New code could leave companies leaderless
With big business in bad odour, asking directors to stand for re-election every year might look like improved accountability. But suddenly companies have worked out that it could mean the whole board being removed at one shareholders’ meeting leaving the businesses without bosses.
The new corporate governance code to be published in May 2010 and taking effect the following month plans to incorporate the concept of annual votes. But the idea has split business and divided investors. The Financial Reporting Council, which produces the code, needs to act quickly and decide which factions it supports.
The worry by companies is that a dissident group of investors will register sufficient protest vote to remove a director – possibly because of corporate policy, but perhaps because of an environmental issue, labour dispute or even as a comment on the person’s private life.
Sainsbury’s chairman, David Tyler, calls annual voting a “charter for mischief making”. Whitbread says it is an annual vote of confidence. British Airways, constantly embroiled in labour disputes, warns that disgruntled employees could hijack the board. HSBC is concerned at the prospect of all its directors being removed on the same day. Tesco warns of the risk of activist shareholders.
The FRC is committed to annual re-election, either of only the chairmen – as recommended by Sir David Walker’s report on bank governance – or of the whole board. GlaxoSmithKlein is typical, however, in saying it likes neither option.
At present shareholders vote on a director after they have been appointed, then every three years so that only about a third of the board faces re-election in any year. Only directors over 70 or who have served nine years face annual votes.
Retaining that system for most of the board but voting each year on the chairman minimises the risk of seeing the whole board rejected, but it still causes potential problems. Not only is a chairman important, treating that role differently destroys the concept of a unified board with collective responsibility.
A small number of companies do have annual election of all directors – and Land Securities, BAE Systems and Anglo American back the idea – but the corporate consensus is against. Some fund managers, however – including Aviva and Legal & General - like the concept, as do trade bodies like the Association of British Insurers and advisory groups such as Pirc.
But even investors are mixed. The National Association of Pension Funds did support annual votes but has changed its mind. Prudential likes the idea as an investor but not as a plc. Standard Life objects as both investor and quoted company. Hermes is against.
The FRC needs to get off the fence fast and decide whether what the new UK Corporate Governance Code will say. Annual re-election carries dangers and voting only on the chairman is not a good compromise. The answer may be to delay this clause of the code but there is no guarantee a generally accepted solution can be found. Leaving it to individual companies to decide who is subject to votes and how often looks the best way out of this conundrum.
