UK/SWEDEN - Adapting the idea of shareholder-led nomination committees, as used in Sweden, could encourage UK institutional investors to become more engaged in corporate governance issues, a UK think tank has claimed.

A new report from Tomorrow's Company, supported by the Swedish activist investment firm Cevian Capital, examines developments in stewardship and engagement practices in Sweden over the last 15 years, including the use of board nomination committees where shareholders play a key role.

Tomorrow's Company highlighted UK boards of directors are appointed by a nomination committee that is a sub-committee of the board and made up of board members, which effectively gives them the ability to elect themselves.

In contrast, Swedish shareholder-led nomination committees comprise four or five of the largest shareholders and the non-executive chair of the board. The committee then reports their findings and recommendations directly to the annual general meeting, including the structure and amount of remuneration for each director, which is then voted on by investors. 

The report 'Bridging the UK Engagement Gap Through Swedish-style Nomination Committees' points out there is nothing in the existing 'comply or explain' UK corporate governance code to stop UK companies from adopting similar arrangements for their nomination committees, And its main recommendation is for listed companies to invite major shareholders to join this committee to tackle the issue of 'ownerless corporations' described by Lord Myners. (See earlier IPE article: Myners says trustees must meet governance 'legal duty' and Myners wants legal governance duty for managers)

Tomorrow's Company argued active shareholder engagement in Sweden through nomination committees had increased confidence and trust in the board by improving transparency. However It admitted the key to the success of this process is the willingness of institutional investors to participate.

The report stated: "Suitably adapted, shareholder-led nomination committees could therefore play a part in the improvement of the quality of governance and stewardship in the UK." Although it added the most important lesson from the Swedish stewardship process is the need for a "formal process in which major shareholders engage with companies and start to work together in a more proactive way than is experienced at present".

The think tank therefore outlined an 'agenda for action" for UK listed companies, institutional investors, pension funds and policy makers to consider, including:

Listed companies inviting shareholders onto the nomination committee; Fund managers recruiting qualified people to sit on the committee as their representative; UK Institutional Shareholders Committee to promote engagement in nomination committees; Pension funds to re-examine manager contracts to specify the level of active engagement in the nomination process; Pension schemes to pool efforts with NAPF to ensure investment managers are more effective in their participation; Financial Reporting Council to promote annual re-election of boards linked with a recommendation that major shareholders are engaged in the nomination process.

Harlan Zimmerman, senior partner of Cevian Capital, said: "In both Sweden and the UK, shareholders delegate all important responsibility for day-to-day governance to board directors." But he noted that while Swedish shareholders have taken responsibility for selecting the board, this is not the case in the UK.

"[UK] Shareholders not only delegate day-to-day governance to directors, they also effectively delegate to their delegates the responsibility to choose themselves. Within a UK governance environment that is otherwise lauded around the world, this seems a paradox."

Mark Goyder, founder director of Tomorrow's Company, said: "We all know the current stewardship vacuum is not an option. 2009 was the year for corporate governance reviews. Let's make 2010 and 2011 the year for corporate governance innovation."

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