BNY Mellon Global Investor Relations Survey 2017 - Website

News and views

Consultation responses

IR Society response to green paper on the EU corporate governance framework

The European Commission
Brussels
22 July 2011

Dear Sirs

Response to green paper on the EU corporate governance framework

Thank you for giving us the opportunity to respond to the above green paper.

The Investor Relations Society’s mission is to promote best practice in investor relations; to support the professional development of its members; to represent their views to regulatory bodies, the investment community and government; and to act as a forum for issuers and the investment community.

The Investor Relations Society represents members working for public companies and consultancies to assist them in the development of effective two way communication with the markets and to create a level playing field for all investors. It has 600 members drawn both from the UK and overseas, including the majority of the FTSE 100 and much of the FTSE 250.

Corporate governance has, in recent years, become a matter of great importance to investor relations professionals. As the governance agenda – especially among regulators - has widened to embrace engagement with institutional investors, and to encourage/require those investors to adopt a stewardship role with their investee companies, listed companies have looked to their IR teams to support investors’ needs. Consequently, we have expert insight into how this engagement works in practice today and strongly held opinions on ways to enhance it.

Our starting point is that each company is unique, as is each investor. To impose firm regulations at national level – let alone at European Union level - would result in precisely the kind of boilerplate reporting, and strategy retrofitting that the Commission is anxious to avoid. We strongly support, therefore, the principle of comply or explain. We consider that the UK Governance Code and the Stewardship Code address many of the issues identified by your green paper.

At a practical level, companies give significant effort to supporting investors – both institutional and retail. With corporate websites, a regular flow of disclosure of both financial and non financial information, quarterly updates, annual and sustainability reports, together with market analysis, and support for the sell side reports, companies make available substantial insight to their investors. Add to that a very full meetings calendar of road shows, broker conferences, one on one meetings and results presentations, and investors (especially institutional with their substantial shareholdings) have very many opportunities to question the company.

The IR team is pivotal in this support. Management time is of course at a premium, and should be balanced carefully between running the business and reporting to investors.

We provide below answers to the specific questions asked; however we would like to highlight certain areas:

• Lack of appropriate shareholder engagement. We do not agree with the green paper’s implied introduction of an EU ‘obligation’ for shareholders to engage. We believe that given the distinctiveness of individual member states, and their domestic governance histories, that stewardship codes should be introduced nationally where necessary.

• Short-termism of capital markets. We agree that the trend that you report is driven by factors such as the development of trading technologies and strategies. Nonetheless companies’ IR teams aim to achieve a balance which gives long term support and yet provides short term liquidity. We think that any EU initiative to artificially change this would be unlikely to work, and would impact the attractiveness of European Union exchanges as attractive places to list. 

• The agency relationship between institutional investors and asset managers; the incentive structures for and performance evaluation of asset managers managing long-term institutional investors’ portfolios. We do not support the view that the European Commission should intervene to create rules regulating the fee structure between owners and managers to address the perceived misalignment of interests. We believe these rules would be counterproductive, and damage the equity markets themselves. 

• Proxy advisors. We believe that there is a role for regulators in obliging proxy firms to improve and standardise their disclosures and practices. Too many instances of poor governance ‘reports’ influencing votes have been recorded.

• Shareholder identification. The IR Society has been consistent in its support for a system of proactive identification for companies to require disclosure of shareholdings, to complement the existing major shareholder notification regime. 
 
Answers to specific questions

(1) Should EU corporate governance measures take into account the size of listed companies? How? Should a differentiated and proportionate regime for small and medium-sized listed companies be established? If so, are there any appropriate definitions or thresholds? If so, please suggest ways of adapting them for SMEs where appropriate when answering the questions below.

We do not think that SME’s should be subject generally to different rules, other than those in place at ‘junior’ exchanges such as the UK AIM market.

(2) Should any corporate governance measures be taken at EU level for unlisted companies? Should the EU focus on promoting development and application of voluntary codes for non-listed companies?

As an organisation representing exclusively listed companies, we have no views on this.

