Lines are being drawn and sides picked for what looks like a fight over coming months for the UK corporate governance crown. But it’s not taking place at beleaguered retail groups Sports Direct or British Home Stores (BHS), where high-profile failures have dominated headlines, but rather in Parliament and City offices, where warring sides are squaring up to each other.
Scores of investors – first Legal & General, then Aberdeen Asset Management and Royal London, and most recently Hermes – have joined what has become a fierce investor revolt ahead of Sports Direct’s AGM on September 7, with many targeting the firm’s board of directors and chairman, Keith Hellawell, for removal.
Others are lending their support to a shareholder resolution filed by Unite, the UK’s largest trade union, and vocally supported by the Investor Forum, which calls for the Sports Direct board to commission an independent review of the firm’s human capital management strategy.
On the surface, this seems like the swift response of a functional corporate governance system to a problem that has reached critical mass – with investors, workers and other market participants all working towards sorting out Sports Direct and its treatment of staff. Indeed, there are already successes: Sports Direct has committed to provide casual retail staff with guaranteed hours instead of ‘zero-hour contracts’, and pay them above the national living wage. Unfortunately, both measures were already previously mandated by UK employment law.
Other targeted areas, such as worker representation on the retail group’s board, control of pay for its board members and executives, chime with new Prime Minister Teresa May’s vision for tighter governance controls for UK-listed companies. “It is not anti-business to suggest that big business needs to change,” she famously said.
The way forward is not clear, however. In one corner of the UK corporate governance arena there’s John Kay, one of the country’s leading economists and author of the government-backed Kay Review of financial markets, out of which the Investor Forum was born.
He wrote in August that failures at Sports Direct and BHS indicated that the “era of shareholder value is coming to end”, with shareholders prompted to ‘do good’ in relation to sustainable investment and stewardship, rather than simply seeking good returns. The Investor Forum itself shortly afterwards announced plans to develop a framework for collective engagement for shareholders, potentially boosting the influence they can exert over listed companies and allowing for defter negotiation of international shareholder law.It sounds like a good idea – work together and investors can boost their corporate sway – but Kay and the Investor Forum are not universally supported, despite their noble aims. Several MPs questioned the conclusions of the Kay Review in 2013, including Lord Myners, former Financial Services Secretary under Gordon Brown’s government, and Hermes’ Colin Melvin. At the time Myners described Kay’s recommendations as lacking practical application “beyond wishful thinking”, while Melvin called plans to bring together CEOs as “impractical”.
Myners himself is supporting Chris Philp, another UK MP and member of the Treasury Select Committee, whose new platform promises “transformational” corporate governance reforms, which aim to empower shareholders and create Swedish-style nomination committees, among other measures. Though welcomed by bodies like the Pensions and Lifetime Savings Association and PIRC – as well as superstar fund manager Neil Woodford – reaction to the changes was mixed, at best.
Mike Fox, head of sustainable investment at Royal London Asset Management, was one dissenting voice. He called plans to introduce an annual, binding say-on-pay vote as potentially detrimental, and that other changes could, in fact, encourage short-termism.
With such a fractured front, investors are still finding that their actual power to transform companies is a little underwhelming. Instead, it’s about sending a message. As Angeli Benham, Legal & General’s Corporate Governance Manager told RI, “a new slate of directors by itself is not going to resolve the issues at Sports Direct”, but it does iterate a vote of no confidence and a desire for change.
Legal & General has, Beham also noted, been engaged with Sports Direct’s board since 2007 when it was first publicly listed, working with board members, management, shareholders and other stakeholders to encourage “positive changes” despite underlying problems remaining.
“We have voted against the re-election of the Chairman for the past two years, which did not bring about sufficient change so far”, she added. “Therefore, we have escalated our concerns this year by voting against the re-election of all of the non-executive directors and explaining our votes publicly.”
It’s unsurprising that investors have been working for years on these issues when, ultimately, they do not seem to have much power to instigate real change – or in some instances even decide on their endgame.
Maybe Teresa May needs to arm UK shareholders with the ability to collaborate, or the ability to transform companies that need a guiding, responsible hand. Or maybe she just needs to give them the ability to agree on what the best way forward might be.