The provision would eliminate Internal Revenue Code section 404(k), an incentive for ESOP creation and operation that permits a C corporation to deduct the value of dividends paid on ESOP stock passed through to employees in cash, deductions used to pay the ESOP acquisition loan, or when the employee reinvests in more company stock in his/her ESOP account balance. Continue Reading →
Tag Archives | UK
Steve Waygood, of Aviva Investors, which owns 2% of UK equities, explains why fund managers still prefer to walk away, rather than trying to change a company culture. Wagood defines sustainability to include how mega-trends influence the firm. Retail investors doesn’t really understand what is being Continue Reading →
Half of employers in the UK don’t offer a pension to their employees. Auto-enrolment, the opt-out defined-contribution system designed to fill this gap, was introduced in the UK on October 1. Top1000Funds.com interviewed Lawrence Churchill who chairs he government-funded pension fund, NEST, one of the funds on offer, during the first day of the rest of the fund’s life. (Feathering NEST, 10/10/2012) Continue Reading →
The UK backed Kay Review of UK Equity Markets and Long-Term Decision Making was commissioned by Business Secretary Vince Cable after the takeover of Cadbury by Kraft, which many thought was driven by short-term investors. After examination the Report made several recommendations that could improve the long-term focus fund returns if properly implemented. Continue Reading →
Shareholder Democracies?: Corporate Governance in Britain and Ireland before 1850 addresses a central issue. Current governance structures often allow managers to pursue their own interests. According to some, a dissemblance of democracy has led to “elitism and self-interest in the boardroom,” resulting in Continue Reading →
UK Prime Minister David Cameron rejected a Labor Party proposal that an ordinary employee sit on a company board compensation committee, noting that having an employee on the committee would break an important principle of not having people on a remuneration committee who will have their own pay determined. Since when are boards setting the pay of ordinary employees? Continue Reading →
Equilar, the leading provider of executive compensation benchmarking and research solutions, announced the release of its Pay-For-Performance Analytics suite yesterday, along with the fact that the Council of Institutional Investors (CII), whose members hold $3 trillion in assets, has signed on as the first client. According to the press release:
By combining an innovative market-based algorithm to identify peer companies with a realizable pay methodology using long Continue Reading →
The Financial Reporting Council (FRC), UK’s independent regulator “responsible for promoting high quality corporate governance and reporting to foster investment,” is also in charge of the Stewardship Code for institutional investors.
The FRC, 230 pension schemes, fund managers and service-providers have signed up for the Stewardship Code, including “most of the major investors in UK equities.” According to Financial News (Shareholders: Turn up to meetings!, 12/14/2011), the FRC not only warned companies Continue Reading →
If you know of good candidates for the Golden Peacock Awards, instituted by Institute of Directors in 1992, now is the time to get nominations in, since they are due September 14, 2011. Below are the categories:
A. Golden Peacock Global Awards
- Excellence in Corporate Governance
B. Golden Peacock National Awards
- Climate Security
- Excellence in Corporate Governance
- Innovation Management
The application form cum guidelines can be obtained by sending an Continue Reading →
Ever since the demise of Enron, I’ve wondered why the vote by shareowners to approve auditors is considered such a routine nonevent. Ask anyone who used to work for former big five firm Arthur Andersen LLP. Yet, “ratification” of auditors remains among the last holdouts of broker voting.
Who watches the watchers in the world of big business? That question is asked by corporate governance consultant Pirc in its Annual Stewardship Review. Reviewing voting results over the last five years, they couldn’t find a single instance of any vote of more than 20% against an auditor appointment. According to Alan MacDougall, managing director at Pirc:
We’re surprised that even after the financial crisis, shareholders don’t seem to make the connection between value destruction and the fairly closed world of auditing UK plc.
The FT article ends with a quote from Lord Myners: “You don’t wash or service a rented car because you expect to give it back. I still get the impression that shareholders treat their holdings like a rented car. For the efficient use of capital, that attitude has to change.”
Pirc makes valid points that his American counterparts should also be raising. Where was/is the outpouring of votes against the auditors who dropped the ball in their audits of American banks during and proceeding the financial crisis? Shouldn’t we be voting down auditors who so obviously failed us?
The best solution I have seen is Mark Latham’s proposal that would allow shareowners to recommend auditors from a pool of qualified applicants, rather than asking us to approve one chosen by management. For an example, see Latham’s proposal to USG dated November 17, 2002 at VoterMedia.org.
