Buckling under the weight of stringent and prescriptive governance standards designed to prevent failure rather than the promotion of company success, the UK capital market lost its mojo. Post Brexit, covid and with a response to inflation bearing fruit, there are signs that the UK is self-correcting. Governance standards may be reframed to encourage competition and growth.
Following the LSE plea to unshackle one size fits all remuneration frameworks (see HERE), and the Financial Reporting Council declining to implement many restrictive Corporate Governance Code proposals to ensure a balance between the quality of audit and corporate reporting and governance. The Capital Markets Industry Taskforce, a UK group of CEOs, chairs and industry leaders aiming to make the UK a market where companies can easily start, grow, scale and stay, has penned an open letter for reduced prescription in corporate governance to stop the loss of companies from UK markets to less prescriptive climes.
In essence, the CMIT open letter rails against the inflexibility of current corporate governance expectations, where any innovative or global remuneration approaches fall afoul of localised “comply or explain” requirements that are more akin to “comply or else”. The CMIT does not believe this is optimal, and, given best practice often has no evidence basis, We would tend to agree , see HERE.
CMIT’s view is that Corporate Governance Codes should support the “promotion of a company’s success” rather than the “prevention of its failure”.
The calls for an investor and issuer forum that would work to “enhance effectiveness, reduce friction and increase competitiveness”, discussing and “distilling” investor requests for metrics and disclosure.
It asks for a corporate governance reset:
- For issuers, it expects boards to act like the professionals they are, with the ability to make decisions that may deviate from the norm in order to promote company success and to be able to provide the rationale for this choice. Where the board does not perform, it expects board members to be held accountable by an annual vote – meaning less “retirements”.
- For investors, this would mean a “meaningful dialogue” and following their own policy position rather than outsourcing decisions to proxy advisers.
- Remuneration quantum would be considered separately to remuneration structure.
- Adverse votes would become less onerous, with CMIT seeking the end of the current UK code expectation that companies explain how they will consult with shareholders following a 20% adverse vote. Majority shareholder opinion should be good enough.
- Comply and explain would become “apply or explain”, implying that explanation is compliance in its own right.
- Dilution rules limiting the issuance of new shares must not exceed 10% of the issued ordinary share capital in a rolling 10-year period (and 5% for executive schemes) would be abolished to provide fast growing companies more flexibility to use equity to reward and attract talent.
- The 50% discount expected when moving from performance tensioned LTI to restricted shares would be abolished.
This letter was published on the same day a letter was sent from the UK Secretary of State for Business & Trade and President of the Board of Trade to the Chief Executive of the Financial Reporting Council on the council’s remit, noting that “proportionality of any new requirements is essential, and it is also important to look actively at where rules and guidance are no longer proportionate and can be removed and streamlined”. See HERE.
Given Australian governance expectations tend to reflect many UK standards, many may be hopeful that the governance simplification pendulum swings our way, which will hopefully be a victory for critical thinking in remuneration design.
See the Taskforce’s very readable letter HERE.© Guerdon Associates 2024 Back to all articles