The UK's latest corporate governance initiative
The UK's third blueprint for good governance is facing criticism from some leading institutional investors. Drawn up by a committee chaired by ICI's Sir Ronnie Hampel, the preliminary report stands accused of leaving key questions unanswered. Business leaders, however, have given it a more positive welcome.
Hampel and his team are currently fielding responses before issuing a final report in December. Essentially, the committee's conclusion is that good governance will be achieved by flexibility and management effectiveness, rather than by excessive accountability and 'box ticking'.
To Hampel and his committee members, embracing the spirit of a rule is more important than following it to the letter. 'There is a need for broad principles,' Hampel says. 'All concerned should then apply these flexibly and with common sense.'
Well-Backed Team
The eleven-member Hampel committee was set up two years ago, largely through the efforts of the UK's Financial Reporting Council, supported by the London Stock Exchange, the Confederation of British Industry, the Association of British Insurers, the National Association of Pension Funds and the professional accountancy bodies.
The committee was given a basic remit to review and overhaul the recommendations of the Cadbury committee on corporate governance and the subsequent Greenbury study group on directors' remuneration. In particular, it was told to substitute principles for detail wherever possible, with a view to restricting the regulatory burden on companies. The intention is that Hampel's committee produce a combined set of principles and a unified code of best practice, drawing together its own recommendations and those of Cadbury and Greenbury.
On the one hand, directors welcome the suggestion that a broader and less prescriptive approach should be adopted. On the other, some institutions and shareholder groups criticize the Hampel conclusions and argue that such an approach would give too much leeway for fudging and special pleading, particularly in the areas of board remuneration and corporate decision-making.
Anne Simpson, joint managing director of shareholder activist and voting advisory group Pensions Investment Research Consultants (Pirc), is less sanguine about the report and its conclusions. 'Sir Ronnie Hampel says that it is not his committee's intention to make history, but he has produced some 50 or so recommendations, several of which are quite controversial.'
In her view, the Hampel report is actually a huge rewrite of existing corporate governance guidelines. 'There is too much in one report and too little time to consider it all properly,' she comments. 'There is some good stuff in it, but there is a need for a wider consultation procedure before the report's recommendations are accepted.'
Simpson would go further. 'What is needed is a standing body, perhaps answerable to parliament, and certainly with broader membership than the Hampel committee, which is dominated by company interests.'
Judgement Tool
Simon Yencken, company secretary and general counsel at Reuters, is typical of most corporate commentators in endorsing the general thrust of Hampel's interim report. 'We support the move away from a prescriptive approach, which has largely been fed by the compliance industry. In our view, corporate governance should be a tool by which to judge a company's performance and not an end in itself.'
He is concerned, however, that reliance on a pure statement of principles may be counter-productive. 'Companies may find it difficult to work out what is actually meant,' he comments. 'I'm not sure the proposal for a narrative statement of corporate governance behavior is a very sensible one. If there's no standard format, companies may produce not very meaningful statements.'
The question of reliance on corporate governance reports and measurements is also raised by Ian Harrison, company secretary of Courtaulds. While supporting the report's approach, which he regards as constructive and helpful, he draws attention to the dangers of assuming everything is okay just because the corporate governance statement looks good. 'Shareholders must continue to be vigilant,' he warns.
By most international standards, UK disclosure practice is advanced and a number of practitioners and observers believe it is now time to stop issuing rules. 'In many ways, UK companies are at a disadvantage,' says Martin Scicluna, chairman of Deloitte & Touche, 'not only because of the amount of information being revealed but also because of the cost burdens involved.' Scicluna approves of the UK's initiatives to date but argues that the way forward is for institutional shareholders to use their influence on companies.
This approach is endorsed by the head of corporate governance at one of Europe's largest life assurance companies. 'It would be helpful if Hampel gave some positive encouragement to companies to consult with their shareholders whenever the situation warrants. It is good that Hampel has drawn attention to the importance of shareholders playing their part in corporate governance. The partnership approach has a lot to recommend it,' he says.
He backs most of the recommendations in the report, particularly where appointments to the board are concerned. 'The call for transparency is welcome, but Hampel could perhaps give a few more pointers about the processes of nominating and appointing directors. Some benchmark guidance is needed in an area that's always had a shroud of secrecy drawn over it.'
The question of whether the roles of chairman and chief executive should be separate is also, in his view, one where Hampel should send a more robust message. 'Only in exceptional circumstances should the two positions be combined in one person,' he argues, 'and Hampel should make it clear that separation is the norm.'
On the whole, he welcomes Hampel's 'flexible approach' but believes any set of governance principles should be firmly underpinned by regularly reviewed policies and clear guidelines.
Sharpening Up
Institutional investors undoubtedly want high-caliber people on boards; some also would have liked greater representation of their own kind on Hampel's committee. As it was, just one of their number was there, David Thomas from The Equitable Life.
Following publication of the report, the mood of institutional shareholders is caught by Alastair Ross Goobey, chief executive of fund manager Hermes. He contends that a number of Hampel's recommendations need to be clarified or sharpened. A particular concern relates to the structure and behavior of remuneration committees and the report's suggestions on the role and function of non-executive directors.
'There is a lack of clarity in the proposals for the way the remuneration committee should be formed and how it should work,' he says. 'For instance, Hampel's recommendation appears to suggest that remuneration committees should put their proposals to the whole board for approval. That is clearly not the best way.'
Ross Goobey believes that Hampel's committee did not intend that interpretation and will be clarifying its position in the final report. He is also disturbed by Hampel's endorsement of Cadbury's recommendation that the board of a company should make the judgment as to whether or not a non-executive director is independent. 'We don't think it should be left to boards to determine who is or is not independent,' he argues. 'We won't treat non-executives as independent unless they meet clear and straightforward criteria and we expect Hampel to either set down or endorse suitable tests of independence.'
