Monday, June 27, 2011

UK Official Launches Corporate Governance Initiative on Executive Compensation and Shareholder Involvement

The UK will launch a consultation on executive compensation and conduct a review of the UK equity investment regime, said Secretary of State for Business Vince Cable. In remarks to the Association of British Insurers, the Minister noted positive UK developments promoting investor involvement in corporate governance, such as the Stewardship Code, which sets out the role of shareholders in holding directors to account and the new Advisory Council of the Institutional Investor Committee, which is a promising sign that investors are starting to work together. But, he noted that the financial crisis has intensified long-standing concerns about whether there are systemic flaws in the way companies are owned and managed in the UK.

The Minister said that he will soon be launching a consultation on changes to company reporting that will propose tougher provisions on disclosure of executive pay and its link to company performance. This is the culmination of a body of work on narrative reporting that will make company reports clearer, shorter and more relevant. Transparency only gets us so far, noted the Minister, and may have the perverse effect of encouraging a race to the top. The Minister intends to explore other ways to intervene sensibly and, in particular, to put an end to the culture of rewards for failure.

As a first step, he will be holding talks with interested parties including remuneration committee chairs in the next few weeks to explore various policy options, with a view to announcing further action in this area in the autumn. In a complex, globalized world, he continued, heavy handed controls aren’t going to work and will do damage. He will require creative thinking on this problem to match, for example, the corporate governance provisions of the Dodd Frank Act.

But ultimately there is no substitute for leadership from companies themselves and their owners. The Minister called on remuneration committees and institutional investors to take a much stronger line and uphold the Corporate Governance Code, which makes it clear that executive remuneration should be tied to performance and a company’s long-term success.

Secretary Cable also stressed the urgency of recalibrating the equity investment regime to support the long-term interests of companies as well as underlying beneficiaries, such as pension fund members. Serious commentators from the business community have suggested expanding a board’s fiduciary duties to make directors give higher priority to the long-term and boosting shareholders rights for long term investors to give them greater voting power than short-term traders. In addition, there have been suggestions that the Government use the tax system to penalize short-term share trading and encourage long-term investment.

The Minister has launched an independent review of investment in UK equity markets. The review will examine behavior right along the investment chain, from company boards, through pension funds, advisers and fund managers, to ultimate beneficiaries. He expects the review to produce recommendations on how best to ensure that the timescales over which companies and fund managers operate match the interests of clients and beneficiaries and ways to strengthen engagement between institutional investors and quoted companies. The review will also examine the most effective means of boosting transparency for clients, underlying beneficiaries and companies themselves and the legal duties and responsibilities of asset owners and managers.