Shareholders called to step up chairmanship scrutiny
UK/GLOBAL - Companies must expect more scrutiny and pressure from shareholders managing pension fund assets, according to officials at UK investment house Legal & General Investment Management, to ensure they act responsibly and efficiently in the interests of shareholders, staff and customers during the current economic climate.
Mark Burgess, head of UK equities at L&GIM, said in a presentation today while the quality of governance in generally good at UK-listed companies, the increased pressure on chief executives and chairmen to keep delivering profits is likely to mean their own roles will face increased scrutiny to ensure they meet the requirements of running well-governed companies.
Shareholders have to be prepared to rock the boat more in this market environment," said Burgess.
"We are finding one of the consequences [of recent market turbulence] is shareholders are being more vocal. I'm not saying there will be a whole raft of changes (to management) but shareholders should challenge," continued Burgess.
This latest comment from L&G follows a recent protest from L&G and other major shareholders about the appointment of Stuart Rose as both chairman and chief executive of Marks & Spencer plc - a unwise move according to Burgess because he believes Rose's focus should be on running the company and is therefore unlikely to be able to fulfil all of his duties as a chairman too.
"If you look at all the things a chairman has to do - prepare board papers, engage with non-execs and shareholders, undertake board evaluation - given how difficult and terrible the consumer market is, I would like to guess Stuart Rose would not want to be doing all of these roles and would prefer to concentrate on sales at Marks & Spencers, for which he will ultimately be judged on."
Part of the argument made by L&G is firms should not operate a combined chairman and chief executive role because the position of the chairman is to oversee the entire operation and challenge the strategy of the management team where necessary, so becomes ineffective in required to scrutinise their own duties.
Data presented by Deloitte in September 2007 showed 85% of the top 100 UK listed companies operated with a non-executive - ie part-time - chairman while 12% had an executive chairman and just 3% employed a combined chairman/CEO.
Burgess suggested the situation is worse in Europe and overseas, as corporate governance is considered to be of a lower standard than that experienced among UK listed companies.
"Standards in the UK are better than elsewhere. Clearly in the US the chairman and chief executive are the same person, the shareholders do not get to vote on a whole host of stuff. And they are worse in Europe, as there are lots of examples of minority shareholders without voting rights. And in Japan it is worse again as all AGMs are on the same day to discourage people from going," added Burgess.
And yet the role of chairman is perhaps the most stressful an individual might have in their career because any serious errors during their tenure as chairman status carry a substantially higher reputational risk than in other roles and often comes ahead of retirement from the business environment.
"We think these points made are quite clear, and we strongly believe the roles of chairman and chief executive should be separated. The individual have to be able to challenge the company. The direct reporting staff generally do not disagree with the management and yet [chief executives] are going to make mistakes on occasions. We think it is a good strong independent person who can see when issues should be revisited in a week. But in terms of personal risk, that is quite a lot to carry," added Burgess.
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