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!

The Stewardship Code, which is complimentary to the Corporate Governance Code, ‘aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.’ To begin with, the Financial Reporting Council hopes that it will be taken up by ‘firms who manage assets on behalf of institutional shareholders such as pension funds, insurance companies, investment trusts and other collective investment vehicles.’

Similar to the Corporate Governance Code (and the Combined Code before it), the Stewardship Code is meant to be applied on a comply or explain basis, but as yet there is no regulatory need for asset managers to comply or explain, and perhaps not much peer pressure either.

The Stewardship Code is based on seven principles:

‘Institutional investors should:

• publicly disclose their policy on how they will discharge their stewardship responsibilities.
• have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.
• monitor their investee companies.
• establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value.
• be willing to act collectively with other investors where appropriate
• have a clear policy on voting and disclosure of voting activity.
• report periodically on their stewardship and voting activities.’

A full version of the Code can be found here.

The FRC hopes to see some reporting coming out of the adoption of the Code, and we expect that certain asset managers will take up this challenge faster than others. It could be a way for some asset managers to set themselves apart from the competition, as a commitment to the principles of the Code may well appeal to their clients.

An example of this type of reporting can be found at the website of F&C Asset Management. Their Responsible Investment Report and Responsible Engagement Overlay report detail engagement, voting activities, and how these fit in with their broader investment strategies. It will be interesting to see how many other institutional investors follow this lead.

According to the new Code’s preface, ‘Two principal conclusions were drawn by the FRC from its review. First, that much more attention needed to be paid to following the spirit of the Code as well as its letter. Secondly, that the impact of shareholders in monitoring the Code could and should be enhanced by better interaction between the boards of listed companies and their shareholders.’ As a result of the second point, the UK Stewardship Code has also been published, and we’ll be recording some of our thoughts on that soon.

CO3 has prepared a summary of the major changes that appear in the new Corporate Governance Code. This can be downloaded here.

Some of the more interesting points found in the new Code deserve a little discussion, and we’d also be interested in hearing your thoughts on it.

Board review
The Code calls for an external evaluation of Board performance at least once every three years for all FTSE350 companies. This raises the question of who would provide this service, and how would they go about ensuring a high-quality, truly independent evaluation?

Diversity
The new Code states that ‘The search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender.’ This is not highly prescriptive language, but we believe that some companies will need to look at, and potentially adjust the terms of reference for their nominations committees. It will be interesting to see how companies go about creating robust processes to ensure that diversity is taken into account, and what effects these may have.

Risk
From the Code’s main principles: ‘The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.’ We sometimes find that the discussion of risk within annual reporting can be lacking depth. A greater focus on risk in the new Code could result in a more thorough discussion of this area, enhancing the transparency of certain organisations and the way they do business.

Chairman’s role
The new Code puts additional responsibility and emphasis on this role. We think that companies with combined CEO/Chairmen may find this brings greater pressure to separate the roles, especially given that the Chairman’s responsibilities include fostering constructive relations between executive and non-executive directors.

In case you missed it the first time, our guide to the changes found in the new UK Corporate Governance Code can be found here. The Code itself can be found on the FRC’s website, here.

A good example appeared in the business section of London’s evening newspaper (the Evening Standard) yesterday.  The article starts off with the rather interesting suggestion that the most “damning indictment” of BP’s handing of its affairs in the Gulf of Mexico is that the audience at a CSR conference thought a blog on the subject was funny.

A supporting statement to this standpoint pointed out that “the Gulf of Mexico (incident) was always going to be a serious crisis for BP”. I think we might have worked that one out don’t you?

One of the fundamental mistakes that most journalists make when discussing this subject is that they think the communications, reporting, transparency and PR aspects of what they see as CSR are the most important. In doing so they betray the fact that they haven’t the first idea concerning what CSR is about.

BP’s current problem was not caused by its decision to rebrand a few years ago. Nor was it caused by its poor public relations surrounding the recent and ongoing incident as the piece seems to imply. BP’s current problem is that it has been associated with an accident that has significant environmental and health and safety implications.  A number of people lost their lives. It is being widely suggested that the episode could and should have been preventable. It is likely to cost the company billions and may threaten its opportunity to conduct its business independently in the future.

A responsible oil and gas business ensures that the likelihood of such an incident occurring is extremely remote. How good the organisation is at branding and PR, if this isn’t addressed properly, frankly is of no relevance whatsoever.

