The debate around comply or explain as a concept took an interesting turn last week when three of the UK’s largest pension fund investors publicly broke ranks on the issue of annual director elections. In a letter published in the Financial Times, Railpen, USS and Hermes, the three largest UK pension funds with £106bn assets under management outlined their concerns that the UK Governance Code’s recommendation for annual director elections could foster a short-termist approach.
The FT article follows a letter written to the chairmen of UK listed companies in which the funds explain that ‘in the spirit of “comply or explain”, we will consider carefully explanations as to why a company does not believe it is appropriate to comply with the annual re-election provision. If we agree that the explanation is valid and reasonable, we will support boards that choose to retain the current triennial election system.’
As the FT letter states: “We already have all the tools required to remove ineffective directors in the UK” At present, directors at most UK-listed companies are elected individually on three year terms. There are a few companies where each director is elected annually – most topically BP plc – although these are the exception. Unlike director election systems in for example, the USA, director elections are legally binding and a director must resign if he or she fails to achieve a simple majority vote. It is also entirely feasible for shareholders to remove directors through the circulation of a members’ resolution, which if it achieves a mjority is also legally binding and the director in question must resign – again, unlike the US system.
But the funds’ stance appears to have caused division amongst other investors who are in favour of annual elections. This is disappointing as The UK Governance Code is, of course, “comply or explain”, not “comply or else” and it is surely to be hoped that the governance market is now sufficiently confident in its own strengths that it can tolerate a degree of diversity. AFter all on any given day funds are buying shares as well as selling them for equally rational reasons.
At this stage the mechanics of annual elections don’t’ appear to have been fully thought through nor the cost of their implementaiton thought through. There will be legal and operational impacts for all parties. From a proxy voting agency perspective alone, if every FTSE350 company opted for annual elections it is likely that we would need twice as many staff or agenda management team in order to cope with the increase in number of resolutions that need to be added to the system. At present a typical meeting has around 12 resolutions, of which 3 will be director related. That would rise to a minimum of 12 resolutions thereby doubling the workload. Registrars will need more resources to tabulate more resolutions . From a company’s perspective there is the question as to what order each director should be offered for election. And as a UK company must have at least one serving director does it mean that the Chairman of the meeting would simply adjourn that AGM after the first ballot is lost? Quite possibly.
Manifest would like to propose an alternative way of looking at the issue, a simple solution which is both easy to manage and very democratic. It takes account of the need for shareholder consultation, yet affords boards ample opportunity to resolve possible underlying discontent without the need for a nuclear option every year.
We would like to propose that, rather than companies proposing each director for election each year, companies propose a single, annual resolution which obtains shareholder permission to continue with three-yearly terms – unless majority voted otherwise. This follows the same “opt-in” logic for EGMs to be held on 14 days notice – a subject which equally provokes division among shareholders.
The benefit for companies and shareholders is that there is fair notice that shareholders appear to have concerns about board accountability and have a reasonable period of time to engage with each other to avert a ballot catastrophe. It’s a low-cost, high impact option which meets the spirit of greater accountability without disproportionate and overbearing costs.
Last Updated: 25 July 2010