Hermes calls for enhanced corporate governance regime for private infrastructure assets

Hermes Investment Management (Hermes), the £28.6 billion manager focused on delivering superior, sustainable, risk adjusted returns to its clients – responsibly, is calling for an enhanced corporate governance code for private infrastructure assets. The code would provide essential social services to help close the governance gap and ensure consistent and optimal outcomes for investors, employees and other stakeholders.

The paper ‘Corporate Governance of Public Service Infrastructure Assets’, outlines two key areas for consideration, designed to help close the governance gap created by the lack of existing relevant and/or appropriate reference points for these businesses. Those areas include:

• The Board: In contrast to publically listed companies, the boards of directors for private infrastructure investments are often made up principally or wholly of representatives of one or more of the shareholders. This can result in large – and arguably unmanageable – boards, conflicts of interest for board members and lack of sufficient board diversity. Accordingly, an enhanced governance framework could include:
  • Initial and periodic documented board effectiveness reviews whereby businesses periodically and genuinely consider the Board’s skills and diversity, the quality of debate and decision making, the adequacy of conflict management processes, and its overall effectiveness in a structured and documented manner to help ensure risks and opportunities are optimally managed.
  • Independent Chair to help provide valuable assistance in steering robust and effective board debate and stewarding interactions between shareholders, the Board, sub-committees and management.
  • A minimum number of independent directors as the presence of independent, experienced industry professionals can provide comfort for investors, end users and other stakeholders.

• Shareholder value: There is increasingly robust evidence of the relationship between well-governed companies and higher long-term returns. Short-termism and a lack of focus on ESG issues can erode long-term shareholder value. An enhanced governance toolkit for infrastructure businesses, which ensures the interests of stakeholders feature appropriately in the minds of directors would be therefore be valuable. The following areas warrant consideration:
  • Stakeholder committees, made up of company management, shareholder directors/independent directors and other key stakeholders could be appointed, operating under agreed terms of reference.
  • Remuneration should be more aligned to matters other than financial returns (such as metrics related to environmental and social performance, like health and safety)
  • Transparency and disclosure of key non-financial information for infrastructure businesses could reinforce accountability and good practice. Infrastructure businesses could be required to comply with such standards, or explain their non-compliance in their annual reports.

Peter Hofbauer, Head of Infrastructure, Hermes Investment Management, said: “Few asset classes are as necessary, or significant, to the daily lives of individuals as infrastructure. These businesses, which can provide essential social services, including access to water, energy, health and social care, and vital transport services, are the basic physical and organisational structures and facilities needed for the operation of a society. However, ownership of these assets continues to transfer from the public to the private sector. While the listed company corporate governance guidelines are helpful, some of the principles may not be appropriate (nor accepted) in a more bespoke private market environment. The result, therefore, may not always be a consistent, or optimal, outcome for investors, employees and other stakeholders.”

Regarding the wider consultation that the Government is carrying out, we believe the time is right for the authorities and the infrastructure industry to consider implementing some or all of the options set out in our paper.  There is a distinct need for initiatives that will deliver an enhanced governance framework for the benefit of infrastructure company boards, shareholders, stakeholders, the public interest, and increase accountability.

Hofbauer said: “A clear best-practice reference point for the governance of privately-owned essential service businesses that helps to articulate and align the objectives of Government, private investors and the public, can only be beneficial.”

Read the full paper here