Vince Cable, the UK’s Secretary of State for Business used the Confederation of British Industry’s annual conference to launch an an investigation into possible failures of market and corporate governance which have discouraged a long-term approach to investment. The paper, ‘A Long Term Focus for Corporate Britain’, is looking for input on a wide range of questions: the problems of short-termism, investor engagement, directors’ remuneration and – following on from last week’s announcement by the Takeover Panel – the economic case for takeovers.
“The UK has led the world in developing high standards of corporate governance”, said Cable “the first stewardship rules for investors, the first corporate governance framework for companies and the most comprehensive takeover code. Now is the time to look to the future and take a wider view on how these can work together. Well functioning capital markets are vital to productivity, growth and the future prosperity of the UK.
On executive pay, Cable pointed to research from Manifest that CEO total remuneration rose by 14% p.a. over the ten years from 1999-2009 – even though there was a fall in the value of the FTSE 100 of 1% p.a. “So perhaps it is time to return to Earth. The best way to achieve this is surely to strengthen the relationship between shareholders and the managers they are paying. It is, after all, their money!”
The consultation covers four broad themes:
The Board of Directors
1. Do UK boards have a long-term focus – if not, why not?
2. 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?
Shareholders and their Role in Equity Markets
3. What are the implications of the changing nature of UK share ownership for corporate governance and equity markets?
4. What are the most effective forms of engagement?
5. Is there sufficient dialogue within investment firms between managers with different functions (such as corporate governance and investment teams)?
6. How important is voting as a form of engagement? What are the benefits and costs of institutional shareholders and fund managers disclosing publicly how they have voted?
7. Is short-termism in equity markets a problem and, if so, how should it be addressed?
8. 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?
9. Are there agency problems in the investment chain and, if so, how should they be addressed?
10. What would be the benefits and costs of more transparency in the role of fund managers, their mandates and their pay?
Directors’ Remuneration
11. What are the main reasons for the increase in directors’ remuneration? Are these appropriate?
12. What would be the effect of widening the membership of the remuneration committee on directors’ remuneration?
13. Are shareholders effective in holding companies to account over pay? Are there further areas of pay, such as golden parachutes, it would be beneficial to subject to shareholder approval?
14. What would be impact of greater transparency of directors’ pay in respect of linkage between pay and meeting corporate objectives, performance criteria for annual bonus schemes, relationship between directors’ pay and employees’ pay?
Takeovers
15. Do boards understand the long-term implications of takeovers, and communicate the long-term implications of bids effectively?
16. 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?