By Kirsty McHugh, OUP UK
One of the main areas in corporate governance that has caught the headlines recently is risk management. There is a widely held perception that in recent years many boards have not managed the risks associated with their businesses well – whether that was because they did not identify the risks fully or whether because having identified the risks, they did not take appropriate action to manage them. In the below post, Professor Chris Mallin explains more about this. She is Professor of Corporate Governance and Finance & Director of the Centre for Corporate Governance Research at the University of Birmingham, and blogs with fellow OUP author Bob Tricker at Corporate Governance. She is the author of Corporate Governance, the third edition of which has just been published. Her other blog posts can be found here.
The Financial Reporting Council (FRC)’s Review of the UK’s Combined Code published in December 2009 states that ‘One of the strongest themes to emerge from the review was the need for boards to take responsibility for assessing the major risks facing the company, agreeing the company’s risk profile and tolerance of risk, and overseeing the risk management systems. There was a view that not all boards had carried out this role adequately and in discussion with the chairmen of listed companies many agreed that the financial crisis had led their boards to devote more time to consideration of the major risks facing the company.’ The FRC therefore proposes to make the board’s responsibility for risk more explicit in the Code through a new principle and provision. Moreover it also intends to carry out a limited review of the Turnbull Guidance on internal control during 2010. Many companies, and especially those in the financial sector, have already established risk committees whilst other companies especially smaller companies, may combine the consideration of risk with the role and responsibilities of the audit committee.
The UK’s Alternative Investment Market (AIM) expanded rapidly during the 12 years following its inception in 1995. Then from 2007 onwards it went into decline. David Blackwell, in his article ‘Signs of recovery seen after years of famine’ states that ‘Hundreds of companies have left the market, the number of flotations has collapsed and fines for Regal Petroleum and others – albeit for regulatory infringements dating back years – have once again sullied the market’s reputation’. Nonetheless he points out that 2009 saw an improvement with the AIM index rising by 62 per cent over the year compared to a rise of 22 per cent in the FTSE 100.
The lighter regulatory touch on AIM has both attractions and drawbacks. On the one hand, companies find it easier to gain a London listing (albeit on AIM rather than the main market); on the other hand, this may bring concomitant risks for investors as they will be investing in companies which may well be riskier than their main market counterparts.
Family firms are the dominant form of business in many countries around the world and range from very small businesses to multinationa
Chris Mallin is Professor of Corporate Governance and Finance & Director of the Centre for Corporate Governance Research at the University of Birmingham. She is the author of Corporate Governance and she blogs with fellow OUP author Bob Tricker at Corporate Governance. The below post is an adapted version of one found on that blog, and is about whether companies should split the roles of Chair and CEO. Her previous OUP posts can be found here, here and here.
It is widely recognised that corporate scandals and collapses often occur when there is a single powerful individual in control of a company. This is exacerbated when there is a lack of independent non-executive directors on the board. Therefore it seems axiomatic that powerful individuals can be constrained, and the temptations they may face conquered, by having in place a sound corporate governance structure achieved through dividing the roles of Chair and CEO.
UK Context
Back in 1992, the much lauded Report of the Committee on the Financial Aspects of Corporate Governance, often referred to as the Cadbury Report after the Chair of the Committee, Sir Adrian Cadbury, identified the potential danger of combining the roles of Chair and CEO in one person. The Cadbury report recommended ‘there should be a 
clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision’. This principle was embodied in corporate governance best practice in the UK, with the Combined Code on Corporate Governance (2008) stating ‘there should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision’, and furthermore the Combined Code explicitly states ‘the roles of chairman and chief executive should not be exercised by the same individual.’
Whilst combining the roles of Chair and CEO is rare in the UK’s largest companies, Marks and Spencer PLC is a notable exception. In May 2004 Sir Stuart Rose was appointed to the position of Chief Executive and subsequently in 2008 he became both chairman and CEO until July 2011. This combination of roles goes against the Combined Code’s recommendations of best practice. As a result in 2008 some 22 per cent of the shareholders did not support the appointment of Sir Stuart Rose as chairman. Nonetheless he remains in the combined role although there is still considerable shareholder unrest and 2009 has seen more dissent by shareholders on this issue.