(3) Should the EU seek to ensure that the functions and duties of the chairperson of the board of directors and the chief executive officer are clearly divided?

We support the UK Corporate Governance code recommendation that the roles of Chairman and Chief Executive are separate. However there may be circumstance where this structure is not appropriate and on this basis we believe that a comply or explain obligation is preferable to an EU regulation.

(4) Should recruitment policies be more specific about the profile of directors, including the chairman, to ensure that they have the right skills and that the board is suitably diverse? If so, how could that be best achieved and at what level of governance, i.e. at national, EU or international level?

The UK Corporate Governance code provides best practice guidance on the recruitment and required skill sets for Board directors. We believe that national corporate governance guidelines should include appropriate guidance along these lines and we believe that such issues should be decided at national levels.

(5) Should listed companies be required to disclose whether they have a diversity policy and, if so, describe its objectives and main content and regularly report on progress?

As noted above, companies are different, and will have different priorities. Imposing a ‘requirement’ to make these disclosures would impose a further, potentially unnecessary, burden.

(6) Should listed companies be required to ensure a better gender balance on boards? If so, how?

This is not an issue within our expertise on which we feel able to comment.

(7) Do you believe there should be a measure at EU level limiting the number of mandates a non-executive director may hold? If so, how should it be formulated?

This is not an issue within our expertise on which  we feel able to comment.

(8) Should listed companies be encouraged to conduct an external evaluation regularly (e.g. every three years) ? If so, how could this be done?

There are, in our view, merits and demerits in the frequency of the evaluation. The more concerning question is whether the results of the evaluation should be made generally public. Clearly, any evaluation where the outcomes will be disclosed would have limited value.

(9) Should disclosure of remuneration policy, the annual remuneration report (a report on how the remuneration policy was implemented in the past year) and individual remuneration of executive and non-executive directors be mandatory?

Yes.

(10) Should it be mandatory to put the remuneration policy and the remuneration report to a vote by shareholders?

Yes, provided it is an advisory vote.

(11) Do you agree that the board should approve and take responsibility for the company’s ‘risk appetite’ and report it meaningfully to shareholders? Should these disclosure arrangements also include relevant key societal risks?

Yes, the board should be responsible for risk, and disclose how key risks are identified, quantified, mitigated and managed. Whether societal risks are ‘key’ in that context should be a matter for the board.  

(12) Do you agree that the board should ensure that the company’s risk management
arrangements are effective and commensurate with the company’s risk profile?

Yes

(13) Please point to any existing EU legal rules which, in your view, may contribute to
inappropriate short-termism among investors and suggest how these rules could be
changed to prevent such behaviour.

This is not an issue within our expertise on which we feel able to comment.

 (14) Are there measures to be taken, and if so, which ones, as regards the incentive structures for and performance evaluation of asset managers managing long-term institutional investors’ portfolios?

No. We do not support the view that the European Commission should intervene to create rules regulating the fee structure between owners and managers, to address the perceived misalignment of interests. We believe these rules would be counterproductive, and damage the equity markets themselves. 

(15) Should EU law promote more effective monitoring of asset managers by institutional investors with regard to strategies, costs, trading and the extent to which asset managers engage with the investee companies? If so, how?

No. See reply to 14 above. We believe that institutional investors themselves are best placed to monitor the effectiveness of asset managers. The UK Stewardship code outlines best practice for engagement between investors and investee companies and we believe this is an appropriate model to use.

(16) Should EU rules require a certain independence of the asset managers’ governing body, for example from its parent company, or are other (legislative) measures needed to enhance disclosure and management of conflicts of interest?

No – we do not think that this is an area which requires further EU legislative measures.

(17) What would be the best way for the EU to facilitate shareholder cooperation?

We note that the UK Financial Services Authority published in February 2011 guidance on concert party arrangements for the control of UK financial institutions. We think this could serve as a useful model. The guidance confirms that shareholders would not be acting in concert were they to vote together, especially on governance issues.