I also like the idea of an Association of Member-Nominated Trustees. The closest the US comes to that, as far as I know, is the effort led by CalPERS and CalSTRS to develop a primarily digital resource, the Diverse Director DataSource (or 3D), devoted to finding untapped diverse talent to serve on corporate boards. (see 3D Advisory Panel Named)
It would be good to see this group or another also take on the additional aims of the UK’s Association, which include:
- To support the development of member nominees and to enable them to perform their role to the best of their ability.
- To provide member nominees with a collective voice, and if desired, to lobby on pension matters with the Regulator, within the pensions industry and through the professional associations and trade bodies.
- To provide or guide access to training services which meet member nominees’ needs.
- To help identify and champion best practice among pension schemes – including scheme governance, performance and communications.
- To provide a networking environment through which member nominees can share their experiences and challenges with other member nominees in confidence.
- To provide support for sponsors through targeted services – including for example a member nominee selection process.
- To conduct research or studies which may help MNs become more effective in their performance.
Oxford Brookes University Business School wants to test the proposition that Shareowner Engagement is having an impact. They are looking for a PhD student to investigate the Stewardship Code, which “aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.”
Proposed areas of research include how institutional investors adopt the Code; whether the Code leads to increased shareholder engagement and better governance; whether and how shareholders make use of the information supplied by institutional investors. If I were twenty years younger, I’d be there.
A U.K.-government-commissioned review by former trade minister Lord Mervyn Davies into board diversity, published Thursday, recommended FTSE 100 boards should aim for a minimum 25% female representation by 2015, up from 12.5% in 2010. Unlike Norway and Spain, Lord Davies doesn’t believe in setting hard quotas. Worryingly, he doesn’t rule them out if a business-led approach doesn’t yield change. (HEARD ON THE STREET: Corporate U.K.’s Limited Gene Pool – WSJ.com, 2/24/2011)
Worryingly? The “shallow pool of candidates” is pure bunk. Directors don’t need to be CEOs or exCEOS. As I heard about the Norwegian experience last year at ICGN, brining women on boards increased qualifications. (ICGN Day 1: CorpGov.net Coverage, 1/16/2010) “In Norway, which instituted a 40% requirement, once companies had to bring on women directors they became very concerned about qualifications for directors. Once qualifications were written down, they were also applied to men. Result: golf club members down; professionals up.”
The University of Cambridge has announced its first entirely new degree in Law since the 19th century with the launch of a Master’s degree in Corporate Law (the MCL).
The MCL will begin in the academic year 2012-13 and will operate as a full-time nine-month programme, offering students the opportunity to engage in a detailed study of the legal and regulatory framework in which companies are governed and financed.
The MCL will cover key fields such as corporate governance, the regulation of financial markets and pensions, offering a wider and more diverse range of corporate courses than a typical Masters degree programme.
The course, in addition to offering in depth analysis of legal rules, will provide students with the opportunity to understand how “real world” corporate deals are structured and run.
The MCL will be taught by the Cambridge Law Faculty’s team of corporate lawyers, widely recognised as one of the strongest in the field. The intake will be approximately 25 students per year.
Applications will be accepted from September 2011. Further information is available on the MCL webpage on the Law Faculty’s website. Wow, corporate governance is helping Cambridge move from the 19th to the 21st century. With their help, maybe this will be the century we shift focus to governance. Bob Tricker has often proclaimed the 19th century the entrepreneur’s, 20th century management’s, and 21st that of governance.
We certainly see focus swinging to questions of legitimacy and effectiveness in wielding power worldwide. By the time the 22nd century dawns, corporate power may actually be exercised “in a way that ensures both the effective performance and appropriate social accountability and responsibility… rooted in rigorous and replicable research,” as Tricker envisions. We should all welcome University of Cambridge’s new program.
Activism is an attractive alternative to takeovers as a way to push through corporate change. Two out of three mergers fail to make money for the buyer, and the failures can be spectacular, as seen with AOL Time Warner or the purchase of ABN Amro. The disaster that followed the ABN Amro takeover makes contested takeovers especially unlikely in the financial services industry, leaving activism as the only avenue for change. (Forget corporate governance – vive la révolution, Financial News, 2/14/2011)
The Belgian Corporate Governance Commission (CGC) has implemented gender diversity into its governance code on a ‘comply or explain’ basis. Listed companies are encouraged to increase the number of women serving boards to at least 30% within seven years. The Confederation of British Industry sent a similar request last year in its submission to Lord Davies’ review into the shortage of women on UK company boards. (Belgium backs 30% gender target, PIRC Alerts, 1/25/2011. See also: Women on Board: The Norwegian Experience)
The membership of remuneration committees should be widened to allow employee or shareholder representatives to participate in order to make their operation more effective and facilitate pay restraint, according to Europe’s largest independent proxy agency PIRC.
