Does regulation prevent firms from adopting optimal governance rules?
An open letter from the Capital Markets Industry Taskforce (CMIT) proposes a reset of the UK's approach to corporate governance.
The letter argues that the current governance and stewardship regimes must evolve to ensure their relevance to the competitiveness of the markets they apply to. The CMIT recommends:
- Establishing a new "investor and issuer forum" to facilitate more effective ongoing engagement between boards and their shareholders.
- Removing the stipulation in the Code that requires a company to explain its actions if 20% or more votes are cast against a proposed resolution. Stewardship should not be measured by the number of votes cast against management. It discourages companies from innovating and trying outside proxy advisors' frameworks.
- Relaxing the dilution provisions contained in the Investment Association's (IA's) Principles of Remuneration, which they argue are outdated and limit the ability of many issuers to reward their people and remain competitive.
- Removing the guideline preventing companies from issuing 10% of shares to employees. If companies instead gave salary rather than equity, this would still be costly to shareholders but have no incentive effects.
- Removing the current provisions in the IA's Principles of Remuneration that the discount rate for moving from Long Term Incentive Plans (LTIP) to restricted share awards should be at least 50% of the normal grant level. A one-size-fits-all discount discourages the movement away from LTIPs in cases where LTIPs have the most manageable conditions.
The CMIT proposes a set of revised governance principles for both issuers and investors, emphasising the promotion of a company's success, accountability of the board, and the integration of governance and fund management functions within an investor.
Some may argue that relaxing dilution provisions and removing the stipulation for significant votes against resolutions could reduce shareholder rights and protections, highlighting the need for further discussion of these recommendations.