The revised UK Corporate Governance Code, published in June last year, takes effect for accounting periods beginning on or after 2 June 2010. One of the new requirements of the Code is the part of Code Provision B.7.1 which states:
"All directors of FTSE 350 companies should be subject to annual election by shareholders."
A number of larger companies have put their full boards up for re-election each year for a number of years. In general, however, compliance with this requirement will mean a move from retirement by rotation over a three year period. This article looks at when, whether and how to make that move.
- Does the revised UK Corporate Governance Code requirement for annual re-election apply this year? Our view is that technically it does. For example, if the financial year is a calendar year and the AGM is held in April, then the AGM in 2011 is taking place in a financial year to which the new Code applies (a financial year beginning on or after 29 June 2010), even though the annual report being laid before members at that AGM relates to a year governed by the old Code. Regardless of that technical answer, we understand that bodies representing institutional investors, such as the Association of British Insurers and the National Association of Pension Funds, have stated that they will not recommend votes against companies which do not comply with the new provision this year. So, depending on whether the shareholder base comprises ABI and NAPF members, that may mean that the provision does not need to be complied with. The position of the ABI and NAPF may, however, be contrasted with that of other representative bodies, for example PIRC, who preferred annual re-appointment previously.
- If B.7.1 does apply, should you comply or explain? There was a lot of debate over this provision when it was introduced, with the main objection being that it would cause boards to look at the short term rather than long term in their management of the business. Some investors (pension fund schemes USS and Railpen and pension fund manager Hermes) wrote an open letter to the Financial Times saying they did not support it and would instead support any company which gave a "reasonable and valid" explanation of not having annual re-elections. Once again, depending on the particular shareholder register in question, an explanation of non-compliance, rather than compliance, may be more than acceptable.
- What is market practice? Rather contrary to the above, the impression given by the notices published to date and our experiences in connection with preparations for AGMs this year is that companies are looking to comply and to put the full board up for re-election, although this will not be universal. The fact that the statistics cited by the FRC show that director re-elections are very rarely controversial (only nineteen directors from nine companies on the FTSE all-share index lost a vote over a nine year period) and the fact that some companies have already been seeking annual re-elections for a number of years without problems mean that there is a concern that there is nothing worth 'fighting' over. Conversely, if a company resists annual re-elections it might cause a debate among commentators, when the board is performing well and there is no need to have any debate.
- Can the company comply? Seeking annual re-elections will require some directors to put themselves up for re-election voluntarily. We do not envisage directors being particularly reluctant to do so, but it is obviously a question which needs to be asked.
Some companies have also raised concerns over what would happen if the whole board was voted off. Should they amend their articles to make provision for such an eventuality? There is some evidence of companies looking to make such changes, but it is difficult to imagine articles which can make adequate provision for such a situation. In terms of planning for negative shareholder voting, energy would be better directed at early engagement and understanding what shareholders are expecting or are dissatisfied with. In reality it has always been possible for shareholders to remove directors and companies have not created structures to accommodate such a scenario.
The market practice so far is as follows:
- No annual re-election
Brewin Dolphin Holdings plc
Enterprise Inns plc
Thomas Cook Group plc
- Annual re-election
Compass Group plc
Daily Mail and General Trust plc
Euromoney Institutional Investor plc
Imperial Tobacco Group plc
ITE Group plc
Mitchells & Butlers plc
The Paragon Group of Companies plc
The Sage Group plc
TUI Travel plc
WH Smith plc