In its submission to the Department of Business, Innovation and Skills (BIS) consultation on short-termism, PIRC argues that encouraging remuneration committees to hear divergent views could improve decision-making. This might include allowing employee or shareholder representatives to participate. PIRC’s proposal is influenced by research into group decisions by Cass Sunstein, co-author of the book Nudge which has influenced Coalition thinking on designing effective policy. Alan MacDougall, PIRC’s managing director, said:
Various solutions have been tried over the years to address accelerating executive pay with little success. It is time that we looked properly at the dynamics of remuneration committees. Broadening the membership to include different viewpoints could improve the decisions committee members make, and introduce some restraint where it has clearly been lacking. Given the Coalition’s interest in the policy applications of research into behavioural influences this seems to be an idea whose time has come.
PIRC also calls for the UK Government to consider the benefits of putting more ‘sand in the wheels’ in respect of merger and acquisition activity. PIRC suggests that the Government carry out proper analysis of the benefits of introducing a minimum holding period before shareholders can vote on acquisitions, upping the threshold for a deal to be passed, and giving shareholders in the acquirer a vote. According to MacDougall.
There are compelling arguments for ensuring that the long-term owners of public companies have the opportunity to have more of a say on proposed acquisitions. It is also interesting to note that under the current legal framework it can be more difficult to change a company’s articles than to decide who owns it. It seems entirely legitimate to question whether this is an appropriate balance.
To help embed stewardship responsibilities within pension funds, PIRC suggests that pension fund trustees be required to undertake an annual review of how they have met their responsibilities as owners during the year. PIRC also argues that that the Government should define fiduciary duty as it applies to institutional investors’ stewardship activities.
PIRC is the largest independent European provider of corporate governance, proxy voting and corporate social responsibility investment research and advisory services. Their clients include pension funds and fund managers with combined assets of over £1.5 trillion.
In books such as Going To Extremes and Why Societies Need Dissent, Cass Sunstein has explored group decision-making. His research into decisions made by US judicial panels with political appointees found that if the panel is made up solely of Democrats they take more ‘liberal’ stances on issues than their individual views would predict, and Republicans shift to a harder conservative position. PIRC believes that a similar process may occur where remuneration committees are comprised of individuals who share the same views on high pay.
Shareowners and/or employees on compensation committees could reduce the likelihood of group think. US firms and shareowners should consider similar options. ISS, CalPERS, John Chevedden and others please take note.
The Financial Reporting Council, the UK financial reporting watchdog, wants shareholders to have more say in choosing the firms which audit corporate accounts.
The suggestion is among a raft of ideas the FRC is putting forward for debate in a bid to improve corporate reporting in the wake of the financial crisis. The FRC argues annual reports have become too cluttered, reducing their value for investors.
“There should be greater investor involvement in the process by which auditors are appointed,” the FRC said.
“We recognise that although shareholders confirm auditor appointments, management is perceived to determine the appointment (or reappointment) and remuneration of auditors and that, therefore, auditor independence is compromised.
“There is a case for the independence of the decision to be reinforced by the Audit Committee seeking greater shareholder involvement.” The comments come in the new Effective Company Stewardship: Enhancing Corporate Reporting and Audit report
There are two options. Either company audit committees should be required to explain why they appointed the auditor, or they could discuss the appointment “with a number of principal investors”- and then report on that consultation to shareholders generally… Responsible Investor.
There is, of course, a third option. Shareowners could select the auditor from a group of qualified contenders. For more on that option, see Proxy Voting Brand Competition by Mark Latham.
UK’s Secretary of State for Business, Vince Cable, launched a consultation into corporate governance and whether failures in that process are stoking a trend for short-termism in investment that damages the long term interests of companies and many of their investors.
The consultation will examine allegations that publicly quote companies are being run in order to create short-term spikes in share value, rather than for the long-term benefit of the company, the economy and its longer term shareholders. Said Cable,
The paper I am issuing today is a call for evidence from across the corporate world and beyond to examine whether the system in which our companies and their shareholders interact promotes long-term growth – or undermines it. I want a serious examination and debate into the role of investors and the time horizons over which they operate; the factors influencing board decisions; the reasons for the growth of directors’ pay; the impact of the investment chain; why returns from equity have reduced; and why takeovers that are economically damaging still take place.
