Pensions World

Are the controls on top directors tough enough? asks Anthony Hilton, Evening Standard

This spring may go down as the time when shareholders finally lost patience with companies about executive pay. Hermes, the manager of the British Telecom pension scheme, together with the National Association of Pension Funds, announced that it had just met with about 40 pension schemes and a similar number of FTSE companies. Though the meeting was cordial, its focus was a document from Hermes outlining proposals for pay reform.

The tone was far more assertive that one normally finds in such documents: "We are at a turning point in the evolution of publicly listed companies in the UK", it said ... "The directors of corporate Britain need to reflect deeply on the culture of boards and the companies they lead. The ultimate success of companies and our economic future will be influenced by boards and their remuneration committees seeking honestly to address the flaws in much of the remuneration that is paid to the directors of public companies..."

Raft of reforms

The basic idea of a raft of reforms is to make companies focus on what is needed to deliver long term prosperity for the business.

The big question, of course, is what happens if boards do not respond as they should and what are the shareholders going to do about it. And that brings us to the pressure on the beneficial owners of assets – not just their agents, the fund management companies – to take a greater interest in corporate governance.

Back in Budget week in mid-March London played host to a meeting of the International Corporate Governance Network, the international umbrella organisation of pension schemes, asset owners, corporate activists and others interested in improving corporate performance by making boards work better.

Considering the short time the body has been in existence, a huge amount has already been achieved. And this week saw the addition of two further codes – one a model mandate to govern relationships between the fund and external portfolio managers, a second to lay out ground rules for political contributions by companies.

But however fast they move forward, public expectations move faster. As Professor John Kay has said when talking about his review of the relationship between companies, investors and the stock markets, capitalism is ultimately judged by the benefits it delivers to society. That benefit can only be increased if the performance of business improves. This gives asset owners, through their ability to influence management, a key role in ensuring that business delivers what society expects.

Ignoring the code

Arguably even when the spirit is willing, the flesh is weak and in too many cases the spirit is not even willing. Last year saw the launch in the UK of a new stewardship code designed to further shareholder engagement. But a survey a few days ago of British companies found that 79% of them had not noticed any change. It was as if the code did not exist.

So the governance industry needs to toughen up. The people running the funds have to be clear about what is expected of them, to make sure the activities are properly resourced and to be brave in pursuit of their goals.

But they need also to be smarter. They need to co-operate and form alliances with regulators, with pension trustees, with bond holders and most of all with each other so they can bring effective pressure to bear on companies. They need structures and they need staff to make it happen, because that is what politicians and the public expect.

And they also need to be under no illusions about what will happen if they fail to deliver. Few people want regulation and even politicians doubt it will solve the governance problems. But if shareholders do not act, it leaves government very little choice. Regulation will be almost certain to fill the vacuum.