ShareSoc Chairman's Blog

In reply to Roger Lawson, post #85

anyone who considers Corporate Goverance to be important should not consider the Combined Code to be a "box ticking exercise". That's the kind of excuse given by people who do not wish to adhere to the rules of any game for their own convenience.

Not for the first time, you have completely misunderstood my point!

You often appear to come at these issues with a box-ticking mentality, slaveishly following the recommended preference of the Common Code and COMPLETELY IGNORING the fact that the Common Code itself explicitly recognises that there are circumstances in which the recommended preference may NOT actually be the best solution for shareholders. That is precisely why they say "Comply or Explain".

Whilst you are doubtless right that many companies make mealy-mouthed explanations that are mere "flags of convenience" for people who prefer to circumvent the default position of the Common Code for their own purposes, there ARE sometimes good reasons for not complying precisely or immediately - and those are required to be explained to shareholders.

Be sceptical by all means - but do not be a dogmatic box-ticker!

Based on what little I know about the four particular situations you mention (but with some knowledge of  Stagecoach), I think you are perfectly entitled to be sceptical. But please don't generalise - and you should always pay close attention to the particular circumstances and the explanations given. Few things are as potentially disruptive for a company as changes at the top - and smooth working relationships are actually more important than the theoretical optimum arrangement, if one is forced to make a choice (as sometimes happens - the world isn't perfect and circumstances vary).

ee

Hogwash is my only comment.

In reply to Roger Lawson, post #87

Good Evening Mr Lawson

You appear to want to run a one party state where your view automatically prevails, what the rest of us want IMO is real shareholder democracy where what matters is the interests of shareholders, in most cases that is for an independent Chair but in exceptional cases , as provided by the code, the company may choose otherwise and explain why.

What is wrong with that?

Cheers

Your comments are malicious garbage. Perhaps those who wish to debate this issue should disclose their identities so we can see what interests you have in the matters being discussed. You seem to be criticising my comments on Emptyends anonymous posts about corporate governance which were perfectly well argued, and logical. It got a response from him that simply made no sense. You and he are simply apologists for those who wish to ignore the Combined Code. So my response was quite appropriate.

To spell out what is "wrong with that": the explanations provided so far for the four recent cases provide no justification whatsoever, and I suggest you read the posts in detail if you do not understand that.

In reply to Roger Lawson, post #89

Hmm .....

Not really sure how to respond as you appear to be totally irrational...my advice to you is to find a role that doesn't involve winning hearts and minds, because you do not have the right mindset!

For the record , the combined code is praisworthy , adherence should be the norm , however it provides for exceptional circumstances , you appear to believe that to be wrong?

If a company cannot make an acceptable case for the exception then by all means saddle up with my blessing.

PS one final point is civilised dissent is what makes a debate worth having.

There was civilised debate until you made a libellous comment. And you have just made another one. I challenge Emptyend and you to a debate on the issues discussed in front of an audience of ShareSoc members. The question to be debated would be this: "That this house believes that all Chairmen of public companies should be 'independent' as defined in the Combined Code unless there are truely exceptional circimstances that demand otherwise". Of course you might have to disclose who you are and be willing to answer questions about your past experience if you accept this invitation which you do not appear to be willing to do. But the invite is there. Just send acceptance to info@sharesoc.org and I will organise at a future ShareSoc meeting.

In reply to Roger Lawson, post #91

As a matter of fact (late last year) I accepted an invitation from Mark Bentley to attend just that sort of meeting sometime early in 2012. I heard nothing more about it .......so I reminded Mark again when I saw him at an AGM and it transpired that it hadn't been organised as expected.

For your information, as you plainly haven't been informed, Mark's email to me said:

FYI, I’m organising a forum in the New Year on ShareSoc’s behalf, with participation from company directors, institutional representatives and other relevant parties (details to be finalised, still early stages!), as well as ShareSoc representing individual investors. The purpose of the forum would be to discuss ideas for improving shareholder engagement with businesses (including control of remuneration).  Would be delighted to have the benefit of your views and will send you an invitation once details have been finalised.

And my response to him was:

I’d certainly be interested in your forum and, subject to details/timing etc, would be happy to contribute.....

My general observation on the topic is that there is actually no substitute for having a group of non-execs on remcoms who take their responsibilities seriously in terms of getting the balance right. Too often there is an overly-chummy relationship with execs and an ethos of mutual backscratching (where execs sit on each others’ boards). Unfortunately one cannot see this in a formulaic way – for example, one can’t assume that NEDs who have been on the board for a while have “gone native” in terms of compensation policy. My own view would be that serial directorships should be banned and that no-one should have more than two Director roles in public companies (eg one exec and one NED, or two NEDs), other than when sitting on the boards of companies within a single publically-quoted group. And that “compensation consultants” should only rarely be necessary!

