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Impact Investing

IPE special report May 2018

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What to expect from boards

Transparency, shareholder activ-ism, removing conflicts of interest and the role of non-executive directors in the boardroom are part of the umbrella and latest market focus - corporate governance.
Derek Higgs was appointed by the UK Treasury last year to review just that topic, examining the role and effectiveness of non-executive directors, and consequently proposing measures of improving boardroom management. The resulting report has generated a great deal of debate in the UK, and critics of the proposals have been forthright. But from speeches by the author himself and Ruth Kelly, financial secretary to the UK Treasury, at the NAPF conference in Edinburgh, it appears that these critics have blown the report out of proportion.
The idea of ‘comply or breach’ that many had extracted from the report was certainly not intended. Indeed, both Higgs and Kelly stressed that the report was not meant to be seen as a set of rules, but rather as ‘a statement of best practice’. “Just how far companies comply with the provisions, and at what speed, is rightly a matter between them and their shareholders,” explained Kelly. And Higgs emphasised that the principles were not a case of ‘one size fits all’. Indeed, each individual company could employ the principles most suited to them if they choose to do so. “It all depends,” said Higgs.
The three principle objectives of the ‘code’ explained by Higgs are: To evolve the structure and processes of the board; to throw light on and therefore improve boardroom behaviour to facilitate the effectiveness of boards and individuals; and most importantly to get the right people. This last objective is seen as the most crucial, and hence, has received the most criticism. “There is still broadly a degree of informality in the way people are selected and appointed to boards, and rigour, transparency and openness is needed,” says Higgs. “It is about what businesses and boards need – not about connections.” Higgs suggests that boards should be “casting the net wider” when looking for new appointments, and encourages open advertising and the use of intermediaries. Arguments that the supply is limited are unfounded. Higgs says boards need to think beyond the ‘usual suspects’ and ‘think laterally’ about the qualities needed and where they can be obtained, although research into this area is obviously needed.
Leading onto the role of a senior independent director, both Kelly and Higgs, stressed that the ‘SIDs’ as they are known, are not a new idea. Clarifies Kelly: “Derek has not invented the role of a senior independent non-executive director. On the contrary, this role is already incorporated in the existing combined code. It already works well in many large companies. Nowhere does Derek suggest the senior non-executive should or could be some sort of rival to the chairman – whose role remains rightly central, including in leading on relations with shareholders.” Some 80% of the top 150 UK companies already have a SID in place, whose role is to be available for shareholders to address their concerns, only as a last resort when the normal channels have not resolved concerns. “Their role is to listen – not be a champion of shareholder interests in the boardroom,” says Higgs. A SID would extend the idea of improving the channels of communication between shareholders and boards. Richard Saunders, chairman of the Investment Management Association agrees with Higgs. In a plenary on shareholder activism, Saunders questions, “What are boards afraid of?” Speaking on the behalf of investment managers – in essence, the shareholders - Saunders said: “We need openness of communication with the board, and a frank, transparent open relationship with the company in order to have value. A relationship cannot be one-sided.”
Whether Higgs is a master of persuasion, whether the financial community was merely uninformed or misinformed about the proposals of the Higgs report, or even whether the report was at fault itself seeming commanding and threatening, is open to debate, but votes taken before and after Higgs’ speech showed a significant warming to that which had been proposed. Out of around 400 market participants, 24% more agreed that Higgs’ recommendations should strengthen corporate governance in the UK having heard what Higgs had to say – a total of 87%. 64% agreed that the chairman should be independent on appointment at the end of the session – a rise of 36%. And 85% were in agreement that a senior independent director should be identified to be available to shareholders, from only 69% at the beginning.
Going forward, it is the relationships between each of the financial parties that will take the UK pensions market said Kelly. “We all want to see people saving more for the their retirement. We all know that that means action for the government…We all know also that it means action form the industry: intermediaries operating within a competitive market and making investment decisions free from conflicts of interest; institutional shareholders engaging with companies they invest and upholding high standards of corporate governance; accountants and auditors operating within a robust and transparent system – providing a flow of information the markets can trust.
“Recognising responsibilities on both sides and acting on those responsibilities is what partnership is about. That is how, going forward, we can reinvigorate the pensions system.”

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