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The importance of independence

30 January 2017 by Henry Ker

The importance of independence - read more

Independent board members are key to engendering public trust in UK business

In December 2016, 21st Century Fox tabled a takeover bid for Sky. 21st Century Fox is currently Sky’s biggest shareholder, controlling 39%, and its offer for the remainder of the company stood at around £11.2 billion, or £10.75 a share.

However, the bid raised concerns with several of Sky’s minority shareholders about the independence of some of the company’s directors. Sky’s Chairman James Murdoch (Rupert Murdoch’s son) is also Chief Executive of 21st Century Fox.

There had been mounting speculation that a bid by 21st Century Fox was imminent and it is not the first time Rupert Murdoch has looked to acquire the remaining 61% of the UK’s largest pay-TV broadcaster. He made a full bid for the company in 2010 which was later abandoned as Murdoch’s News Corporation dealt with the fallout from the News of the World phone hacking story.

Appropriate appointments

Under the Companies Act 2006, the role of the company’s directors is to act in the interest of all members of the company – whether large or minority shareholders. This is one of the reasons why independent directors are so important to the UK’s system of governance – the legal obligation is not just to protect a company and its shareholders from any potential subjective views of the executive team, they also ensure the interests of minority shareholders are heard and protected.

Shareholder engagement is a vital part of good governance and although clearly the primary shareholder is on-board with the proposed deal, it is interesting that some of the minority shareholders feel that they must raise in public their concerns about the bid.

Commenting on the takeover bid, Alison Kennedy, Governance and Stewardship Director at Standard Life Investments, told Governance and Compliance: ‘We don’t believe it is appropriate that the CEO of a 40% shareholder be appointed as the chairman of the company, particularly when that shareholder is known to harbour ambitions to bid for the company. As things stand, the interests of 21st Century Fox are not aligned with those of the minority shareholders in Sky plc.

‘On behalf of our clients, we voted against the appointment of James Murdoch as Chairman in 2011. We did the same at the AGM in October 2016. We also voted against the re-election of the members of the Corporate Governance and Nominations Committee as we were not convinced that the nominations process for the appointment of the Chairman was sufficiently robust.’

In total, 28.45% of shareholders voted against Murdoch’s reappointment at the AGM.

The UK Corporate Governance Code, states ‘the chairman should on appointment meet the independence criteria’. These criteria are clearly set out in provisions B.1.1.

The Code asks that ‘the board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination’; these include if the director ‘has close family ties with any of the company’s advisers, directors or senior employees’ or if they ‘represent a significant shareholder’, among other things. Although the principles of the Code of course operate on a ‘comply or explain’ basis and are not legally binding in any way.

However, James Murdoch does not consider his role as Chairman to be an independent one. Speaking to The Guardian after Sky’s 2016 AGM, he dismissed concerns around his role saying ‘I’m not qualified as independent because I’m not an independent director, being associated with the major shareholder’ – the Sky board does have six designated independent directors, including Senior Independent Director, Andrew Sukawaty.

Shareholder foresight

It is interesting to note that shareholders raised issues with Murdoch’s appointment back in January 2016 over this very situation. Ashley Hamilton Claxton, Corporate Governance Manager at Royal London Asset Management (RLAM – a minority independent shareholder which holds 6.2 million shares in Sky, worth around £62 million or 0.36% of the company), commented: ‘His appointment is a major concern because the chairman should be independent. And particularly so in this case as Fox is such a significant shareholder that has shown an interest in taking over the company. It is surprising the board has chosen to elevate him to the level of chairman again […]

‘Should Fox make a bid for Sky, investors need a strong independent chairman to protect the interests of minority shareholders […] If there was a situation where a vote was tied we question what extent the chairman will act in the best interests of all shareholders, he is conflicted.’

This principle of independence was the reason for Standard Life Investments’ opposition at the AGM to Murdoch’s appointment as Chairman. It is also the reason behind RLAM’s opposition to his original appointment and the issue has again come up.

In any situation where the objectivity of a company board is reasonably called into question, the onus is on the company to be transparent and demonstrate independence.

Interests of shareholders

However, Sky has been clear that it has formed an independent committee to consider the takeover proposal, to rule out any potential conflicted directors from involvement. The independent committee comprises the members of the Sky board, including the Group CEO and COO/CFO, minus those with connections to 21st Century Fox (Murdoch and NEDs John Nallen and Chase Carey).

Sky stated in its announcement about the recommended cash offer, ‘each of whom the Board of the Company considers to be free from conflicts of interest with regard to the Proposal. The members of the Independent Committee will act in accordance with their duties as directors and, in particular, in order to protect the interests of shareholders’.

The last comment is important, given there are shareholders questioning the offer. Regarding transparency around the takeover bid, Richard Marwood, Senior Fund Manager at RLAM, said: ‘Following the £10.75 [per share] offer for Sky from 21st Century Fox, we would urge the independent committee of Sky directors, who recommended that shareholders accept the offer, to share more information on the independent financial advice that they based their agreement on. Such disclosure would help shareholders assess the fairness of the offer and give greater confidence in the independence of the committee in the
bid process.’

Independent directors

What the Sky/21st Century Fox takeover reminds us about is the importance of independent directors to the UK corporate system. Enshrined in the Corporate Governance Code, the notion of independent directors taking an objective view is vital to the success of public companies and works in tandem with the legal duties that directors have under the Companies Act 2006 for the company to be run in the interests of its members.

If we are to avoid corporate scandals and accusations of self-interest, being able to show that members of the board are independent and unprejudiced is a key component of engendering public trust in UK business.

It is no coincidence that developing corporate governance systems around the world are adopting elements of the UK system. For example, the Japanese Corporate Governance Code, introduced in 2015, added a requirement for two independent directors on public corporate boards.

If a company is involved in a potentially contentious business decision, whether a takeover of merger or something else, being able to fall back on its independent directors to ensure that no conflicted motive is involved is vital to avoiding accusations of self-interest or misconduct.

It is worth noting, should Sky be bought out by 21st Century Fox and become a wholly-owned subsidiary rather than a UK listed company, it would no longer be under any obligation to ‘comply or explain’ with the UK Corporate Governance Code. However, as there is so much attention on the governance of private companies and pressure for them to adopt similar standards of governance, with public trust in organisations at something of a nadir, they may still want to consider some of its principles, especially given Sky’s profile and role as a leading UK company.

Sky declined to comment on this article.

Henry Ker is Deputy Editor of Governance and Compliance

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