Shareholder engagement is IMO mainly a matter of getting them to use their votes – and to base their votes on their own, informed opinions….. rather than what some third party lobbyist might suggest (don’t mean you there – I have in mind the people who look at AGM resolutions and help lazy institutions by “advising” on which way to vote on each resolution).

In the meantime, Mr Lawson,  it seems to me that you should consider your own position very carefully indeed.

ee

Have no idea what your last comment means, but my offer to host a debate on the issue of independent Chairmen stands. The other proposal from Mark was a different matter altogether and I think it was not proceeded with for a number of reasons. But I agree with your other comments. I have never suggested that shareholders should not consider all the facts, and certainly they should not vote in a "formulaic way" but look at the issues. But the Combined Code is not only the law of the land, which should not be ignored by companies unless they have very, very good excuses, it is also sound guidance to ensure good corporate governance. This is what you and others seem to disagree with and propose that companies make their own mind up whether they are going to adhere to it or not.

In reply to Roger Lawson, post #93

the Combined Code is not only the law of the land, which should not be ignored by companies unless they have very, very good excuses, it is also sound guidance to ensure good corporate governance. This is what you and others seem to disagree with and propose that companies make their own mind up whether they are going to adhere to it or not.

This is the nub of your problem. I don't disagree with the Combined Code - but I do take it as a complete document ; the Code is (apart from a couple of minor quibbles caused by the need to be a general guide for companies both large and small) very sensible. However, it is an INTEGRAL part of the Code that companies can explain why circumstances may sometimes mean it is a good idea to depart from the preferences laid out in the Code.

You choose to behave as if the explicit option to explain non-compliant aspects simply didn't exist and shouldn't exist - hence your comment above about "very, very good excuses".

I'd suggest to you that someone in your position should be taking a more rounded view of the Code. Indeed I suggest that you read it - starting with the preamble that explains its status and objectives. The extract below is from an original 2008 FRC document. I have highlighted several passages which you would do well to note:

PREAMBLE
1. Good corporate governance should contribute to better company
performance by helping a board discharge its duties in the best
interests of shareholders; if it is ignored, the consequence may well be
vulnerability or poor performance. Good governance should facilitate
efficient, effective and entrepreneurial management that can deliver
shareholder value over the longer term. The Combined Code on
Corporate Governance (‘the Code’) is published by the FRC to support
these outcomes and promote confidence in corporate reporting and
governance.
2. The Code is not a rigid set of rules. Rather, it is a guide to the components
of good board practice distilled from consultation and widespread
experience over many years. While it is expected that companies will
comply wholly or substantially with its provisions, it is recognised that noncompliance
may be justified in particular circumstances if good
governance can be achieved by other means. A condition of noncompliance
is that the reasons for it should be explained to shareholders,
who may wish to discuss the position with the company and whose voting
intentions may be influenced as a result. This ‘comply or explain’ approach
has been in operation since the Code’s beginnings in 1992 and the
flexibility it offers is valued by company boards and by investors in
pursuing better corporate governance.
3. The Listing Rules require UK companies listed on the Main Market of the
London Stock Exchange to describe in the annual report and accounts
their corporate governance from two points of view, the first dealing
generally with their adherence to the Code’s main principles, and the
second dealing specifically with non-compliance with any of the Code’s
provisions. The descriptions together should give shareholders a clear
and comprehensive picture of a company’s governance arrangements in
relation to the Code as a criterion of good practice.
4. In relation to the requirement to state how it has applied the Code’s main
principles, where a company has done so by complying with the
associated provisions it should be sufficient simply to report that this is
the case; copying out the principles in the annual report adds to its length
without adding to its value. But where a company has taken additional
actions to apply the principles or otherwise improve its governance, it
would be helpful to shareholders to describe these in the annual report.
5. If a company chooses not to comply with one or more provisions of the
Code, it must give shareholders a careful and clear explanation which
shareholders should evaluate on its merits. In providing an explanation,
the company should aim to illustrate how its actual practices are
consistent with the principle to which the particular provision relates and
contribute to good governance.
6. Smaller listed companies, in particular those new to listing, may judge that
some of the provisions are disproportionate or less relevant in their case.
Some of the provisions do not apply to companies below the FTSE 350.
Such companies may nonetheless consider that it would be appropriate to
adopt the approach in the Code and they are encouraged to do so.
Externally managed investment companies typically have a different board
structure, which may affect the relevance of particular provisions; the
Association of Investment Companies’s Corporate Governance Code and
Guide can assist them in meeting their obligations under the Code.
7. In their turn, shareholders should pay due regard to companies’ individual
circumstances and bear in mind in particular the size and complexity of the
company and the nature of the risks and challenges it faces. Whilst
shareholders have every right to challenge companies’ explanations if they
are unconvincing, they should not be evaluated in a mechanistic way and
departures from the Code should not be automatically treated as
breaches. Institutional shareholders should be careful to respond to the
statements from companies in a manner that supports the ‘comply or
explain’ principle and bearing in mind the purpose of good corporate
governance. They should put their views to the company and be prepared
to enter a dialogue if they do not accept the company’s position.
Institutional shareholders should be prepared to put such views in writing
where appropriate.
8. Companies and shareholders have a shared responsibility for ensuring
that ‘comply or explain’ remains an effective alternative to a rules-based
system. Satisfactory engagement between company boards and investors
is therefore crucial to the health of the UK’s corporate governance regime.
Although engagement has been improving slowly but steadily for many
years, practical obstacles necessitate a constant effort to keep the
improvement going.
9. Companies can make a major contribution by spreading governance
discussion with shareholders outside the two peak annual reporting
periods around 31st December and 31st March and by raising further the
general standard of their explanations justifying non-compliance.
Shareholders for their part can still do more to satisfy companies that
they devote adequate resources and scrutiny to engagement.
10. References to shareholders in this Preamble also apply to intermediaries
and agents employed to assist shareholders in scrutinising governance
arrangements.
11. This edition of the Code applies to accounting periods beginning on or
after 29 June 2008, and takes effect at the same time as new FSA
Corporate Governance Rules implementing European requirements
relating to audit committees and corporate governance statements. The
relevant sections of these Rules are summarised in Schedule C. There is
some overlap between the content of the Code and the Rules, and the
Rules state that in these areas compliance with the Code will be deemed
sufficient also to comply with the Rules. However, where a company
chooses to explain rather than comply with the Code it will need to
demonstrate that it nonetheless meets the minimum requirements set out
in the Rules.
12. The Code itself is subject to periodic reviews by the FRC, the latest of
which was conducted in 2007 and was generally reassuring about the
Code’s content and impact. In the normal course of events the next review
will take place in 2010.
Financial Reporting Council
June 2008
June 2008 The Combined Code

ee

In reply to Roger Lawson, post #91

I'd be happy to debate that resolution but can see little point as it is exactly what I'd been saying throughout this thread!

You would be right in my view to highlight Stagecoach as an example of a poor decision but I'd simply point out that nobody in their right mind would be holding the Shares if they weren't fans of Mr Souter and or Ann Gloag as they have dominated the company since its formation!

I think a valid distinction could be drawn between Companies with dominant founders who sell a minority of shares and do so on the understanding that they remain in the driving seat and what may be termed more mainstream businesses where one would expect as a shareholder to see more separation of roles and independence of view from NED's and Chairs alike.

Cheers

In reply to emptyend, post #94

Again you are misinterpreting what I have said. As you point out, the Combined Code says: "If a company chooses not to comply with one or more provisions of the
Code, it must give shareholders a careful and clear explanation which
shareholders should evaluate on its merits. In providing an explanation,
the company should aim to illustrate how its actual practices are
consistent with the principle to which the particular provision relates and
contribute to good governance". The explanations provided in the specific cases mentioned have not been adequate.

In reply to Roger Lawson, post #96

Sigh.

I have no problem whatsoever with your comments on specific cases. You are entitled to your views and I see no reason to disagree with them in the recent cases.

My problem is with you choosing to ignore the fact that the Combined Code explicitly gives companies the option to explain - and with you seeking to generalise from the particular.

In post 82 you inaccurately claimed:

It would seem that the Combined Code is now being ignored repeatedly (the ones mentioned are 4 cases in as many weeks). Perhaps making it more binding on companies should be considered?

It is not being "ignored". It is simply that some companies are choosing (perhaps for good reason - and that will be tested at the next AGM) to explain rather than comply. Whether explanations are acceptable or not is something that will be tested by shareholder votes, not by edicts.