US Context
In the US, the roles of Chair and CEO have often been combined but now more and more companies are appointing separate individuals to the two roles. A recent example of a US company which has decided to appoint an independent chairman is Sara Lee, the famous producer of gateaux, beverages and body care products. Sara Lee has decided to make this change as a response to investor pressure and also the growing trend in the US to split the two roles. Kate Burgess in her article ‘Sara Lee to separate executive roles’ explores this case in more detail.
Institutional Investor Pressure
In the UK there has long been pressure brought to bear by institutional investors on companies which have tried to combine these roles. This pressure, together with the long history in UK corporate governance codes against the combination of roles, means that few large companies seek to combine the roles (although as noted above, Marks and Spencer plc is an exception).
Recently Norges Bank Investment Management (NBIM), a separate part of the Norwegian central bank (Norges Bank) and responsible for investing the international assets of the Norwegian Government Pension Fund, has started a campaign to convince US companies to split the roles of Chair and CEO and appoint independent chairmen. Kate Burgess in her article ‘Norwegian fund steps up campaign’ highlights how NBIM has submitted resolutions to four US companies calling on them to appoint independent chairmen. The four companies are Harris Corporation, Parker Hannifin, Cardinal Health Inc, and Clorox. In addition NBIM has also voted against combined Chair/CEOs at some 700 US companies. Interestingly Sara Lee had also been the focus of action by NBIM before agreeing to appoint separate individuals to the roles in future. Also in Kate Burgess’ article, Nell Minow of The Corporate Library states ‘NBIM can leverage a lot of shareholder frustration and a widespread sense that this is a sensible, meaningful but not disruptive initiative’.
It seems to be only a matter of time before the vast majority of companies will split the roles of Chair and CEO. Of course the individuals appointed to those roles must be both capable of fulfilling the tasks expected of them, and of ensuring that ultimately the two roles, carried out by separate individuals, unite the company under a common leadership approach. That may prove more difficult than many imagine and so the appointments process must consider fully the many traits needed to ensure success.
Chris Mallin is Professor of Corporate Governance and Finance & Director of the Centre for Corporate Governance Research at the University of Birmingham. She is the author of Corporate Governance and she blogs with fellow OUP author Bob Tricker at Corporate Governance. The below post is an adapted version of one found on that blog, and is about the important of votes in corporate governance. Her previous OUP posts can be found here and here.
Voting ones’ shares is seen as one of the main tools of corporate governance. In recent times, votes have been cast against adoption of the annual report and accounts, against the appointment, or re-appointment, of certain directors, and against certain proposed strategies. Votes can also be used via the ‘say on pay’ to signal displeasure at executive remuneration packages. Although the ‘say on pay’ is an advisory vote, it may nonetheless be quite effective at making boards think twice about the proposed pay packages for executive directors.
However companies do not always take as much notice of the votes cast as one would like. For example, the recent annual general meeting of Marks and Spencer is a case in point as regards the use of voting as a (vociferous) voice. Andrea Felsted and Samantha Pearson in their article ‘M&S chief defiant amid revolt by investors’ highlight that nearly 38% of votes cast backed a resolution seeking the appointment of an independent chairman within the next year. Sir Stuart Rose, who has been the centre of much criticism since taking on the roles of both chairman and chief executive, did not seem overly bothered by the investors’ views on this matter. There was also much shareholder dissent over the re-election of the chairman of the remuneration committee and over the adoption of the remuneration committee report.
Withheld votes
Whilst the importance of the vote is universally accepted, let us consider what happens in the UK when a vote is withheld. A withheld vote may signal that an investor has reservations about a resolution, or it may be a stronger expression that an investor is unhappy about a resolution, whilst falling short of actually voting against the resolution. However when the ‘vote withheld box’ is ticked on proxy forms in the UK, the withheld votes are not counted as part of the votes cast. For example, after its annual general meeting in May 2009, Shell published the voting results on its website. On Resolution 1 : Adoption of Annual Report & Accounts, there were: ‘votes for’ 3,301,631,965, ‘ votes against’ 3,394,595, and ‘votes withheld’ 16,026,721. However when indicating the percentage split of the votes, ‘votes for’ are shown as 99.90% and ‘votes against’ as 0.10%. The votes withheld were nearly 5 times that of the votes against but nowhere are they reflected in the percentage totals of votes cast. Similarly, on Resolution 4 : Re-appointment of Lord Kerr of Kinlochard as a Director of the Company, there were ‘votes for’ 3,161,974,849, ‘votes against’ 77,443,311, and ‘votes withheld’ 77,876,289. The percentage allocation indicated 97.61% ‘votes for’ and 2.39% ‘votes against’. The ‘votes withheld’ which again exceeded the ‘votes against’ were not reflected at all in the percentage totals. It should be said that Shell does clearly state that “a ‘vote withheld’ is not a vote under English Law and is not counted in the calculation of the proportion of the votes ‘for’ and ‘against’ a resolution.”
