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OPINION

When a rule isn't a rule

When a rule isn't a rule
May 5, 2016
When a rule isn't a rule

When it comes to governance, pay is currently preoccupying shareholders, as we have reported elsewhere in the magazine and on the website. This is hardly surprising, when historic losses are matched by huge bumps in overall pay. Market watchers have been reminded of the 'shareholder spring' of 2012, when owners of some of the UK's biggest companies clashed with management over the issue. The events were named after the 'Arab spring', the string of democratic uprisings that spread across north Africa and the Middle East in the previous year. A cynic might point out that in both areas the revolt soon faded and the old order was re-established.

But the rules have changed a little in the UK. Following legislation passed by the former coalition government, effective in 2013, shareholders have a binding vote to approve the directors' remuneration policy at least every three years. To be clear, this does not apply to companies listed on the alternative market. There is also an annual advisory vote on how it is implemented. If the company is defeated on this vote, its remuneration policy has to be put to a vote by shareholders the following year. After losing such an advisory vote, BP (BP.) has that binding vote on its remuneration policy next year.

But there is another area where even this progress has not been made. The UK Corporate Governance Code says a chairman should meet its set independent criteria, and that only in exceptional cases should a chief executive go on to the chairman role. Currently presenting an exception is Michael Dobson, chief executive of Schroders (SDR) from 2001 until last month, when he was appointed non-executive chairman despite the opposition of nearly a third of the company's external shareholders. The move is a bit rich given the criticism levelled by its then head of equities Richard Buxton in 2008 that Marks and Spencer's (M&S) elevation of Sir Stuart Rose to executive chairman set "an appalling example". But the asset manager has consulted shareholders, and emphasised its separation of powers.

Quoted companies got better at explaining than complying last year, according to the 2015 review of the code by consultancy Grant Thornton. The level of full compliance with the governance code fell from 61 per cent in 2014 to 57 per cent of FTSE 350 companies in 2015, a fall offset by a rise in 'good quality' explanations. This includes explaining the reasons for non-compliance, the alternative arrangements they are making, as well as timeframes, provisions and other specifics around the alternative route taken.

On a five-year average, just over half (55 per cent) of companies comply fully with the code's provisions. The most common cause for non-compliance is, indeed, independent representation on the board. The code requires half the board, excluding the chairman, to be made up of independent non-executive directors. One in eight FTSE 350 companies (12.8 per cent) fail the guidelines here, and almost one in two (48 per cent) new entrants. There are 10 companies that have a combined chief executive and chairman, up from six in 2014.

The problem with making public comments on governance is that many of us live in glass houses: few governance and appointment structures are perfect. But the virtue of independence is one for which we should fight; to make sure that strategy is properly scrutinised, and that today's decisions are informed by yesterday's decisions, not intended to justify them.