The announcement by FTSE 100 copper miner Antofagasta that there will no longer be any executive directors on its board means the unitary board system is no longer synonymous with UK corporate governance and is a first for a UK listed company (investment trusts aside). This ground breaking announcement means that no other FTSE All Share board (ex Investment Trust) is comprised entirely of non-executive directors.
In fact Antofagasta has broken two moulds, not one. In addition to announcing the absence of executives from its board, the company has also announced that the new group CEO Diego Hernandez will not be a board director. Mr Hernandez has been CEO of Antofagasta Minerals which accounts for nearly 95% of the group’s earnings since 2012.
What appears to be radical change is in fact the culmination of changes made to the board structure over a period of time.
You have to go back to 2004 (in a world before before Ugg boots, X factor and Facebook) to find an Antofgasta board that included a Group MD. In 2004 the Antofagasta board comprised seven directors, three of whom were executive and four non-executive. The executives comprised group managing director Philip Adeane, Andronico Luksic , the Executive Chairman, and JP Luksic, son of Andronico. Antofagsta has been controlled by the Luksic family since the early 80s and the retirement and subsequent death of Luksic family patriarch Andronico Luksic in 2005 coincided with significant board changes. Adeane the group MD became a non-executive director and from 2005 to the present JP Luksic presided over the board as executive Chairman, the sole executive on the board without a CEO at board level. Each year the company has re-iterated its belief in its governance compliance statement that the company is not at risk from a concentration of power from having an executive chairman due to the delegation of operational management at divisional level.
The governance structure in place for the whole of this period appears to have served the company and its shareholders well. Antofagasta has outperformed its mining peers and the FTSE 100 on a total shareholder return basis over the last six years. Given the apparent success of the structure it is reasonable to ask whether the switch to a board comprised entirely of non-executives with a Group CEO below board level constitutes a problem or whether any concerns are placing form before substance.
One potential issue that arises is the ambiguity about who is really running the company from a regulatory perspective. Antofagasta is incorporated in the UK. Company Law in the UK requires the directors (not an executive committee or senior management) to sign off on the accounts. Antofagasta also reports according to International Financial Reporting Standards (IFRS). IFRS requires “information according to how the Chief Operating Decision Maker normally sees it” and tolerates the possibility that this Chief Operating Decision Maker is an executive committee.
In Antofagasta’s case the Schedule of Matters reserved for the board was reviewed in 2014 and includes responsibility for any significant changes in accounting policy or practice. Clearly it is important that responsibility for determining what gets reported lies with the same body that has responsibility for signing off on what gets reported. Anything else would represent a risk that directors may be unaware of what is and what is not included in the reported figures.
Perhaps the most obvious issue is accountability. UK Company Law provides a coherent framework in which the board members who attest to the “true and fair” view of the accounts are answerable to shareholders by a vote at a general meeting. Company articles in the UK used to routinely include a provision permitting the insulation of the Chairman or some other designated role from the shareholder vote. The efforts of governance best practice lobbyists in the UK helped to eradicate such articles some years ago but the insulation of Mr Hernandez, the Antofagasta CEO from a shareholder vote is a serious step backwards.
Voting rights are valuable. Recent US litigation at Google over voting rights is a case in point . In the context of a company which is majority controlled through the investment vehicle of a family the effective loss of the right to vote on the CEO should persuade any minority investors hoping that their voting rights offered some protection that they are simply along for the ride.
Last Updated: 8 May 2015