The Combined Code on Corporate Governance (2008) under Code provision D.2.1, states that ‘For each resolution, proxy appointment forms should provide shareholders with the option to direct their proxy to vote either for or against the resolution or to withhold their vote. The proxy form and any announcement of the results of a vote should make it clear that a ’vote withheld’ is not a vote in law and will not be counted in the calculation of the proportion of the votes for and against the resolution. However it’s interesting to note that a decade ago, the Report of the Committee of Inquiry into UK Vote Execution (1999), published by the National Association of Pension Funds, stated that whilst it was initially attracted to the idea of adding a third box (being an ‘abstention’ or ‘vote withheld’ box), it then decided that there were several arguments against the inclusion of such a third box. Firstly it might provide investors with an ‘easy option’ so that rather than voting against, they withheld their votes; and secondly since withheld votes are not counted, and have no legal effect, then it could drive down the level of recorded votes.
However as we have seen, the Combined Code does advocate the inclusion of a ‘vote withheld’ box on the proxy form. Therefore, it could be that in practice the addition of a third box which allows a withheld vote but which is not counted, may lead to the understatement of the level of dissatisfaction with some resolutions. Given that institutional investors are coming under more and more pressure to be seen to be active owners of shares, it may be that a ‘vote withheld’ will increasingly become seen as sitting on the fence, rather than taking a decision to vote against. In the US, it would seem that abstentions do have a legal effect under a majority voting system. For example, in a director election if there were more votes withheld than were voted for the candidate, then the candidate would not be elected, hence the abstentions (votes withheld) would have a legal effect.
Broker votes
Turning to US issues, the SEC has recently made some important changes to proxy voting. Weil, Gotshal and Manges (2009) report that ‘the SEC approved a change to NYSE Rule 452, eliminating broker discretionary voting of uninstructed shares in uncontested director elections, which will have the effect of reducing the number of votes cast in favor of the board’s nominees in the election of directors and strengthen the influence of institutional investors and activist shareholders.’
Blank votes
However James McRitchie has brought to our attention the problem of blank proxy votes which go to management. He highlights that fact that the broker vote issue that the SEC took care of is ‘where retail shareowners don’t submit a proxy (or voter information form) at all. When that happens, the broker or bank can vote within 10 days of the meeting. The “blank vote” issue arises when the shareowner votes at least one item on their proxy but leaves some other items blank……..[the voting] platform for institutional investors doesn’t allow submission of blank votes, [but the] platform for retail holders does and the SEC allows them to fill in the blanks as instructed by brokers and banks (always with management)’. Furthermore he states that ‘As shareowners who believe in democracy, we have filed suggested amendments to take away that discretionary authority to change blank votes, or non-votes, as they might be termed. We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.’
Clearly the area of voting is a complex one and changes are being brought in over time to remove barriers to voting and to help ensure that votes are cast in a way which fairly reflects the owners’ intentions. A decade ago it would have seemed highly unlikely that many institutional shareholders would publish their voting levels in individual companies and on individual resolutions but many institutional shareholders now do this. In the US a number of institutional shareholders have gone a stage further and disclose their voting intentions prior to a company’s AGM. Hopefully institutional shareholders in other countries will adopt this approach in future.
Chris Mallin is Professor of Corporate Governance and Finance & Director of the Centre for Corporate Governance Research at the University of Birmingham. She is the author of Corporate Governance and she blogs with fellow OUP author Bob Tricker at Corporate Governance. The below post is an adapted version of one found on that blog, and is about the calls for wider adoption of a ’say on pay’ in the US. Her previous OUP post can be found here.
