In March 2010 the Pensions Investment Research Consultants (PIRC) published the fourteenth edition of its Shareholder Voting Guidelines (Guidelines), which were first issued in 1993. The 2010 Guidelines replace the 2009 version. PIRC comments that its Guidelines relating to the board, directors’ remuneration and audit and reporting are linked to the Financial Reporting Council’s newly proposed revised Corporate Governance Code that it is currently consulting on.
Amendments and insertions to the Guidelines include the following:
- Size of board - PIRC points out that the nomination committee has a duty to regularly review the structure, size and composition of the Board and make recommendations with regard to any changes. However, nomination committees are using generic boilerplate statements which PIRC does not consider to be appropriate. PIRC will be focussing on disclosure describing the role and capabilities of appointments made during the year and explanations made where such recruitment is not made following the use of external search consultancies or open advertising.
- Non-executive directors - the Guidelines introduce a new paragraph on director competence and suitability. PIRC is of the view that one of the reasons for the large scale corporate failures seen during 2008 and 2009 is due to poor decision making and inaction by board and committee members. Where directors serve on the board of more than one company, the identification of strategic failures at one company will affect the competency of the directors involved at each company where they serve in a similar capacity.
- Appointments to the board - PIRC has added a new paragraph to its Guidelines on the independence of directors who have been nominated by shareholders. PIRC is no longer of the view that such a director cannot be considered independent and comments that if a candidate can demonstrate no material link to the shareholder and when subjected to existing guidelines, is still considered independent, PIRC may consider a shareholder nominee acceptable.
- Commitment - Companies should publish the number of days that directors spend on company business. An overcommitted board would be considered a governance risk.
- Executive pay and the financial crisis - PIRC states that remuneration policies must consider risk management in relation to how senior employees are incentivised.
- Remuneration committees - The remuneration committee should be given oversight of the remuneration policy of the entire firm to enable it to consider the sensitivities of employees when designing executive remuneration policies. According to PIRC, companies currently widely ignore this principle and it is concerned about the increase in discrepancy between executive and employee pay. As a result, companies should disclose a statement setting out the chief executive’s potential annual pay as a multiple of the average employee earnings.
- Balance of incentive and reward - Disclosure of basic salaries should not only describe within-year increases, but also absolute increases between fiscal periods. Bonus policies should also be reviewed such that annual repetition of bonuses is controlled to ensure that such an award does not become expected by executives. Companies should disclose to shareholders the levels of performance achieved against the different bonus measures and precise bonus targets that were in operation in the year under review should be stated.
- Share schemes - Shareholder approval should be obtained where substantial amendments are being made to a share scheme.
- Capital management - PIRC comments that companies often use share buybacks as a means of enhancing earnings per share (EPS) results which may be used to determine executive bonus payments. Remuneration committees should therefore make a statement that EPS results will be, for the purpose of bonus payments, adjusted to take account of the effect of any buybacks during the year.
Audit and reporting
- Audit committee report - PIRC comments that at present most audit committee reports are inadequate in that they do not include details of issues dealt with by the audit committee during the year and tend simply to describe its duties.
Shareholder rights and corporate actions
- General meetings - Where companies wish to take advantage of the shorter 14 days’ notice period for calling a general meeting permitted under the CA 2006, the company should make a clear case as to why the shortened notice period is in the interests of all shareholders. If companies fail to give adequate justification, PIRC will not normally recommend shareholder support for the resolutions proposed at the meeting. Companies should always give as much notice of general meetings as is practicable.
- Dividends - Where there is a clear discrepancy between the final dividend proposed by a company and the company’s earnings, PIRC will normally withhold support for the approval of the dividend unless the company provides adequate justification.
- Pre-emption rights - PIRC supports the Association of British Insurers’ guidelines which permit resolutions by companies to issue shares in connection with rights issues on a non pre-emptive basis where the authority does not exceed two-thirds of the company’s issued share capital. It does, however, expect a company which is proposing such a resolution to have a sufficient level of independent supervision on the board to monitor the authority.
- Amendments to articles - PIRC does not consider that the removal of most of the objects clause from a company’s articles will have a negative affect on the operation of corporate governance but it is concerned about the new power in the Companies Act 2006 which enables a company to amend its articles to include a procedure by which it can change its name. Since name changes can have a profound effect on a company, PIRC believes that name changes should only be made following approval by special resolution.
A copy of the PIRC Guidelines 2010 can be purchased from PIRC via the following link.