Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, March 13, 2008

Explaining rather complying can be good business for both investors and issuers

Studies from time to time show the levels at which FTSE 350 companies “explain” rather than “comply”. Frequently they show upwards of 40% of companies failing to abide by the spirit of the Combined Code.

So what to make of 2 recent events.

First, the Marks and Spencer decision to to promote its chief executive to executive chairman, extending his tenure by two years. Second an ABI study indicating that companies with the best corporate governance levels in the FTSE All-Share have produced returns 18 pct higher than those with poor governance,

The M&S move runs contrary to the UK’s Combined Code that recommends a chief executive should not move to become chairman of the same company. The move prompted the Association of British Insurers (ABI) to issue an "amber-top" warning to members saying M&S needed to provide a "convincing explanation".

And this comes days after the ABI itself issued research showingthat companies that lose support of their institutional shareholders over boardroom structure and pay perform less well than those whose corporate governance practices are supported by investors.

The study suggests that companies with the top corporate governance records produce returns 18% higher than those with poor governance over a four-year period.

The ABI noted that "Our members' interest in governance has always been driven by their desire to generate value for policyholders over time. The results confirm our belief that good governance produces better returns with less volatility - something that long-term savers need.”

Nonetheless Marks and Spencer’s institutional investors appear to differ in their views with some accepting the breaking of normal standards if it means Rose, the man they credit with overseeing an dramatic turnaround in the last three years, stays at the business and succession speculation dies off. But others – including the normally silent L&G – have concerns.

So it appears that compliance with the (to date) voluntary Combined Code is good business for both issuers and investors – but there are exceptions that prove the rule. Which itself argues that the Code’s “comply or explain” mechanism is far superior to the hard coded rules of SOX. Provided of course the “explanation” is well done.


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