A radical new proposal aimed at tackling the fat cat pay culture in the UK by adopting a Swedish-style shareholder committee model is “simply not necessary” and could result in a few large fund managers dictating policies on pay and director nominations, leading industry experts said.
Earlier this month, Member of Parliament Chris Philp touted a shareholder committee plan, on the lines of the Swedish nomination committees, made up of the top five company investors to replace existing nomination committees and approve pay proposals.
Philp’s plans come as new Prime Minister Theresa May prepares to unveil new reforms to curb excessive pay. May, who has put boardroom governance at the centre of her agenda to reform pay, has also called for workers to be part of company boards.
Over the coming weeks, the government is expected to start a public consultation on the viability of employee representation on company boards.
Philp, a Conservative backbencher and member of the Treasury Select Committee, is hopeful that his plans will be looked upon favourably by the government.
“We have met with Number 10 and we think this model is an elegant solution, that dovetails very neatly with the Prime Minister’s suggestion of having more employee representation,” said Philp.
Philp’s plan would see one employee representative who would sit with shareholders and the chairman when discussing pay and board nominations.
But while his plans to open up the debate on corporate governance were welcomed, leading corporate governance experts questioned the need for a wholesale change to the existing system.
“A Swedish-style shareholder committee is simply not necessary or appropriate in a UK context,” said Kerrie Waring, executive director of global governance body the International Corporate Governance Network (ICGN), pointing out that investors already have the ability to appoint or remove directors on an annual basis, as well as being able to enter into dialogue with nomination committees on candidates.
“Such a system might work well in Sweden but we should remember that they have fewer companies. The top five UK investors in UK companies would be very thinly stretched,” she added.
Davit Pitt-Watson, former chairman of Hermes Focus Funds, said the key question was whether the Swedish-style nominations committee model was “readily importable” to the UK.
“These committees work in Sweden – similar provisions apply in Italy – but it isn’t a panacea. We need to beware of trying to change our entire system,” he added.
He noted that BlackRock and Legal & General Investment Management, two of the largest passive managers in the UK, could end up being on the nomination boards of at least 700 out of 800 UK companies under the new plan.
However, Philp said fund managers were not obligated to take up their position on all the committees they qualified for.
“You would expect some sharing of the workload amongst the big fund management groups. The whole idea is to make shareholders more active in the stewardship function,” he said.Concerns over larger investors dominating the committee were also raised by the umbrella body of pension funds. Joe Dabrowski, Head of Governance & Investment at the Pensions and Lifetime Savings Association (PLSA), said that it was essential that members of the proposed committee be engaged investors, rather than simply the largest investors.
“A sharing of the workload amongst the big fund management groups”
“It is important that this point is not lost through an arbitrary selection process,” Dabrowski added.
Pitt-Watson said instead of reforming the entire system, other reforms, “low-hanging fruit” in the form of simple measures could be used.
As an example, he said small, retail investors should be able to know how their fund manager voted on specific issues such as pay. If fund managers had to disclose how they voted on specific issues, it would act as a simple, yet effective way of holding them to account, Pitt-Watson said.
Mark Goyder, founder director of non-profit think tank Tomorrow’s Company, said the committees could act as a “catalyst” on the key issue of director nominations.
Goyder had advocated adopting the Swedish model of nominating committees in a report he co-authored with Harlan Zimmerman, a senior partner at activist fund firm Cevian Capital.
Philp’s proposal also has the backing of Paul Myners, who is currently chair of Cevian Capital and former City Minister. Fund manager Neil Woodford has also lent his support.
Goyder, however, noted that Philp’s plan included committees approving pay packages, which are not part of the Swedish committees which solely look at director nominations. “My worry with Chris Philp’s idea is that, whilst it makes total sense to put the largest investors in charge of identifying the best board candidates, remuneration and the culture of the organisation are closely entwined and are the ongoing responsibility of board and CEO and cannot be outsourced to investors without making them insiders.
“Without changing the membership of the remuneration committee I would broaden its terms of reference to include not just remuneration, but also things like culture and succession,” he said.
But the Swedish corporate governance model which is held as gold standard has not proved infallible, racked by a series of financial scandals in recent years. Last year, forestry group SCA raised an outcry over the use of corporate jets by executives and their families. Swedbank lost its chairman and CEO after a property scandal and Nordea’s conduct in helping clients with offshore investments was called “shameful” by Prime Minister Stefan Lofven after it was leaked in the Panama Papers.
But Philp argued that the shareholder nominations committee itself emerged as a very effective structure from the controversies. “In the case of Swedbank for example, shareholders acted swiftly to remove the chairman and renew the board,” he said.