Long march to build better boardrooms

NEXT week’s report from professor John Kay into Britain’s equity markets and the long-term performance and governance of quoted companies comes at a sensitive time for uK plc.

arriving hot on the heels of the shareholder spring, a series of investor rebellions that have embarrassed a host of major British companies, the Kay review is expected to lambast the City for being excessively short-termist in outlook.

Coverage of the protest voting has centred on the amount of money these ousted executives – such as David Brennan at astraZeneca, sly Bailey at Trinity mirror and andrew moss at aviva – were paid. But the deeper issue is the mechanisms by which their remuneration was set rather than the payout itself.

Directors were rewarded too well when the companies they managed failed to perform. Yet performance for most City investment managers is measured by the most recent quarterly earnings report. Total returns over a much longer period of at least five to ten years should be the priority.

Fiduciary duty is the thorny issue at the crux of the shareholder spring. The way companies and their boards engage with the big pension funds – as asset owners – is broken, making it unclear who is responsible for stewardship. Companies argue that it’s not their fault, they’re working under intense pressure to keep institutional investors happy by hitting short-term earnings targets.

asset owners and managers shrug off responsibility, pointing to the behaviour of executives who have become motivated by greed.

But both parties are also increasingly pointing the finger at proxy voting agencies when things go wrong.

agencies such as Iss, manifest and pirc are hired by fund managers to analyse and report back on corporate governance issues, as well as providing them with software that allows them to vote on resolutions at annual meetings. some also recommend which way to vote. one company chairman complained to me that a proxy agency emailed him at 8am to demand a response to its concerns about the independence of a director by 5pm the same day. This aggressive approach was presumably designed to force a prompt reaction. Yet it neglected to recognise the composition of a board that was able to explain why some directors had served longer than the maximum term regarded as good corporate governance practice.

an executive of a different quoted company confided that he was bemused by having completed a series of shareholder meetings ahead of his firm’s aGm. all of the investors he’d spoken to had told him they were happy with the way the business was being run. They raised no complaints and pledged to vote through all resolutions.

But just days later the vote went against the company. The investors blamed their proxy voting agency for pursuing an agenda that did not reflect their views.

one big name City fund manager complained that the proxy voting agencies were becoming a major problem because some investors couldn’t be bothered to get to know all the companies they are invested in, so outsourced the decision-making.

The proxy agencies meanwhile maintain that outsourcing is not the same as giving up on decision-making. The provision of a service to help keep fund managers informed is vital when some are expected to follow hundreds of different companies, track corporate governance issues with each, and then vote at aGm time.

When typically 80pc of their workload is compressed into 20pc of the year, it’s not unreasonable to expect fund managers to seek help.

and yet, as representatives of business owners, to hand over responsibility completely is an abrogation of duty.

The proxies say they merely recommend how investors should vote – the decision is up to them.

so who’s right and who’s wrong?

In a recent survey for the Quoted Companies alliance, half the respondents didn’t know whether proxy agencies were a force for good or bad.

PErhaps professor Kay or the European securities and markets authority, which is about to produce its own report on the issue, can tell us.

What is most worrying is the fact that there’s a stand- off between the three stakeholders – companies, institutional investors and proxy agencies – about who holds who to account.

It’s far too important an issue for the debate to get sidetracked.

We need to get to the point where the fund manager who made the decision to buy the shares is honest about what they like and don’t like about the way a business is being run, and sticks to their word.

proxy agencies should not be used if it’s clear their aim is not to improve companies but to engineer a public bust-up.

after all, under uK company law the fiduciary duty cannot be devolved and legal responsibility remains with the investor.

Ben Griffiths is City News Editor. Ruth Sunderland is away