There was a mixed reaction to the provisions under Financial Reporting Council’s (FRC) revamped UK Corporate Governance Code, the details of which were released earlier this week – although even ‘mixed’ might be a little charitable. Neville White, head of SRI policy and research at EdenTree Investment Management said it “appears to offer little in the way of significant reform and may add to the tide of criticism against the FRC as being too timid”. Sir Win Bischoff, chairman of the FRC, believes the Code’s “overarching theme of trust, is paramount in promoting transparency and integrity in business for society as a whole”; that's a noble sentiment, but there’s a distinct difference between promoting transparency and legislating to ensure it.
True, the Code has more to do with best practice than it does with prescription, but if you thumb through the document you’re left with the impression that even though it chimes with Sir Win’s utopian vision, it’s a little woolly for the most part – although that might have something to do with its constant recourse to the term “sustainable”, another modern buzzword, and one so overworked that it has essentially been rendered meaningless.
Semantics aside, there are some pleasing elements. We’ve seen a positive response to the outline position on remuneration schemes, whereby director incentives should be made to align with long-term shareholder interests by ensuring that share awards should be released for sale on a phased basis and be subject to a total vesting period of five years or more. One of the many galling issues surrounding the collapse of Carillion was that its former finance director hived off £776,000-worth of shares after stepping down from the board, less than a year before the construction group went belly up. The FRC would obviously be keen to avoid a repeat, but none of this is mandatory; there’s no compulsion, so whether it will be widely adopted is impossible to gauge.
Elsewhere, the Code declares that “remuneration arrangements should ensure reputational and other risks from excessive rewards, and behavioural risks that can arise from target-based incentive plans, are identified and mitigated”. Most shareholders would recognise that this is highly desirable, but what constitutes behavioural risk is certainly open to debate. It’s hard to imagine that a remuneration committee would be prepared to question a share buyback scheme, even one funded by senior debt, yet these repurchases also serve to support company earnings – and by extension, share prices – on which many bonus awards are determined. Some might argue that the proliferation of these schemes has less to do with their benefits from a capital gains angle and more to do with simply meeting bonus provisions – but that’s a purely cynical view.
Likewise, with M&A, how do you determine if, say, a price for a proposed acquisition, although pitched well in advance of comparative industry multiples, isn’t simply the result of a flawed due diligence process, rather than skewered incentives? It’s a scenario that would be all too familiar to shareholders in the FTSE 100 resource majors at the height of the commodities boom, but when does irrational exuberance give way to behavioural risk?
One of the other principles linked to remuneration centres on engagement with the workforce, specifically that workers should be kept abreast of how executive compensation aligns with wider company pay policy. I think I can assist on that score – it hardly ever does. Figures from the Chartered Institute of Personnel and Development show that it would take the average UK full-time worker on a salary of £28,000 (median full-time earnings) 160 years to earn what an average FTSE 100 chief executive is paid in just one year. Apply that criteria to WPP and you would be working well into the next millennium.