Revision of the OECD Principles of Corporate Governance
At the end of 2014, we commented on the proposed amendments to the OECD Principles of Corporate Governance, the first ones since their last revision over a decade ago. The Principles have been highly influential, as they are used at the regulatory and company level all around the world. We are generally supportive of the proposed revisions, which we feel are well considered and overdue following the fallout from the global financial crisis. However, in our response we also strongly recommended the inclusion of a section that promotes effective engagement of shareholders with board members on key strategic, performance and governance matters. In our experience, such engagement can provide boards with valuable information and ideas and ensures appropriate accountability.
In particular, we want to see more emphasis placed on the role of shareholders in the board nomination process. The right to elect directors is one of the fundamental rights of shareholders and needs to be underpinned by an appropriate involvement in the nomination process. We recognise that what amounts to appropriate involvement will differ depending on the applicable legal framework, market practice and the shareholding structure of a company. For example, in many markets this could simply mean consultation of significant shareholders on the criteria that should be considered when identifying nominees for election to the board.
In the UK, the value of interaction between shareholders and boards has long been recognised and is reflected in the country’s Corporate Governance Code. The importance of effective board level dialogue with shareholders is even more apparent from the recent proliferation of so-called stewardship codes around the world.
Interaction between shareholders and boards works!
We believe effective stewardship by shareholders can contribute to positive change and ultimately more sustainable value creation and risk reduction at investee companies. German conglomerate Siemens is a case at hand. Following intensive private engagement, we were unusually vocal around the company’s AGM in January 2014, raising serious concerns about the composition and work of the supervisory board on behalf of a group of global institutional investors. The company reacted decisively to the criticism, which was shared by Germany’s largest fund managers. It carried out a board evaluation facilitated by a third party, revamped a key committee and proposed to replace two board members at its AGM on 27 January 2015 – three years prior to the expiry of their mandates. While we continue to push for more clarity and urgency on the company’s chair succession, we are pleased with its progress to date and believe that shareholders have played a role in bringing about the much needed change.
Board remuneration in Germany
Siemens will also ask shareholders to vote on a revised management board remuneration system. We generally feel that too much precious time in shareholder-board interactions is spent discussing remuneration instead of focusing on strategic questions, performance and the people who lead and oversee the organisations. Moreover, in Germany, with a few notable exceptions, such as Mr Winterkorn’s 2011 pay package at Volkswagen, management board remuneration has not been as controversial from an investor’s perspective as in the UK or the US. Siemens is no exception but the proposed changes to its remuneration system will bring simplification and contribute to the alignment of pay and performance.
However, a recent study by the Vlerick Business School’s Executive Remuneration Research Centre from January 2015 suggests that the CEOs of the largest German non-financial companies are now better paid than their peers in the UK. Moreover, there are important questions about the size of pension entitlements. We are monitoring developments in Germany closely and will intervene where appropriate. While a number of factors are likely to have contributed to rising CEO pay levels, supervisory boards in Germany – as stewards of stakeholders – should ensure that they are comfortable with the compensation levels and able to justify them to shareholders.
Minder law in Switzerland
If they are not, unhelpful developments – such as the introduction of a binding vote on the quantum of pay following the Swiss model – may be the consequence, which would mean a significant re-allocation of powers between shareholders and supervisory boards. We recognise that there have been a number of significant problems with board and executive remuneration in Switzerland and some valid concerns about quantum remain. However, based on our discussions with Swiss companies to date it seems questionable whether the binding remuneration vote introduced by the so-called Minder law will in practice contribute to better corporate governance or facilitate stewardship by shareholders. We are working together with other investors and companies to address some of the problems resulting from the implementation of the Minder law, notably in relation to the role of shareholders. Expect more on this topic in my next blog in February.
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