Monday, 12 April 2010

UK: election 2010 - the Labour Party manifesto

The Labour Party published its election manifesto today: see here (pdf). Chapter 1, page 8, sets out several proposals under the heading of corporate governance reform:

To build strong businesses we need skilled managers, accountable boards, and committed shareholders – all with a culture of long-term commitment. We will strengthen the 2006 Companies Act where necessary better to reflect these principles. The UK’s Stewardship Code for institutional shareholders should be strengthened and we will require institutional shareholders to declare how they vote and for banks to put their remuneration policies to shareholders for explicit approval.

Too many takeovers turn out to be neither good for the acquiring company or the firm being bought. The system needs reform. Companies should be more transparent about their long-term plans for the business they want to acquire. There needs to be more disclosure of who owns shares, a requirement for bidders to set out how they will finance their bids and greater transparency on advisers’ fees.

There should be a higher threshold of support – two-thirds of shareholders – for securing a change of ownership and the case for limiting votes to those on the register before the bid should be examined".

These proposals are, inevitably, vague and imprecise in places and they raise many questions, particularly concerning the manner in which the proposed takeover reforms will be achieved. Despite the statement that the takeover process requires reform, there is nothing to suggest that a future Labour Government would be prepared to challenge the shareholders' central position in the UK corporate governance framework. Can changes to the rules regarding takeovers be made without also considering the wider governance framework?

A greater role for shareholders regarding banks' remuneration policy is envisaged in the manifesto although it is not clear how the proposal for "banks to put their remuneration policies to shareholders for explicit approval" would be different from the advisory vote currently required by Section 439 of the Companies Act (2006). What does explicit approval mean in this regard?

Elsewhere there is a clear commitment - "we will require institutional shareholders to declare how they vote" - which suggests that a future Labour Government would exercise the power available to it under Section 1277 of the Companies Act (2006). With regard to institutions, the manifesto refers to strengthening the UK's Stewardship Code, although the consultation on the content of this Code has not yet been completed by the Financial Reporting Council. The FRC is considering whether the Stewardship Code should be based on the Code on the Responsibilities of Institutional Investors issued by the Institutional Shareholders’ Committee (ISC). The manifesto reference to strengthening the Stewardship Code may well mean the ISC Code, but this would be to pre-empt the results of the FRC's consultation.

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