Comments can be submited via “the response form.” The form can be submitted by letter or email to: Adam Gray Long-term Focus Consultation Corporate Law and Governance Department for Business, Innovation and Skills 1 Victoria Street London SW1H 0ET firstname.lastname@example.org.
The consultation provides a nice very brief overview of history and regulatory framework. Key questions posed include:
- Do UK boards have a long-term focus – if not, why not?
- Does the legal framework sufficiently allow the boards of listed companies to access full and up-to-date information on the beneficial ownership of company shares?
- What are the implications of the changing nature of UK share ownership for corporate governance and equity markets?
- What are the most effective forms of engagement?
- Is there sufficient dialogue within investment firms between managers with different functions (i.e. corporate governance and investment teams)?
- How important is voting as a form of engagement? What are the benefits and costs of institutional shareholders and fund managers disclosing publically how they have voted?
- Is short-termism in equity markets a problem and, if so, how should it be addressed?
- What action, if any, should be taken to encourage a long-term focus in UK equity investment decisions? What are the benefits and costs of possible actions to encourage longer holding periods?
- Are there agency problems in the investment chain and, if so, how should they be addressed?
- What would be the benefits and costs of more transparency in the role of fund managers, their mandates and their pay?
- What are the main reasons for the increase in directors’ remuneration? Are these appropriate?
- What would be the effect of widening the membership of the remuneration committee on directors’ remuneration?
- Are shareholders effective in holding companies to account over pay? Are there further areas of pay, e.g. golden parachutes, it would be beneficial to subject to shareholder approval?
- What would be the impact of greater transparency of directors’ pay on the linkage between pay and meeting corporate objectives performance criteria for annual bonus schemes relationship between directors’ pay and employees’ pay?
- Do boards understand the long-term implications of takeovers, and communicate the long-term implications of bids effectively?
- Should the shareholders of an acquiring company in all cases be invited to vote on takeover bids, and what would be the benefits and costs of this?
This seems to me to be a very positive step. I’d like to see the SEC in the US issue a concept release, perhaps even more focused on the issue of short-termism, or perhaps this is something their yet to be reconstituted Investor Advisory Committee could initiate. I think we’ve been too focused on liquidity and not enough on encouraging long-term investment.
Also of interest, UK Takeover Panel Publishes Review of Takeover Rules (HLS Forum on CorpGov and Fin Reg, 10/30/2010). “amendments to the Code will clarify that target boards may “take more account of the position of persons who are affected by takeovers in addition to offeree company shareholders,” primarily employees of the target company. Offeree companies will “not be limited in the factors they may take into account in giving their opinion” on a bid, and the Code will be amended to require disclosure of additional information so that “the offeree company board and all other interested constituencies [can] consider the long term effects of an offer on the merged business in all circumstances.”
Sigrid Rausing, founder of the Sigrid Rausing Trust, reports that a UK ethical investment research body, EIRIS, launched a report on a FTSE100 mining company, Vedanta Resources, at a seminar attended by some of the UK’s leading fund managers.
The company has come under international scrutiny for its plans to mine bauxite in the Indian state of Orissa. Responsible investors have been engaging with the company, and some of these have divested because of concerns about the lack of progress in addressing human rights issues.
The Norwegian Government’s pension fund was one of the first to disinvest on ethical grounds in 2007, coinciding with a campaign by several NGOs. In September 2009, the UK Government upheld a complaint lodged against Vedanta under the OECD Guidelines for Multinational Enterprises. Others began divesting and
Amnesty International published a report stating that Vedanta’s plans to mine bauxite in Orissa’s Niyamgiri Hills, considered sacred by the indigenous Dongria Kondh people, will threaten rights to water, food, health and livelihood. Still others have taken the decision to vote against Vedanta’s report and to oppose the reappointment of certain directors at the company’s AGM this week.
Indian governments had approved permits and even participated with the company. However, they now announced an investigation into rule violations and the likely impacts on the Dongria Kondh people. Delays have cost Vedanta $90 per ton. According to Rausing:
This may account for the willingness of more investors to signal their disapproval of the company’s handling of human rights and environmental issues by voting against the Board’s resolutions.