Widespread concern at the high levels of executive director remuneration has led to calls for wider adoption of a ‘say on pay’ in the US. Investors in the UK and Australia have, for many years, had the right to vote on the remuneration committee report of the companies in which they invest. The vote on the remuneration committee report is an advisory one meaning that it is not binding on the company. However in practice institutional investors have tended not to vote against the remuneration committee reports and on the – until recently – relatively rare occasions on which the remuneration committee report was voted against, it was seen as a strong signal of disapproval about some aspect of executive remuneration and one which the directors would be unwise to ignore.
Royal Bank of Scotland
It was no surprise to anyone that the Royal Bank of Scotland shareholders overwhelmingly rejected the banks remuneration committee report at the companies Annual General Meeting on 3rd April. Jane Croft and Andrew Bolger in their article ‘Thumbs down for RBS pay report’ stated that some 90.42% of votes cast rejected the report. UK Financial Investments Ltd (UKFI) the Government owned company which manages the taxpayers’ shareholding in RBS, and controls 58% of the RBS shares, voted against the report. Manifest, the proxy voting agency, stated that ‘the resolution on the remuneration report at Royal Bank of Scotland Group plc represents the highest ever “Total Dissent” vote on the remuneration report since the introduction of the requirement for the report to be put forward to a non-binding vote’.
Remuneration (compensation) committees
Remuneration committees have previously been criticised for having a ratcheting effect on executive directors’ remuneration. The composition of such committees is usually independent non-executive (outside) directors but nonetheless this has not stopped the increasing levels of executive remuneration. This is probably in part attributable to the fact that remuneration committees would tend to recommend remuneration for executive directors in the upper quartile of their peer group hence the ratcheting effect over time. The Corporate Library points out that, in the US, chief executives pay rose 24 percent in 2007 giving a median remuneration of $8.8 million.
Trade Unions Involvement
An interesting development is for trade unions calling for more worker involvement in setting top executive pay. Brian Groom in his article ‘TUC leader urges staff input over chiefs’ pay’ highlights that Brendan Barber, General Secretary of the Trade Union Congress (TUC), stated ‘there was “massive anger” among workers at paying the price for a recession made in the boardroom, not on the shop floor’. The directors of FTSE 100 companies came in for criticism as well as the directors of banks, with Mr Barber arguing for ‘workforce representation involved in remuneration committees of major companies’. The idea of representation of the workforce on the board or board committees has traditionally not been given much consideration by UK boards but maybe that might change in the future.
Shareholder proposals/resolutions
Another are where we may see change is in relation to shareholder proposals or resolutions. Although it is possible in the UK for shareholders to put forward shareholder proposals or resolutions, it is not that easy to do and hence dialogue has been the most frequently used tool of corporate governance with shareholder proposals maybe numbering just five or six a year.
In the US it is much easier to put forward a shareholder proposal and so we can see 800 or 900 of these each year in US companies. It is likely that in the future more of these shareholder proposals will be relating to executive remuneration and that they will achieve strong support from institutional investors who are increasingly being criticised for not having taken more action to help limit executive remuneration. Francesco Guerrera and Deborah Brewster in their article ‘Mutual funds helped to drive up executive pay’ highlight that mutual funds have tended to vote in favour of companies compensation plans and this has effectively sanctioned these spiralling executive remuneration packages. Kristin Gribben in ‘Pay proposals to dominate proxy season’ puts forward the view that, in future, mutual funds in the US will be more likely to support remuneration (compensation) related resolutions filed by shareholders.
Back-door pay
There is concern that some companies may seek to remuneration executive directors via the ‘back-door’ if, for example, bonus schemes do not pay out. Pauline Skypala in ‘Warning over “back-door” pay’ highlights that this is a concern to some investors including Co-operative Asset Management whose corporate governance manager, Paul Wade, states ‘If a company fails to create value for its shareholders, it is totally inappropriate to grant rewards to management that are disproportionate to shareholder returns’.
Future developments
With the continuing focus on executive directors’ remuneration packages, the forthcoming AGMs promise to give rise to many interesting debates, much emotive discussion, more shareholder proposals, and many more instances where ‘say on pay’ will result in an emphatic ‘no’ to excessive remuneration or remuneration which does not have appropriately stretching performance links.
