Proxy advisers are helping to cause a breakdown in the relationship between boards and shareholders, according to new research.
The conclusions come after interviews with 35 chairs of FTSE companies, examining their contact with investors.
Conducted by City PR company Tulchan, along with former Financial Times editor Andrew Gowers, the report concludes that many chairs believes their relationship with institutional investors has “deteriorated”. They blame proxy advisers—including the “poor” quality of their work—and worry the UK Corporate Governance Code’s “comply or explain” principle has been supplanted by an “adversarial focus on compliance”.
Mark Burgess, a partner at Tulchan, writes that chairs reveal they believe the “constant focus” of investors is “trying to regulate and legislate” all risks out of existence.
“The result has been to limit risk taking and probably lowers the growth prospects of companies and the underlying economy.
“Those with entrepreneurial aspirations, as well as many participants in the governance process, feel stifled by red tape and ‘box ticking’.”
Chairs who took part in the survey include Lord Stuart Rose of ASDA Stores, Cressida Hogg of Land Securities and Sir Donald Brydon of Tide Holdings.
‘Deeply frustrating’
One chair in the report says investor relationships as they stand may dissuade companies from going public: “That quality gets sacrificed for quantity, and instead of a productive dialogue, we end up with an inflated and deeply frustrating box-ticking exercise.
“The long-term consequences of this will not be negligible, notably an increasing reluctance of companies to float on the stock exchange.”
While many chairs are very happy with their institutional investors—“Some are outstanding and no chair could ask for more,” says one—others are less impressed.
One chair complained about the shift in focus from broad principles to “detailed rules”.
“It’s more and more about rules being set by shareholders and asset managers. Partly because of some big corporate failures, we’ve left behind the premise that shareholders and the company are on the same side.”
Chairs complained that investors “outsource” decision making to proxy advisers. “How can you as an investor exercise your fiduciary duty to your ultimate client if you’re investing in a company about which you know little, other than some mathematical characteristics of the previous share price performance.”
‘Blanket recommendations’
Another chair adds: “There are some shareholders who are subcontracting some of their relationship with a board to proxy agencies, particularly around the time of an AGM. Proxy agencies read board resolutions and look at the performance of the company, then make blanket recommendations to shareholders.”
Other chairs accused shareholders of box-ticking and “generic communications” when engaged in stewardship.
“The public company model is broke,” says one chair. “You have a very large group of very talented and dedicated execs and non-execs getting together ten times a year and 70% of the agenda is typically governance and regulation.” The chair adds: “That leaves little of the 35 days a year a non-exec normally devotes to a company to think about other things.”
Another dismissed shareholders’ attitudes to the UK Corporate Governance Code. “It’s not comply or explain anymore. It’s just comply.”
One chair challenged investors. “We need to discuss, first, pushing back more responsibilities on to boards themselves, and second, whether it’s possible to get shareholders to fulfil the obligations they have signed up to in the Stewardship Code, which will involve them devoting more resources to engaging with companies, and, if not, what the consequences of that would be.”
Relationships between boards and investors largely take place behind the scenes. And investors have in recent years become increasingly concerned with major governance issues such as executive pay, diversity in boardrooms and, of course, climate change.
In addition, the corporate governance code was updated in 2018 and is currently going through another review. Relationships are changing. Not everyone will be happy.