Pension funds’ annual director elections letter exposes rift

Critics fear move threatens consensus on corporate governance code

A contentious rift has emerged between some of the UK’s largest pension funds and asset managers over a letter written to the directors of UK corporates encouraging them to explain and opt-out rather than comply with the annual re-election of their board directors.
Fund managers and corporate governance specialists told that they had been surprised by the letter sent to directors of FTSE 350 companies by two of the largest UK pension schemes USS and Railpen, and Hermes, the pension fund manager. It said they would back companies that give ‘reasonable’ explanations against an annual board vote, because of concerns that the yearly challenge would “engender a short-term culture with the risk of well-performing boards being distracted by short-term voting outcomes.”
The letter added: “If we agree that the explanation is valid and reasonable, we would hope to support the majority of companies adopting this approach.”
The annual re-election of company boards was one of the key recommendations of May’s 37-page revised Combined Code on Corporate Governance. The code operates on a comply-or-explain basis.

However, one governance specialist said: “This has not gone down well with a lot of people in the governance world. There’s a real fear that it will break the consensus of the code.”Anita Skipper, corporate governance director at Aviva Investors, said: “We’re not sure what they (USS, Hermes and Railpen) are basing their argument on, and it would be interesting to know. A lot of companies already hold annual elections and many companies tell us that this does not introduce any element of short-termism in their approach. Within FTSE350 companies, it would have to be truly exceptional to get more than the 50% required to remove a director.” Another fund manager noted that support for the annual director elections was one of the first times that perceived mainstream houses such as Blackrock and Legal & General had taken publicly strong stances on holding company boards to account. But a pension fund supporter of the letter, said: “We don’t think asset managers have got it right on this one, and as the ultimate shareowners we support the three-year dialogue/vote period with company boards as being adequate and practical.” The split is notable because UK corporate governance rules are regularly used as a model for international governance regulation.
Among business groups there was support for the Railpen/Hermes/USS letter. Roger Barker, head of corporate governance at business lobby group the Institute of Directors, said the move was consistent with the ‘comply or explain’ spirit of the code. He added that the IoD’s members wouldn’t have chosen annual elections, but said: “we can live with it”. Too often, he said, companies blindly apply the code without thinking about it – and that most investors are relatively passive and non-engaged.