DOC

Two years on from Sir Adrian Cadburys first report into the

By Tom Cunningham,2014-06-28 19:43
9 views 0
Two years on from Sir Adrian Cadburys first report into the ...

    CORPORATE GOVERNANCE

    - is it really working?

     Personal Shareholders Speak Out Two years on from Sir Adrian Cadbury‟s first report into the financial aspects of Corporate Governance there is considerable Naturally, the changing trends in share ownership have taken the debate as to the effectiveness of the Committee‟s whole debate into the public domain. ProShare set up to recommendations in real terms. The headline news regarding promote wider share ownership has announced that the Barings serves to demonstrate that proper controls regarding proportion of the adult population owning shares is around 22% corporate governance still have a restricted role in avoiding compared with 9% in 1979. 59% of shareholders have a stake in some of the incredible business collapses that give sleepless only one or two quoted companies and only represent around nights to many shareholders. 17% of the total shareholding in these businesses. Institutional investors still continue to dominate the voting at AGMs, but personal shareholders regard their holdings as very special. There are no figures published regarding attendances at AGMs, Not Mandatory or EGMs, but there is clear empirical evidence to suggest a more proactive stance from personal shareholders. The personal shareholder is therefore becoming far more vociferous and it is That apart, a number of other concerns have been mooted. The not surprising that their voice (but not their voting power) has recommendations of the Cadbury Report were voluntary and become recognised. there have been suggestions from a number of sources that they should have statutory authority. In general, institutional shareholders, unlike the general public and politicians, are not so much concerned with the actual levels of executive pay, but more with the motivational aspects of the package in other words, the Director should be rewarded for Executive Pay and Perks providing long term returns for the shareholders. There is some disparity of opinion among shareholder groupings on this subject There is a strong argument that the Report needs to address the with the National Association of Pension Funds focusing its subject of executive remuneration more effectively. The attention on reciprocal arrangements for Non-Executive arguments about “excessive pay” particularly when it is not Directors. It has expressed concern that where reciprocal Non-correlated to “exceptional performance”, especially in respect of Executive Directors are appointed, each approves the other‟s the recently privatised utilities, have even prompted certain hefty pay increase; the interests of the shareholders are not best figures in Government circles to look at this. The Prime represented, even though the stricter “mechanical” aspects of Minister, commenting on „distasteful‟ pay rises, has said he is corporate governance have probably been fulfilled. not ruling out legislation (28 February1995). The Greenbury Committee, which is looking at pay awards for senior executives, It has also been suggested that the maximum term of a Director‟s is expected to be disinclined to favour legislation. The contract should be shortened from three years to one year, with a committee (whose eleven constituent members collectively earn maximum retirement age of 70. ?3.75m a year) has a little harshly been described as being akin to Dracula being placed in charge of a blood bank, is probably The National Association of Pension Funds would also like going to recommend yet another code of practice when it reports shareholders to have more detailed information regarding full in the summer. terms of Directors‟ contracts. Other shareholder organisations have adopted a more conservative approach, demanding less specific information but a more detailed explanation as to the rationale behind pay awards and benefits to executive directors. Legislation May Follow On the same day as the Prime Minister‟s comments, the board of Grand Metropolitan came in for heavy criticism at its Annual General Meeting. Share values in Grand Met had declined some 16.5% over the preceding two years whilst the FT-SE 100 had risen by 6%. On learning that the Chairman‟s salary had NED’s Contribution increased by 13% on the previous year to ?928,958 (plus an additional ?415,279 from exercising options), one shareholder The Non-Executive Director should be appointed for the was prompted to describe the situation as “obscene” and “greed uniqueness of the contribution that he/she can add to the existing taken to the ultimate”. The public cynicism about executive pay Board‟s experience. They should be regarded as having an input rises is growing, but this needs to be balanced by an acceptance into overall corporate governance and not, as one suspects is that companies have to have the best available executives. The commonly considered to be the case, seen as the sole bastions of role of the Remuneration Committee (hopefully staffed by Non-shareholder protection. There must surely be a fear amongst Executive Directors) and its influence on the executive directors shareholders that compliance with the Code recommended by is still not widely understood or recognised. It could be argued Sir Adrian‟s committee is becoming a structural process without that, since the Shareholders technically appoint directors, any real, positive, input into the direction of the business. increases in their remuneration should always be approved at the AGM before implementation. There are immense practical, not to mention political difficulties in implementing legislation in respect of top end executive pay, More Regular Information but it is an area of corporate governance that requires further scrutiny. Whilst the Institute of Directors makes quaint, This wider dimension of corporate governance away from the clubbable pronouncements and the Greenbury Committee more publicised recommendations regarding Non-Executive proposes a code of practice, perhaps it is inevitable that firm Directors is an area that needs to be developed. There is, for political action will eventually be taken this will not serve to instance, growing support for more regular financial information benefit shareholders or directors in the long run. The First to be published, with many calling for US style quarterly Cadbury Report has failed to rectify one of the most important reporting. All too often, corporate accounts fail to include the and, now, publicly examined area of corporate governance. information that most investors wish to see. One area that shareholders are pressing for is information on segmental analysis by business line and geography, planned expenditure, together with a comment on current performance against targets. pto

    Jackson Taylor Executive Search London and Darlington

CORPORATE GOVERNANCE

    - is it really working?