The “big idea” behind the OFR was to encourage companies, within their annual reports, to be more transparent about financial and non-financial matters which are material to shareholder value. Many business representatives argued that it was too prescriptive and, because companies were nervous about possible litigation, would encourage bland statements and a conservative approach. This argument eventually won the ear of the government and the OFR was unceremoniously ditched in favour of the much less specific Business Review. Since then the idea has drifted off the radar of most people – until now.

CO3 encourages our clients to be more transparent. However we really do wonder whether this sudden rebirth is really going to achieve anything particularly in view of the history of the matter. We believe the government and regulatory bodies should concentrate on achieving uniform international reporting standards and imaginative use of technology (the internet anyone?) to communicate this sort of information. The OFR may well only be adding another, rather unwelcome, local complication to the annual reporting exercise in the UK.

Good to see then, that PwC, one of the leading accountancy firms, plans to source a good chunk of the energy needed to run its new building from a local biodiesel producer. Uptown Oil manufactures heating and vehicle fuels from oil it collects from local venues. Taxis can fill up at its Southwark base and the company delivers fuel nationwide.

As part of biodiesel’s beauty is that it can be produced locally, perhaps we’ll see the company able to expand – Manchester, Leeds perhaps – as more businesses look for lower-carbon alternatives to regular fuels. There’s certainly no shortage of chip fat around.

Maybe next time you’re in London, tucking into a plate of chips, ask where the oil is going to end up. And if you’re working at PwC, fried food might not be such a sin anymore.

The home page of the main company website has largely been taken over by information about the episode. The company is also supplying information to the American authorities who have set up a website for the same purpose. BP is also extensively applying social media.

BP is using pictures, videos and bulletins concerning the progress that is being made to stem the flow of oil.  The online information prominently showcases contact details, media statements made by company executives, company responses to government statements, suggestions for volunteers and records the efforts being made to limit the environmental damage associated with the incident.

The reputational harm that BP has incurred following the accident has obvious ramifications for the long-term management of the business. The company is, however, making a considerable effort to ensure that this is not made worse through poor communications.

It is a lesson that the banking sector in particular seems not to have heeded. We are watching the situation “over the pond” between the seemingly all powerful Goldman Sachs and the American authorities and courts with some interest. Meanwhile the UK high street banks are facing stiff new competition from a variety of new market entrants (such as Tesco, Virgin Money and Metro). They are all looking to capitalise on the public’s mood towards the existing services by offering a fresh approach. Other problems include the threat of more regulation and taxes. These have been encouraged by increasingly noisy campaigns from a number of NGOs and growing support in the media.

The banking sector has a basis on which to build an ICMM type approach. Initiatives such as the Equator Principles have demonstrated that such an exercise might well be possible. May we take this opportunity to suggest a bit of bedtime reading for banking employees who are interested in tackling these issues. We think that you will find the ICMM website information thought provoking and rather useful!

This innovation is clearly welcome, but will it start and end with PUMA? Hopefully not. One of the claims, or hopes, laid out in the promotional video is that the Clever Little Bag ‘may one day change the industry’. This idea appears to be backed up by the words of PUMA CEO/Chairman Jochen Zeitz, who Treehugger quotes as saying ‘there is a patent pending for the bag design but that he would be happy to share it with others and make it a universal system.’ It’s a positive sign, and may be a precursor to a joint approach to the other issues faced by companies such as PUMA, Adidas and Nike.

Some might speculate that it is relatively easy for the boss of a FTSE100 company with a market capitalisation of a shade over £25billion, with stock currently trading at around £20 per share, to make a statement that perhaps slightly dismisses the importance of shareholder value. But actually there is an even wider argument here which Paul Polman hinted at but didn’t quite explore in the FT article: that by demonstrating that an integral part of your business model is consideration of the interests of a wide range of stakeholders, it de facto indicates a robust approach towards the generation of long-term shareholder value.

This is where the CSR argument comes in. A company which adopts a comprehensive responsible approach towards a broad range of stakeholders (including customers, staff, local communities, governments, NGOs, and shareholders) and issues (environmental, social, health and safety, and so on) is more likely to be see to be “in it for the long haul”. People (and by people I mean consumers, staff and, yes, even shareholders) are more likely to value brands and companies more highly if they are clearly showing that they are aware of their impacts, risks and opportunities on a wide variety of levels, and that the business is being run accordingly.