(18) Should EU law require proxy advisors to be more transparent, e.g. about their analytical methods, conflicts of interest and their policy for managing them and/or whether they apply a code of conduct? If so, how can this best be achieved?

Yes, we believe that there is a role for regulators in obliging proxy firms to improve and standardise their disclosures and practices. Too many instances of poor governance ‘reports’ influencing votes have been recorded. In the first instance we believe that the proxy firms themselves should be given the opportunity to propose a code of conduct and standards for their industry.

(19) Do you believe that other (legislative) measures are necessary, e.g. restrictions on the ability of proxy advisors to provide consulting services to investee companies?

No, see response above – we think in the first instance self regulation would be an appropriate solution. If this is not seen to be effective it may be necessary for other legislative measure to be proposed.

(20) Do you see a need for a technical and/or legal European mechanism to help issuers identify their shareholders in order to facilitate dialogue on corporate governance issues? If so, do you believe this would also benefit cooperation between investors? Please provide details (e.g. objective(s) pursued, preferred instrument, frequency, level of detail and cost allocation).

A focus of your paper is on the concepts of “stewardship” and “engagement”. Encouraging investors to take a longer term interest in - and to engage with - their portfolio companies is at the heart of your plans. 

Knowing who to engage with is an essential first step. That includes being able to identify not only who owns the stock, but also who votes it, who accounts for it and who decides on the investment strategy. The availability of this knowledge underpins the push towards encouraging better stewardship. Without it, engagement is all but impossible.

Finding the ultimate owner, the vote holder (or influencer), the portfolio strategist, or the asset allocation manager is far from straightforward. Within the EU itself - there are different thresholds, with different timings, different interpretations of what constitutes a reportable position, different settlement systems and different voting rules. These make relying on public investor disclosures totally ineffective in achieving a reasonable view of the company’s shareholders.

An Issuer Initiated Enquiry - with responses required under EU law for all member states - will provide a solution to the problems outlined above.

Introduced through the Transparency Obligations Directive, an Issuer Initiated Enquiry would allow companies to form a complete picture of their ownership. It would allow a company listed on a regulated exchange in the EU to issue a notice requiring an investor it knows, or believes, has an interest in its shares to confirm that fact. In addition to disclosing its own interest, the investor would also have to disclose any information it has about others with an interest in the shares. This would also allow the company to pursue information through a chain of nominees by requiring that each link in the chain disclose the person for whom they are acting.

Finally, you ask for a view on costs of such a regime. In our view the largest element of cost will be in setting the systems up in the first place. Thereafter, costs for investors will be minimal. And since in practice much of this work is outsourced to custodians, costs will dwindle over time as competition kicks in.

Also, as your paper acknowledges, regimes similar to those proposed above exist in some member states. Investors must therefore already have such systems in place to comply. Adding extra countries to the systems will not be a substantial cost.     

(21) Do you think that minority shareholders need additional rights to represent their interests effectively in companies with controlling or dominant shareholders?

No. We think that existing company law protects the rights of minority shareholders.

(22) Do you think that minority shareholders need more protection against related party transactions? If so, what measures could be taken?

No. We think that existing company law protects the rights of minority shareholders.

(23) Are there measures to be taken, and if so, which ones, to promote at EU level
employee share ownership?

This is not an issue within our expertise on which we feel able to comment.

(24) Do you agree that companies departing from the recommendations of corporate governance codes should be required to provide detailed explanations for such departures and describe the alternative solutions adopted?

The UK Corporate Governance Code requires companies to explain why they have not followed the code and we believe this system works well. No further requirement should be made. Fixed obligations will lead to template, standardised disclosures.

(25) Do you agree that monitoring bodies should be authorised to check the informative quality of the explanations in the corporate governance statements and require companies to complete the explanations where necessary? If yes, what exactly should be their role?

No. The principle of comply or explain, and indeed the engagement process described in your consultation, should be that investors have the opportunity to check the quality of explanations, and take action as appropriate. We also consider that such a monitoring process assumes the existence of a standard to monitor against, which itself will lead to boilerplate disclosures.    
 

Published: 25 July, 2011