Of course, money often brings investors closer together but Rausing argues the new UK Stewardship and Corporate Governance Code offers a new motive to coalesce around ethical issues, since it requires UK institutional investors to monitor the companies in which they invest, make public their policy on stewardship and, if they fail to do so, explain why. (The Vedanta case: A CSR wake-up call for sleeping investors, Ethical Corporation) Apparently, simply requiring explanation gets investors to think about where they should take a stand… certainly a positive step that should be adopted by US investors, whatever their position. (I generally favor engagement over divestment.)
Annual elections of directors, do they ensure accountability to shareowners or encourage companies to concentrate too much on short-term returns. I was surprised to read the following in Responsible Investor (UK: stewardship elusive as pension funds buck governance code, 7/21/10):
Hermes, Railpen and the Universities Superannuation Scheme – with combined assets of £106bn (€126bn) – have written to companies in the FTSE 350 saying they would back them if they ignore the Financial Reporting Council’s recommendations on annual elections. The trio are worried that annual elections – a key, though controversial, plank of the FRC’s new Corporate Governance Code – could lead to a “short-term culture” and undermine collective decision-making.
The article goes on to say the National Association of Pension Funds, Confederation of British Industry and Standard Life Investments also favor terms of three years. The Council will review the code in three years, should US investor groups do the same?
The Financial Reporting Council’s new UK Corporate Governance Code has replaced the Combined Code on Corporate Governance and applies to accounting periods beginning on or after 29 June 2010. Whether in the UK or not, the new Code is worth reviewing.
The new Code again emphasises the role and responsibilities of the board and continues the existing ‘comply or explain’ approach. Changes introduced by the new Code include:
- Annual election of directors for all directors of FTSE 350 companies. All other directors will continue to be subject to election at intervals of no more than three years.
- Board diversity is encouraged to improve the quality of decision-making and to reduce the risk of “group think.” Appointments should be made on merit against objective criteria and with due regard for the benefits of diversity on the board, including gender.
- Board performance. In addition to boards reviewing their own performance annually, FTSE 350 companies should now be externally facilitated at least every three years (and any connections with external facilitators should be disclosed).
- Board’s responsibility for risk. Boards should, at least annually, conduct a review of the effectiveness of the company’s risk management and internal control systems and should report to shareowners.
- Proper debate. New provisions outline the chairman’s responsibilities for leading the board, the role of non-executives in challenging and developing strategy, and the need for all directors to have time to discharge their duties sufficiently.
- Remuneration. The performance related element of executive directors’ remuneration should be stretching, designed to promote the long-term success of the company and the remuneration of non-executive directors should not include share options or other performance-related elements. The remuneration committee should consider the use clawbacks for misstatement or misconduct and non-financial performance metrics generally compatible with risk policies and systems.
View the new UK Corporate Governance Code (43 page pdf). View the FRC’s revisions to the UK Corporate Governance Code (24 page pdf). (FRC publishes the new UK Corporate Governance Code, Shepherd & Wedderburn LLP, 6/30/10) See also UK Dismantles FSA and Empowers Bank of England, PLI Practice Center, 7/6/10.
UK institutional shareholders will be forced to declare how they vote at company annual general meetings (AGMs) if the current governing Labor Party wins the general election on May 6. In addition, it wants a higher threshold of investor support for takeovers: two-thirds of shareholders. (UK shareholders to be forced to reveal votes if Labour wins May 6 UK general election, Responsible Investor, 4/13/2010)
Lindsay Tomlinson, Chairman of the National Association Pension Funds, addresses the ICGN and notes that the Institutional Shareholders’ Committee put out a Statement of Principles on Shareholder Engagement. It will now have some enforcement teeth. (Check Against Delivery, 3/25/2010)
Firstly we expect that it will be an FSA requirement that all investment management firms authorised to do business in the UK will be required to make a statement about the way in which they comply with the Code. This could include words to the effect that they take no notice of it, but it would be a public statement which is made through our main regulator. A regulator which has immense power – for example to ban me from the industry for life.
In addition to that, there will be some form of monitoring mechanism which we proposed should be through each individual’s firms front office controls report a SAS70. And we are anticipating that the FRC will, itself, undertake some form of monitoring, probably at the aggregate level, but maybe extended to individual firms.
Much has been written about the role of directors and boards but far too little on the how shareholders can add value. Carolyn Kay Brancato did so in her excellent book, Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Value. However, Brancato was primarily writing from the perspective of managers. Although there was general recognition that shareholders can add value, the thrust of the book was on what managers need to know about shareholders and how to attract shareholders who will support them. Charkham and Simpson take a larger societal viewpoint. At bottom, they are concerned not with what is best for managers but what system will best provide the goods and services that society needs. Continue Reading →