Defined over 25 years ago by the Cadbury report as “the system by which companies are directed and controlled” corporate governance and its best practice has continued to evolve. Cadbury sought to strengthen the accountability of boards to their shareholders. Except for private equity investors the close connection between the owners and managers of companies seldom exists nowadays. This “agency problem” arises as more companies have diverse and dispersed ownership. Not just owners using custodians often with complex and opaque nominee structures but hedge funds and traders many of which may be somewhat transient owners.
The company board is responsible for strategy, communicating this to shareholders and ensuring the appropriate allocation of resources. This all requires good board oversight from effective non- executives.
In part as a consequence of the more disparate ownership structures shareholders often lack effective mechanisms to fully engage with the board when the wrong strategy is being pursued, execution flawed or resource allocation questionable. The company can all too easily be under “management capture” particularly if the non-executive directors for whatever reason are not effectively challenging the executive agenda. The symptoms may present as issues of remuneration, succession and lax evaluation of skills and competencies in the boardroom.
Shareholders, proxy advisers and activists might vary in the mode of engagement with boards but the issues tend to coalesce around common themes. Votes on remuneration policies, pay and share awards invariably feature as do board powers on share issues for cash. The real levers to this are in the increasing attention being paid to board make-up, competence, mix of skills and diversity and the accountability of individual directors. This often puts non-executive committee chairmen – particularly nomination and remuneration- in the firing line for challenge to re-election. In addition non-executive board attendance or excess non-executive board commitments elsewhere are being scrutinised much more these days.So when shareholders seek to challenge boards the non-executive directors will often be in the front line.
Boards led by progressive non- executives are now recognising the need for preparedness and to take the initiative in shareholder engagement. This is achieved by a careful and systematic approach working hopefully to a timescale of the board’s choosing. Such an approach should provide for a full review of governance policies and their implementation as well as ongoing corporate communications so as to fully meet the requirements of the Annual Report and Annual General Meeting – the first base for effective shareholder engagement.
Activism has now crossed the Atlantic and is becoming an increasingly important part of the UK corporate scene. Shareholders which have hitherto been seemingly patient even acquiescent can be party to a strong and even emotional challenge; often arising without outward signs of an intention to take action. Sheer frustration can be the driver to a significant change of stance.
Active shareholders which shift to being activist are often highly organised, able to move quickly and seemingly without notice. They are often well connected with major investors as well as proxy advisers and frequently have ready access to capital to increase holdings and influence.
By contrast many company boards would be caught completely off guard by an activist approach or campaign. Few boards have the experience necessary and are well enough prepared to handle such situations effectively.
All those years ago Cadbury sought to strengthen the accountability of boards to their shareholders. Today the progressive non-executive recognises the importance of the board taking the initiative for more regular engagement with shareholders and to increase preparedness should an activist strike.