You are perfectly at liberty to challenge the acceptability of any company's explanation of why they choose to depart from the recommended approach in the Combined Code. What you are NOT entitled to do is to claim that companies aren't allowed to (or shouldn't) deviate from the Combined Code if they choose to - because they most explicitly are!

ee

Again you are trying to put words into my mouth that I have not said. I have never argued that companies cannot deviate from the Combined Code where there are justifiable circumstances. But they are ignoring it in the sense that they are not providing explanations for such exceptions that meet the requirements of the Combined Code (or in regards to common sense either).

In reply to Roger Lawson, post #98

Again you are trying to put words into my mouth that I have not said

I quoted you verbatim. Again.

they are ignoring it in the sense that they are not providing explanations for such exceptions that meet the requirements of the Combined Code (or in regards to common sense either).

There are NO "requirements" regarding the quality of the explanation provided to shareholders. The requirement of the Combined Code is:

If exceptionally a board decides that a chief executive
should become chairman, the board should consult major shareholders
in advance and should set out its reasons to shareholders at the time of
the appointment and in the next annual report.

You can certainly argue that the reasons provided are insufficient - and you would be able to vote against the Annual Report at the next AGM. There is no "test" in the Combined Code that suggests that the explanations have to meet certain standards. Neither is there any obligation to keep providing reasons in subsequent Annual Reports.

It follows from this that if you believe your objections to such changes are well-founded and that explations are inadequate, there is a clear course of action:

1) lobby the company to focus on providing a full and detailed explanation in the Annual Report.

2) be prepared to vote down the Annual Report at the next AGM if the explanation continues to be insufficient in your opinion.

But please don't rant in a general way about companies not complying with the Common Code when they are actually doing so.

ee

More sophistry. The Combined Code does require explanations for ignoring provisions to be adequate, as you showed yourself by quoting from the relevant provisions.

In reply to Roger Lawson, post #100

The Combined Code does require explanations for ignoring provisions to be adequate

Sigh. No it doesn't. The test of "adequacy" is whether shareholders accept the explation or not. There is no other test. Neither should there be - it is for the members of the company to decide such matters. All that the Combined Code says is that companies....

must give shareholders a careful and clear explanation which shareholders should evaluate on its merits

...which seems crystal clear to me. If you don't think the explanation is good enough, then you vote against the Annual Report. Period.

It is all extremely clear. Companies have the right to deviate from the recommendations of the Combined Code but if they do then they must explain why they are doing so - to the satisfaction of shareholders as demonstrated by the vote in the AGM.

I trust you can now accept that point.

ee

The Code says (as you pointed out previously), "that In providing an explanation,
the company should aim to illustrate how its actual practices are
consistent with the principle to which the particular provision relates and
contribute to good governance". In other words (and in mine), "adequate explanation".

As I have been asked to comment by ee, I will.

This discussion seems to have got our of hand and (at one point) degenerated into a slanging match. Let's keep it civil. Bear in mind that comments made on BBs are easily misunderstood. Roger raised a question about whether the compliance with the independence provisions of the Corporate Governance Code 2010 (which has superseded the Combined code, and is only mandatory for companies with a Premium Listing) should be made mandatory.

ShareSoc most certainly doesn't advocate box ticking and I can understand why Roger found that unjustified accusation offensive. Each case must be examined on its merits. Of course, that argues that the answer to question is "no" (but perhaps there is little excuse for FTSE350 companies and above not to comply?). What Roger, many of our members, and I observe is that there are too many cases where companies choose the "explain" route (often with inadequate explanations) rather than attempting to comply. IMO all the cases Roger has highlighted give cause for concern, as there are broader corporate governance issues than just the independence of the chairman.

ee says:

If you don't think the explanation is good enough, then you vote against the Annual Report. Period.

IMO, whilst true, it is extremely rare for shareholders to vote against receiving a company's R&A. That's a bit of a nuclear weapon as the R&A covers a large range of matters, not just corporate governance. The fact that in the vast majority of cases, votes are in favour does not mean that all shareholders are necessarily happy with the R&A in its entirety. ShareSoc would rarely recommend voting against the R&A. Far better to give publicity to what we consider to be abuses (as Roger has done) and then allow shareholders to decide what action to take. Many shareholders may not be fully aware of the issues involved, hence we highlight them.

Also worth noting what the requirement of the 2010 code actually is:

The chairman should on appointment meet the independence criteria set out in B.1.1 below. A chief executive should not go on to be chairman of the same company. If, exceptionally, a board decides that a chief executive should become chairman, the board should consult major shareholders in advance and should set out its reasons to shareholders at the time of the appointment and in the next annual report4.

Just setting out the reasons in the annual report is not adequate.

