Theresa May set the cat among the corporate pigeons when she promised to reform boardroom governance at UK public companies. Now she has to find a way to deliver on her bold pledge. The prime minister would do well to consider a provocative paper published by her Tory colleague Chris Philp, a member of the Treasury select committee.
Philp’s big idea, published on Thursday, isn’t original but there’s no shame in that. The likes of Lord Myners, a City minister in the last Labour government, have banged on for years about the appeal of Swedish-style shareholder committees that would, in effect, replace nominations committees and recommend the appointment and removal of directors.
Reformers have been right to think creatively because the rise of “ownerless corporations” – companies in which the base of shareholders is so fragmented that the supposed owners behave as passive onlookers – is one reason why almost every governance reform of the past 30 years has disappointed.
Unchecked boardroom greed is just one obvious example. The chief executive of the average FTSE 100 company can now expect to receive 150 times the income of the average worker, a gap that May was surely correct to call “irrational” and “unhealthy” in her pre-leadership speech in Birmingham. Nobody appears inclined to take responsibility, certainly not the usual crop of non-executives “drawn from the same narrow social and professional circles as the executive team”, to use May’s words again.
Putting a committee of shareholder representatives in charge of proposing directors would not be a cure-all, or guarantee fresher thinking. But the odds ought to improve. Directors would have a keener sense of who they are really working for, and fund managers would have to take more responsibility for the makeup of the boardroom. A reformed set-up sounds a better model than the one Myners derides as producing non-executives “elected with North Korean-like majorities by uninterested shareholders, selected through a process led by the chairman which would also be familiar to those in Pyongyang”.
Shareholder committees would have two other roles. They would ratify pay packages and question strategy and performance. Again, both sound sensible prods to make fund managers wake up and take more responsibility for what is done in their clients’ names. For good measure, Philp suggests adding an elected employee representative to the shareholder committee as a non-voting member (a nod to May?) though his prejudice against trade union reps is baffling.
Many fund managers, one suspects, will be horrified by the idea that they could be asked to do more work and accept a few duties and responsibilities. One can hear the objections already: too much danger of becoming an insider; too costly; too time-consuming.
Only the first complaint is serious since fund managers must still have the freedom to be able to sell an investment. But other European countries have been able to police similar systems without regular insider-trading scandals. As for time and cost, the fund management industry should remember what a splendid rake-off it collects from handling other people’s money. Its fees are not supposed to be a free lunch.
The fund manager Neil Woodford, an increasingly vocal critic of his industry’s short-termism, thinks the proposals could help to cultivate “a more appropriate and valuable form of corporate governance in the UK” for the greater economic good. That’s a significant endorsement and May should take the hint. Binding votes on pay and publication of pay ratios (two other ideas in Philp’s paper) are fine as far as they go. But, if you really want to reform governance in the UK, go back to first principles: shareholders are meant to be active owners, not paper-shufflers.
888 Holdings bid for William Hill was never a runner
Who’s he trying to kid? Itai Frieberger, the chief executive of 888 Holdings, thinks a leak was one reason why his ambitious bid for William Hill, in partnership with Rank, never got off the ground. “The leak didn’t allow us to have a conversation behind closed doors,” says Frieberger. “That’s one of the root causes of why we couldn’t progress it. Before we could make a call to William Hill, it was all over the press. That is very unfortunate.”
Unfortunate, maybe, but ultimately irrelevant to the outcome. The 888/Rank proposal failed because the terms were too mean, the financing relied too heavily on debt and William Hill’s board thought it could do better under its own steam, a reasonable judgment given the complexity of a three-way merger in a heavily regulated industry. The doors could have been sealed tight and the result would have been the same.
