The Walker Review has ignited something of a bonfire under the UK’s current “Guidelines” based approach to corporate governance monitoring and enforcement. Leaving the politics of the debate aside for a moment, there is a genuine practical consideration for adopting a more formal approach to “Best Practice Guidelines” – ongoing suitability.

Over the past 20 years the various UK investor protection committees (IPCs) have been a central part of the soft regulation landscape. In the absence of a formal regulatory home, the collaborative approach has offered a time and effort-saving way of encouraging issuers to “do the right thing”. As such, these soft laws were framed with the best of intentions.

But time moves on and markets and market practices change, which calls into question the ongoing suitability of “Best Practice” principles.  Investors domiciled ex-UK have different experiences and approaches to governance and they are now bringing their views to bear at the UK ballot box. What the data from those ballot boxes is telling us is that there appear to be a number of unintended consequences in UK best practice which are in need of review. The next question is, who should take ownership of that review process in a globally diversified world of share ownership?

Let’s take a look at one of the most high profile governance issues – executive remuneration and consider some of the unintended consequences of the current regime.

From an investor perspective, a significant proportion of the blame for spiralling pay has been put at the door of remuneration consultants. However, in recent years the UK has published a series of guidelines and recommendations designed to encourage alignment between investors and companies. So another view to consider is that remuneration consultants are acting entirely rationally and simply responding to the Best Practice environment which is being created for them and exploiting the guidance to their clients’ best advantage.

As a case in point, Manifest revisited an article published in January 2008 analysing a circular from Clifford Chance which was a response to the then recently updated ABI executive remuneration guidelines.

Among the points that the Clifford Chance circular was suggesting Remuneration Committees should consider were:

• That in recent years, the “toughness” (their quotes) of performance targets have gradually been eroded;
• That recent share price falls had a silver lining in that more options and/or LTIP awards can be granted within individual share option limits;
• That since an LTIP plan is inherently more valuable than an option grant, many companies may wish to seek shareholder approval to increase LTIP grant limits to levels that were previously only found in option plans;
• That the ABI recommendation that where two or more performance conditions apply, that consideration should be made to making them interdependent, would be unlikely to be embraced by companies; and
• That companies, where the share price had fallen significantly, may benefit enormously from the adoption of private-equity style plans.

Last Updated: 19 October 2009