Annually elected directors – best practice or not? We think we should be told!
Not for the first time, listed companies have been receiving conflicting suggestions about what is (and is not) corporate governance best practice.
The new Corporate Governance Code, published by the FRC and applicable to UK listed companies for reporting periods commencing on or after 29 June 2010, indicates that best practice now requires FTSE350 companies to arrange for all of their Directors to be re-elected every year (subject to the usual “comply or explain” stipulation).
The appearance of this requirement was accompanied by the usual complaints about red tape and burdensome regulation of the sort that accompanied the Combined Code’s requirements about the separation of Chairman and Chief Executive duties a few years ago. However things went a stage further last week when the heads of three prominent institutional fund managers (Hermes, Railpen and USS), all of whom are associated with encouraging companies to adopt corporate governance best practice, wrote to the Financial Times.
“We agree with the reservations expressed by the chairman of FTSE companies in the Iddas Report, The Chairman’s Perspective, on the new requirement that all directors of FTSE350 companies will be subject to annual re-election” they said. This report described the new stipulation as “crazy”. They argued that the existing mechanisms were satisfactory and that the new requirement “will engender a short-term culture with the risk of effective boards being distracted by short-term voting outcomes.” The letter also pointed out that they believed that the requirement “would appear to run counter to the objectives of the Stewardship Code for Institutional Investors, published on 2 July, which aims to facilitate more effective engagement.”
Whilst we think a bit of healthy debate is generally a good thing, perhaps it might have been a better idea for interested investors and regulators to decide on an agreed approach. At the moment it isn’t clear whether the consensus within this world favours one option or the other. We think we, and the 350 companies affected, should be told!
