The ABI has published a report on improving corporate governance and shareholder engagement. The report is a critical evaluation of the roles and responsibilities of the main elements of corporate governance, including:
- The role of the non-executive in providing constructive challenge.
- How institutional investors hold companies to account.
- The relationships between, and responsibilities of, asset managers and asset owners.
The report also contains a comprehensive review of the approach taken by institutional investors in corporate governance. In addition it contains some proposals that the ABI believes will improve shareholder engagement.
The key recommendations contained in the report include:
Corporate governance reporting
Corporate governance reporting should use an “apply and explain” approach in respect of the application of the Principles of the UK Corporate Governance Code (“Code”), as a step further from the Code’s approach of “comply or explain”.
All annual reports should contain a Chairman’s introductory statement, which should include how the principles relating to the role and effectiveness of the board (contained in sections A and B of the Code) have been applied.
Explanations of any deviations from the Code should comply with the following criteria:
- Company-specific in context and historical background.
- Convincing and understandable rationale.
- Mitigating action to address any additional risk.
- Time-bound and subject to review.
- Specify deviations from the main principles as well as from specific provisions.
- Explain how the alternative course being adopted is consistent with the Code Principles and contributes to good governance.
Non-executive directors (“NEDs”)
The ABI believes NEDs are crucial to good governance. Consideration should be given to how much time each NED is able to commit to the company and how their roles are structured to reflect this.
Companies should consider how to provide information to NEDs in the most effective manner. In particular it is common for board packs to be too long, too narrowly focussed and be heavily weighted towards backward-looking financials and operational detail, providing little if any stimulus for more strategic or forward-looking discussion at board meetings. The report provides an example of a thematic model to address this issue.
Details of any proposed transactions involving the company should be given to NEDs as early as possible, including a description of the discussions between the proposed parties. NEDs should consider whether it is appropriate to seek separate, independent advice on the merits of the proposed transaction, and, in any event they should be given direct access to the company’s financial and legal advisers for the transaction in order to ensure that information can be rapidly obtained and understood.
Companies should be encouraged to consult their major shareholders on major board appointments and to improve Nomination Committee reporting in the annual report.
Companies should develop a transparent annual investor relations programme that includes a schedule of meetings to discuss corporate governance and stewardship related issues. Companies should consider the presence of NEDs at a selection of investor relations’ presentations.
Wider coverage of investment issues, such as strategy, performance and capital management would be welcomed. Companies should disclose their voting policies, processes and actual voting decisions.
Shareholder rights and structural measures to encourage long-term investment
The ABI does not support differentiated voting or dividend rights which may result in unintended adverse consequences particularly in respect of the interests of minority shareholders.
The report notes that AGMs are poorly attended by institutional investors and increasingly dominated by small retail investors. The report considers but does not support “virtual-only AGMs” as the ABI believes that AGMs remain a key opportunity for shareholders to exercise their ownership obligations. Shareholders could encourage companies to consider how the meetings can be reinvigorated.
Without going into any specific detail on process, the ABI suggests a simplified procedure should be considered for requisitioning of general meetings and proposition of shareholder resolutions.
Asset owners and asset managers
The ABI supports the concept of developing a “Stewardship Mandate” to be included in investment agreements which clarify and govern the stewardship requirements, including the range of activities to be undertaken by an asset manager on behalf of its client.