UK’s divisive annual director elections proposal gets OK

Move goes ahead despite opposition from Hermes, Railpen and USS

The UK’s corporate reporting watchdog has issued a new recommendation that directors must face annual election.
This is despite opposition from some of the country’s leading governance advocates such as Hermes, Railpen and the Universities Superannuation Scheme who argue it will increase short-termism.
The Financial Reporting Council today unveiled its new 37–page Corporate Governance Code, a re-working of the existing Combined Code. One of the key changes is that FTSE350 directors should face a yearly vote, on a comply-or-explain basis, to “increase accountability”.
Hermes, the asset manager owned by the BT Pension Scheme, has said it “strongly opposed” the move, arguing that most productive change happens through sustained dialogue and not in the “febrile” atmosphere of an annual meeting.
Fellow asset owners Railpen and USS expressed similar views. Railpen worried that annual elections could undermine independent directors.
The National Association of Pension Funds, theConfederation of British Industry and Standard Life Investments also came down in favour of the current system of three-yearly election.
But other asset managers such as BlackRock, F&C Investments, Legal & General Investment Management – as well as the Local Authority Pension Fund Forum – had endorsed the idea.
F&C backed the FRC’s decision, arguing it “will strengthen director accountability and provide a mechanism for shareholders to give more specific and refined input to companies through the voting process”. Proxy voting consultant PIRC welcomed the development, having campaigned on the issue since 1999.
“The changes we have made are designed to reinforce board quality, focus on risk and accountability to shareholders,” said FRC chair Baroness Hogg. “In return, we look to see a step up in responsible engagement by shareholders under the Stewardship Code, on which we have consulted and aim to publish by the end of June.”