures in themselves but rather it should be about what value those structures deliver for investors".

The FRC noted in the report that it had focused on changing the 'tone' of the Code by making "limited but significant changes to signal the importance of the general principles which should guide board behaviours".

Baroness Hogg, chairman of the FRC, said: "The changes we have made are designed to reinforce board quality, focus on risk and accountability to shareholders. In return we look to see a step up in responsible engagement by shareholders under the Stewardship Code, on which we have consulted and aim to publish by the end of June."

The design of the Stewardship Code has raised some concerns among the pension industry, but Lee said: "We believe the Stewardship Code should seek to raise standards and encourage more involved ownership across the institutional investor community. We take encouragement from the discussion on the duties of institutions within the Corporate Governance Code." (See earlier IPE article: Stewardship code is 'last chance' says TUC)