Monday, 25 October 2010

UK: the Government's review of corporate governance - stage 1: a call for evidence with 17 questions

The Government launched its review of the UK corporate governance framework today with the publication of a consultation document titled A Long-Term Focus for Corporate Britain: see here (pdf) or here (Word, .doc). The document provides a succinct overview of the issues and contains questions regarding the board of directors, shareholders and their role in equity markets, directors' remuneration and takeovers. Here are the questions:
  • Do UK boards have a long-term focus – if not, why not?
  • Does the legal framework sufficiently allow the boards of listed companies to access full and up-to-date information on the beneficial ownership of company shares?
  • What are the implications of the changing nature of UK share ownership for corporate governance and equity markets?
  • What are the most effective forms of engagement?
  • Is there sufficient dialogue within investment firms between managers with different functions (i.e. corporate governance and investment teams)?
  • How important is voting as a form of engagement? What are the benefits and costs of institutional shareholders and fund managers disclosing publically how they have voted?
  • Is short-termism in equity markets a problem and, if so, how should it be addressed?
  • What action, if any, should be taken to encourage a long-term focus in UK equity investment decisions? What are the benefits and costs of possible actions to encourage longer holding periods?
  • Are there agency problems in the investment chain and, if so, how should they be addressed?
  • What would be the benefits and costs of more transparency in the role of fund managers, their mandates and their pay?
  • What are the main reasons for the increase in directors‟ remuneration? Are these appropriate?
  • What would be the effect of widening the membership of the remuneration committee on directors‟ remuneration?
  • Are shareholders effective in holding companies to account over pay? Are there further areas of pay, e.g. golden parachutes, it would be beneficial to subject to shareholder approval?
  • What would be the impact of greater transparency of directors' pay in respect of: [a] linkage between pay and meeting corporate objectives, [b] performance criteria for annual bonus schemes and [c] relationship between directors' pay and employees' pay?
  • Do boards understand the long-term implications of takeovers, and communicate the long-term implications of bids effectively?
  • Should the shareholders of an acquiring company in all cases be invited to vote on takeover bids, and what would be the benefits and costs of this?
  • Do you have any further comments on issues related to this consultation?
Will the review result in revolutionary change in the UK model of corporate governance and the preference for market-based solutions? This appears most unlikely, not least because Dr Cable observes in the introduction to the paper that:

The best solutions are those which are owned and driven by market participants, investors and companies. We need clear, consistent rules which work with the grain of the market".

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