Investor Voice - Press Release

The Combined Code sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit and relations with shareholders.

Since its inception in February 2008, InvestorVoice has been concerned about effective corporate governance. In particular, it has been concerned about the effectiveness of a company’s Board of Directors and the effectiveness ofinstitutional shareholders. Our focus has been on financial institutions. 

After experiencing the effects of the global banking crisis, it has become evident to all that many of the United Kingdom’s financial institutions and institutional investors have not fully complied with the Combined Code. Political leaders, legislators and corporate governance bodies are now expressing concern about the compositions of boards, their effectiveness, the excesses in executive remuneration and the related effect on prudent risk management and the lack of engagement by institutional investors. 

InvestorVoice believes that the Combined Code should be more prescriptive in its provisions and require a more formal review on a company’s compliance. In particular, we believe that the Board Performance Evaluation requirements must be strengthened. The Code should also require the mandatory disclosure of shareholder voting records of institutional shareholders. 

Peter Dwyer

Managing Director

InvestorVoiceLimited

(+44) 01344621214

Background to our call

InvestorVoice has been concerned for some time about the state of corporate governance, especially in financial institutions, and the lack of institutional shareholder engagement.

Our concern has not been limited to the United Kingdom. Indeed, we have highlighted the ineffectiveness of boards of financial institutions in the United States and continental Europe. The boards of Bear Stearns, UBS AG and others have received significant criticism from us. However, in the United Kingdom, we are now seeing the dramatic effect of poor corporate governance at a number of financial institutions and poor institutional shareholder engagement.

The United Kingdom’s Combined Code of Corporate Governance (Combined Code) sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit and relations with shareholders. It also contains guidance on institutional shareholder engagement with companies.

Board Performance Evaluation

One of the keyelements of the Combined Code is the requirement for an annual evaluation ofthe board.

 A.6 Performance evaluation

Main Principle

The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.

Supporting Principle

Individual evaluation should aim to show whether each director continues to contribute effectively and to demonstrate commitment to the role (including commitment of time for board and committee meetings and any other duties). The chairman should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the board and, where appropriate, proposing new members be appointed to the board or seeking the resignation of directors.

Code Provision

A.6.1The board should state in the annual report how performance evaluation ofthe board, its committees and its individual directors has been conducted. The non-executive directors, led by the senior independent director, should be responsible for performance evaluation of the chairman, taking into account the views of executive directors.

When we look at the last Annual Report and Accounts of one financial institution we read:-

“The Boardhas undertaken a formal and rigorous annual evaluation of its own performanceand that of its committees and individual directors.

The performance evaluation of the operation and effectiveness of the Board, the Remuneration Committee and the Nominations Committee was undertaken in the autumn of 2007. This was conducted internally using a detailed questionnaire and individual meetings with each director. Amongst the areas reviewed were the role of the Board, Board composition, Board meetings and processes, Board performance and reporting, external relationships and Board Committees. A separate performance evaluation of the Audit Committee was also undertaken internally in late 2007 using a detailed questionnaire and meetings with Audit Committee members and attendees.

The reporton the Board evaluation, which was designed to assist the Board in further improving its performance, was considered and discussed by the Board as a whole and a separate report on the outcomes of the evaluation of the Audit Committee was also considered and discussed by the Board. The Board evaluation involved detailed consideration of Board composition, Board engagement in risk management and capital planning and the format of the Board meetings. The Board also considered the range and balance of its activities and was content that it was allocating appropriate time to such key matters as monitoring business performance, risk appetite and strategy.

Taking into account their review and discussions the directors have concluded that the Board is effective in meeting its objectives and fulfilling its duties and obligations. The directors are also satisfied that each of the Board's Committees (Audit, Remuneration and Nominations) carries out its delegated duties effectively.

In addition, each director discussed his or her own performance as a director and their Board evaluation questionnaire with the Chairman. The senior independent director canvassed the views of the executive directors and met with the non-executive directors as a group without the Chairman present to consider the Chairman's performance. The Board is satisfied that each director continues to contribute effectively to the Board and the Group and demonstrates commitment to his or her role as a director.”

The above was taken from the Royal Bank of Scotland’s 2007 Annual Report. Over the next 12 months, the bank was forced to undertake the largest rights issue in UK history, the CEO resigned, a new chairman was required, the executive director for Corporate Banking and Markets was removed from the board and eventually the bank was part nationalized to the tune of 70%.  Its share price fell by 96% and it is believed that it will report the largest corporate loss in UK history. In January 2009, the new CEO announced that even further board changes were to come. And finally, Gordon Brown, the British Prime Minister criticized the irresponsible mistakes of the Royal Bank of Scotland’s managers.

It is difficult to understand how a board, its committees and its individual directors can be rated as effective when in the following year the three most senior executive directors were asked to leave. Part of the reason will have been that the board evaluation was “self evaluation”.

The Royal Bank of Scotland is not the only company to produce a very bland report.The format and content is very similar at most other companies, although some use third parties to undertake the evaluation.

It is essential for board evaluation to be effective, the evaluation is conducted by an external party, against a more prescriptive code andwith more detailed reporting. The Financial Service Authority should review the full process at each financial institution.

Institutional Shareholder Engagement

The Combined Code also includes three main principles addressing the responsibilities of institutional shareholders.

E.INSTITUTIONAL SHAREHOLDERS

E.1 Dialogue with companies

Main Principle

Institutional shareholders should enter into a dialogue with companies based on the mutual understanding of objectives.

E.2 Evaluation of Governance Disclosures

Main Principle

When evaluating companies’ governance arrangements, particularly those relating to board structure and composition, institutional shareholders should give due weight to all relevant factors drawn to their attention.

E.3 Shareholder Voting

Main Principle

Institutional shareholders have a responsibility to make considered use of their votes.

In the 2008 Annual General Meeting season,the nine UK listed financial institutions held advisory votes on their Remuneration Reports. The reports cover the salary, bonus and long-term incentive payments for senior executives and board members. The approval rate in favour of the Remuneration Reports ranged from 97.2% at Alliance & Leicester to 81.8% at HSBC.  The result at the HSBC meeting, officially 88.4%*, was achieved even after the Association of British Insurers and PIRC issued releases critical of the long-term incentive plans. The Remuneration Report included plans that with bonus and long-term incentive payments would enable senior executives to receive compensation up to 950% of salary.

It would appear that institutional shareholders have supported the large executive compensation plans that many believe have contributed to excessive risk taking.  It is also evident that they have supported management at the financial institutions that have been at the centre of the crisis in theUK.  Even after the beginning of the financial market downturn and after media and analyst concern over the pricing of the ABN transaction, RBS shareholders voted 94.5% in favour of the acquisition. Indeed, at the AGM where the Royal Bank of Scotland AGM, in May 2008, where the company announced its £ 12 billion rights issue, the CEO received a 99% vote in favour of his re-election to the board. This may have been because the company waited for the institutional votes to be submitted before it announced the rights issue.

Our major concern is that there is no mandatory disclosure on how individual institutions have voted on resolutions put forward at Annual and Extraordinary General Meetings.  Although such a move did not assist the United States institutions in avoiding major corporate governance issues, InvestorVoice believes that in future such legislation will encourage institutional shareholders in UK listed companies to improve their corporate governance remit and provide greater transparency.

*To be conservative, we have included Votes Withheld in these calculations, though they are not included in the official vote. If we had excluded the Withheld Votes, the HSBC figure would rise to88.4%.

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