Improved US governance and share ID

The New York Stock Exchange Commission on Corporate Governance has delivered its views on the way forward on corporate governance. After a year-long investigation it has published ten key principles for what it calls “solid governance”. It signals a move away from a prescriptive rules-based governance regime that has been the hallmark of previous efforts, to a market-based, principles approach. This is very refreshing.

The principles are very broad, and allow issuers and their IR teams the freedom to develop a governance communication strategy which suits them and their investors.

It is also interesting that when you consider that agreement has been reached on core corporate governance principles between such a wide variety of stakeholders, ranging from issuers, to investment banks, to investors, corporate governance agencies and regulators.

The second point of interest is that this is yet another nod in the direction of improved shareholder disclosures. Hard on the heels of the SEC’s review of the OBO/NOBO regime, the NYSE code calls for improved shareholder ownership transparency - with this principle: “A critical component of good governance is transparency, as well governed companies should ensure that they have appropriate disclosure policies and practices, and investors should also be held to appropriate levels of transparency, including disclosure of derivative or other security ownership on a timely basis.”

As the European Commission continues deliberating refinements to the Transparency Directive in the area of major shareholdings notifications, its great to see the US (finally?) paying attention to the imbalance of corporate and investor disclosures.

Board evaluation: what to share publicly?

Yesterday I was asked to the ABI Investment conference, to join a panel on board evaluations. My bit was about communicating the result.

It is an interesting dilemma. At one level the board evaluation is a great opportunity to communicate with long term shareholders (and the conference obviously was largely focussed on them, rather than the range of short term holders). Communicating an understanding of how the board works, and how sustainable growth over a period of time is built.

As always, the distinction is between ‘disclosure’ and communication. Discussing the fact of the evaluation and its mechanics of the evaluation – how it was facilitated etc - is limiting. Process and systems can only get you so far.

However, taking a ‘broadcast’ approach of the meat of the evaluation can be challenging. As one speaker commented, the effectiveness of any review –whether conducted for an individual or a group such as a board – is damaged if the result is to be discussed in public. Especially since the review will want to examine people issues, look at the outcome of decisions taken, the chemistry how the board works, the extent to which the culture allows (encourages) challenge to the established view. Getting board buy in – especially from overseas directors – under these conditions is tough.

These soft issues are really difficult to discuss effectively in public. Which is why one senior institutional investor commented “boards don’t publish anything useful in the annual reports”. Another commented that there was little substitute for the fireside chat, which rather ignores the investors NOT known to the company.

There are things that can be done. Creating a summary of recommendations resulting from the review, and tracking and reporting on them afterwards is effective. Succession planning and discussion of the rationale for appointment of new directors were both discussed.

Nonetheless, these disclosures are still about saying to investors ‘we have done these things: now trust us’.

Engagement on governance issues by debt holders?

Hands up, who has heard of the European Federation for Retirement Provision? No, didn’t think so. And yet they have made a really important point in their contribution to the ongoing EU-wide stewardship debate. Governance – and the ES bit – should not just be about shareholders, it should include bond holders as well.

What are – or should be – the appropriate levels of corporate governance involvement by corporate debt holders, and what would constitute an acceptable IR strategy for engaging debt holders?

First, the scale of the problem. There has been a noticeable shift in pension funds’ investment strategies. The trend for UK pension funds to include investment in bonds, and particularly corporate bonds, has been apparent for the past few years. As the pension time bomb ticks, bonds are increasingly seen as a better match for the funds’ liabilities, and pressure to match those liabilities has increased from regulators, sponsors and trustees.

Meanwhile, “engagement” is largely seen as being about equity, but what if an investor’s equity strategy on governance and other issues is different from its debt strategy? We recently saw the corporate bonds of BP being shorted for example.

How much engagement should companies have with debt investors, when corporate bond holders do not get a vote at the AGM? Where do bond holders have leverage over companies on environmental, social and governance issues?

The easy answer is just to accept that bond holders don’t vote and do nothing. After all, lenders should be entitled only to repayment of the agreed amounts. Since they have no future direct claim on the future profits of the business, why should they have a voice on how the company is managed for the long-term?

But if trustees investing in corporate bonds believe they should engage with companies, the time that corporate bond investors can do this is when the company issues a bond. Will we see debt investors asking for covenants, that are normally linked to financial ratios, ask for other “social” rated covenants?

As defined benefit schemes mature, moving more into corporate bonds, and investors are “encouraged” by Stewardship Codes to engage with companies, there needs to be consideration on engagement for corporate bond holders. Time to dust off that debt IR strategy.