The need for a radical redesign of remuneration committees and their functions and powers is echoed by many commentators. There is also a call from some quarters for the end of reliance on voluntary codes like the original Cadbury and Greenbury proposals, although any demand for further regulation is rejected almost unanimously by company executives, and backed by many institutional shareholders and auditors.
Pirc's Simpson says: 'I think on some issues there is a case for the law to change.' She cites the statutory positions on the duties of directors and the powers of shareholders, arguing that the law needs to be tightened on these and other mainstream aspects of corporate governance. 'The trend is that shareholders now want to behave like owners. There is a need for full disclosure, for benchmarking, and for best practice guidelines. The tide is flowing in the opposite direction to relaxation and such recommendations as a narrative report by company managements.'
Government sources do not rule out the prospect of legislation on governance, including the role played in corporate governance by the pension funds and other institutional investors. However, it appears that Blair and his colleagues are content to wait and see the reaction to the final Hampel report before becoming too involved in the debate.
Meeting Structures
The issue of annual meetings has not been fully tackled by Hampel, argue several leading fund managers. And most believe that it is high time the area was thoroughly reviewed and firm decisions taken on how those meetings should be conducted.
Reuters' Yencken rejects Hampel's suggestion that a resume of the meeting be produced. 'This is bizarre,' he says. 'There's no evidence that such a report is needed or has been asked for by shareholders.' The cost of producing and circulating such a summary would be significant and, Yencken argues, the minutes of annual meetings are usually available on request anyway.
'Hampel should have focused more on annual meetings generally,' he continues. 'We accept that the presentation of a business strategy briefing is a good thing, but Hampel could have gone much further. Such topics as electronic meetings via the Internet, for example, need examination. Also, there is the question of what business should be conducted at an annual meeting and what kind of matters should be put to the vote. The whole area of annual meetings needs more thought.'
In Yencken's view, better and more pertinent information is given out at company presentations to analysts. Annual meetings tend to be vehicles for small shareholder involvement, and he draws attention to the propensity for such meetings to be disrupted by protesters.
The UK's Department of Trade and Industry (DTI) is currently sitting on proposals to alter the way annual meetings are run, following a discussion paper issued in April 1996. Industry responses have been with the DTI since this time last year. Ross Goobey says everyone's waiting for something to happen and warns the DTI, 'It's no good remaining silent.'
Annual meeting reforms will have little real impact, say some commentators, unless institutional voting power is harnessed and mobilized effectively. Hampel touches on this concern in his committee's report.
The recommendation is that institutions should adopt a considered policy on voting their shares (although such a vote should still be voluntary) and that the leading institutional groups, the ABI and the NAPF in particular, should get together and agree on a common set of voting guidelines. The corporate governance director at one leading fund manager says this would probably not be effective. 'Both ABI and NAPF are rather broad churches, and achieving unanimity will be difficult.'
Several institutions already have their own voting policy guidelines and don't see an industry-wide policy as being in everybody's best interests. As the representative of one of these put it: 'The danger is that such a policy will be drawn according to lowest common factors, rather than to the highest common denominator.'
Ross Goobey believes that many institutional investors have been slow at taking up the original Cadbury recommendations on the full use of voting rights and the disclosure of voting policies. 'We always vote and we always lodge proxies,' he says, 'although they're not always counted.'
Hampel recommends that companies count all proxies and announce the proxy count on each voted resolution after the relevant show of hands. Ross Goobey agrees: 'All proxy votes should be counted and announced, even where a poll is not taken.'
Overall, the most commonly held view is that Hampel and his panel have produced an eminently sensible report, with an emphasis on enterprise and prosperity rather than accountability, while at the same time laying down a set of ground rules that reinforce corporate governance without imposing more prescriptive rules.
Equally, there is a strong feeling that Hampel has not gone far enough in some areas - with regard to the workings of remuneration committees, for example. Some believe a more radical rethink is called for on this, as well as on the question of the voting behavior of institutional investors.
But those issues will just have to wait for number four in the UK's series of good corporate governance guides.
Fresh Thoughts
Formal responses to the Hampel committee's preliminary report have been arriving thick and fast in the last few weeks. Ronnie Hampel and his team may well have many late nights ahead of them if they are to satisfy all the critics before the final report is released at the end of the year.
Among the submissions to the secondary stage of the committee's work, the NAPF calls for more shareholder influence on directors' pay. It argues that allowing shareholders to vote on individual directors' remuneration packages would be unworkable, but there should be an avenue to vote on remuneration committee reports as a whole. The NAPF also argues for the separation of the roles of chairman and chief executive; a definition of 'independence' for directors; and mandatory director training.
The NAPF's response contrasts with that of the Institute of Directors in several areas. The IoD believes that although the separation of the roles of chairman and chief executive is good practice, recognition that this cannot always be done is a sensible aspect of Hampel's report. It adds that if the roles are combined, it is good practice to appoint a deputy chairman or have a recognized senior non-executive director.
Not so, according to the Investor Relations Society. 'The nomination of a lead non-executive director, whatever the circumstances, would be tantamount to creating two chairman and almost certainly result in conflict and possibly divide the board,' says its release. 'It would be far better to ensure separation of the roles of CEO and non-executive chairmen.'
The IRS is keen that any code should help boards recognize their responsibility for the well-being of their companies as a whole - including other interest groups and the community at large. The response suggests that financial performance alone is not necessarily in the best interests of shareholders, present or future.
'Such a code should allow boards the freedom to focus on creating shareholder value and encourage shareholders to support long-term objectives rather than immediate financial performance,' says Andrew Mills, chairman of the IRS.