     According to one recent survey, leading institutional investors noted serious deficiencies in the disclosure practices of 170 of the world‟s largest companies; corporate accounts are failing to inform investors. the impending crisis. A senior bank official has now publicly proclaimed that the bank is taking a more detached view on Supervisory Boards and that representation should come from Role of Auditors industrialists who have the more appropriate experience. In Germany, the banks take a far more direct and pro-active role in There is also a considerable groundswell of opinion regarding shareholdings than their UK counterparts and their resolution of the role of the auditor and the audit report in terms of corporate corporate governance policy is some way off. An integrate governance, with a suggestion that the auditor should be named European approach to this vital area is even less likely to take The General Motors Guidelines as an individual when he presents his report on the company. place. The United States has, of course, been at the forefront of Furthermore, there is a case to be argued that for public developments and General Motors recently introduced new companies, the appointment of an auditor should be for a guidelines for the role and composition of its Board of Directors. maximum period and thereafter a change should be required Throughout the 1980s, GM was headed by Roger Smith as under legislation. The accountancy profession will, of course, Chairman and Chief Executive Officer. Ros Perot, the former argue against this on the grounds that the longer the firm acts as US Presidential candidate and one time GM Board member, an auditor for a particular client, the more it becomes au fait with described other members of the Board as “pet rocks” because of the nuances of that business. The auditor is then able, it is what he saw as their lack of involvement. In 1992, the Non-claimed, to prepare a more effective report to the shareholders. Executive Directors of GM forced the removal of the then This argument is, perhaps, countermanded by some of the more Chairman and Chief Executive, Roger Stempel, and replaced spectacular collapses of recent times, shortly after a routine him with John Smale in the role of Chairman Smale had led endorsement of the Annual Report by the auditors. the battle from his position as a Non-Executive Director. The power shift in General Motors has hailed a new era in corporate There is no doubt that the accountancy profession is becoming governance with a majority of Non-Executives on the board. more “aware” of its obligations and involvement with corporate The guidelines published by GM do not resolve the argument governance per se and the move towards incorporation by the between separating the role of Chairman and Chief Executive, profession suggests a concern in respect of personal liability. It arguing that the Board should be free to exercise choice in this is very much a case of “watch this space”. matter in the best interests of the company. The GM guidelines do, however, require Non-Executive Directors to evaluate the performance of the CEO and this assessment is to be taken into account by the compensation committee in settling pay for the position. Representing Shareholders Another major area of concern regarding the report on corporate governance must be that it has been sponsored by a number of bodies, with the exception of one truly representing shareholders, Independent Judgement for whom the whole subject ought to be the prime motivation. The economic climate in 1995 has been less inclined to produce the spectacular corporate collapses, which characterised the late 1980‟s and early 1990‟s, and it is therefore difficult to quantify The German Experience the results of the report at this stage. On a positive note, more and more companies provide testimony to the split between the The UK debate surrounding corporate governance and the role of Chairman and Chief Executive becoming an accepted protection of shareholder interests is progressive and responsible. principle in practice a move proposed, but not required, by the In Germany, a similar dialogue is under way, following criticism Cadbury Report. of the dual board structure (where shareholders and labour representatives act, effectively, as Non Executive Directors on Corporate governance has become an issue of great significance Supervisory Boards). The debate in Germany has been fuelled throughout the world. The effectiveness of the first Cadbury by a spate of domestic corporate disasters; Metallgesellschaft, an Report is still open to debate, but what it has achieved is to open industrial and trading operation, suffered heavy losses in US oil a forum for dialogue on the proper issues of corporate futures trading and had to be rescued by the banks to the tune of governance. The raised profile of Non-Executive Directors and ?1.45bn. their spirit of independent judgement are positive but the broader aspects need to be addressed. The archetypal comments of the Germany‟s biggest bank, Deutsche Bank, had a stake in the archetypal chairman “Will all those who disagree with the business and a director headed up the Supervisory Board. This proposal indicate by saying „I resign‟” – are hopefully, banished led to considerable criticism of the banks‟ failure to be aware of from boardrooms for good. Anthony A Taylor BA (Hons) MIMC CMC FIMgt

    Jackson Taylor Executive Search London and Darlington

Report this document

For any questions or suggestions please email
cust-service@docsford.com