Individual shareholders have too often seen their interests ridden roughshod over. Too often chairmen who are not independent have colluded with management and/or major shareholders to the detriment of individual shareholders (e.g. regarding remuneration matters or share placings). That is why ShareSoc considers this an important matter.

Finally, I guess I ought to comment on the situation at Aminex (LON:AEX) , which may help clarify ShareSoc's stance . As a fully listed company (but without a premium listing AFAIK), Aminex is encouraged (but not required) to comply with the Code. Brian Hall is currently non-executive chairman, formerly having been executive chairman. Clearly this does not meet the "box ticking" requirement for independence (B.1.1) - however, neither I nor ShareSoc are likely to have an issue with this, in the near term. BH seems to me to be quite independent of the new CEO and is also not linked with any major shareholders. His experience does give him a unique insight into all aspects of the business, which is no doubt, of value. Hence in this particular case the benefits accruing to the company and its shareholders appear to outweigh those of strict compliance with the recommendations for an independent chairman.

Regards,

Mark

ShareSoc Director

Posted by ShareSoc at 14:07, August 26 2012.

Sorting out the nominee account voting problem

There was an interesting article in this week’s Investors Chronicle (IC) which tackled the issue of private shareholder voting. In reality most individual shareholders don’t vote at company general meetings – often from apathy or simple unwillingness to consider the issues being voted upon, but also because they are usually not provided with easy means to do so. Being mostly in nominee accounts nowadays, they frequently simply cannot vote, or only with an enormous amount of effort, and not being sent company information anyway, they barely know why they should vote.

Alastair Blair has proposed in the past that the solution to this might be to provide a “standing” proxy voting system whereby someone could nominate an organisation (such as ShareSoc perhaps) to vote on their behalf for all companies they hold in their portfolios. But in his latest article in IC you has realised that this is legally impractical even if one could get stockbrokers and registrars to support such an arrangement, which is unlikely. I was indeed very sceptical when I first saw this suggested which is one reason why ShareSoc did not applaud the idea at the time. So Mr Blair is now proposing an appropriate change to the Companies Act to enable blanket proxies to be legally recognisable.

The provision of a standing order proxy voting system is certainly a good idea. It would give shareholders the ability to appoint what might be called an “enduring proxy” to save them the effort of voting personally, but it is surely more essential to give them basic rights to begin with. An “enduring proxy” capability could then be added as an extra facility in any new system, for those who preferred to delegate the voting task to others.

The best solution is a totally new electronic voting system to ensure that all beneficial owners who hold their shares in nominee accounts are treated in the same way as those on the share register. Indeed they should be on the share register with the ability to opt out of company or third party communications if they wish. Such an option should only be granted if they have read specific wording to advise them of the loss of their normal legal rights and an explanation of the disadvantages of doing so.

This has now been supported in the Kay Review which says that “The Government should explore the most cost effective means for individual investors to hold shares directly on an electronic register”. (perhaps because ShareSoc and others campaigned for it).

If you have not yet signed our e-petition on the subject, please do so now. Click on this link to sign it: http://epetitions.direct.gov.uk/petitions/16769

In reply to ShareSoc, post #104

In reality most individual shareholders don’t vote at company general meetings – often from apathy or simple unwillingness to consider the issues being voted upon, but also because they are usually not provided with easy means to do so. Being mostly in nominee accounts nowadays, they frequently simply cannot vote, or only with an enormous amount of effort, and not being sent company information anyway, they barely know why they should vote.

A couple of comments on these points:

1) Most companies who care about their shareholders now make the Notice of Meeting for the AGM available on their websites, so there is little basis to claim ignorance of the agenda..

2) On a couple of occasions this year, I believe I have been the only shareholder at Selftrade to vote my shares in a couple of companies - which is surprising in view of the number of holders who would use that nominee.

The provision of a standing order proxy voting system is certainly a good idea. It would give shareholders the ability to appoint what might be called an “enduring proxy” to save them the effort of voting personally, but it is surely more essential to give them basic rights to begin with.

No it isn't "certainly" a good idea. What it would do is concentrate voting power in the hands of a few individuals - which may suit them very well, but may not actually be in the best interests of shareholders or the company. I understand why you would suggest that, of course......

The best solution is a totally new electronic voting system to ensure that all beneficial owners who hold their shares in nominee accounts are treated in the same way as those on the share register.

I am in 100% agreement with that. That is the only properly democratic way to allow shareholders to easily exercise their rights. Perhaps Nominees should be required by law to make such a facility available if they continue to be allowed to aggregate shareholder stakes and votes?

ee