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A sounding board

11 December 2016 by Anthony Hilton

A sounding board - read more

A stakeholder committee would be valuable, says Anthony Hilton

The Conservative MP for Croydon South, Chris Philp, packed out one of the larger committee rooms of the House of Commons when he presented his proposals for the reform of corporate governance. He wants to elevate the nominations committee into something more effective and relevant.

Currently large listed companies have a nominations committee and its job is to identify candidates for board positions, but Philp believes its workings are too dominated by the main chairman.

Nominations committees rarely block the chair’s nominees and even more rarely put forward someone the chair does not like. The result is boards that are too much in the chairman’s own image, which are too deferential, lacking both the essentials of diversity and the willingness to challenge.

The novelty in Philp’s approach is that he would replace the nominations committee with a shareholder committee to wrest power from the chairman and give it to the shareholders. Its members would be representatives of the five largest long-term shareholders, or the nearest to the five who would agree to do the job.

This committee would nominate candidates for the board but it would also interrogate the board on matters of strategy and make key decisions on senior executive pay. He hopes to force shareholders to take their ownership responsibilities seriously by giving them a structure which allows them to exert huge influence over how the business is run.

There is, however, one serious philosophical flaw in the plan which has been highlighted by Charlie Geffen, a solicitor who was formerly senior partner at Ashurst and who now chairs the corporate practice of Gibson Dunn & Crutcher.

In a recent submission to the BEIS Committee, Geffen wrote that ‘the main challenge facing boards is to have the confidence to recognise that the interests of the company are not the same as the interests of the current shareholders. Shareholders owe no duties to the company they own and by their nature are transient owners of the company. They have the power to change the board and sell their shares. Directors are responsible for the long term interests of the company. The distinction matters’.

This is the key point. Most of the ills of big business can be traced to a surfeit of zeal in trying to deliver shareholder value.

The justification for excessive pay is the hope that it will deliver share price performance; the justification for tax avoidance is to leave as much profit as possible for shareholders; the justification for squeezing suppliers, pushing back on employee benefits and over-charging customers is to improve profit margins. The justification of shelving investment is to avoid near-term damage to earnings.

Behind all these failings is a board which has not struck the right balance between delivering for shareholders and delivering for the other stakeholders.

This is why the Philp proposals are lacking. Giving more power and authority to shareholders via a shareholder committee is going to make it even harder for boards to abide by their long-term duties to act in the best interests of the company when these might clash with the short-term interests of shareholders.

Geffen suggested that companies should instead establish a ‘stakeholder committee’, to help boards ‘focus on the best interests of their company, as opposed to the short-term interests of some shareholders and assist them in engaging with their communities.’ Boards would remain accountable to shareholders and stakeholder committees would sit alongside them, not above them.

In terms of composition, he suggests the committee could have representatives of shareholders, employees, pension funds, customers, suppliers and other community interests. Members could be proposed by the board and approved by shareholders and would have the right to be consulted on major board decisions but would not have the right of veto. They would challenge boards and afford them the cover they need to resist pressure from shareholders for short-term results when this would divert focus from the long-term interests of the company.

Geffen could be on to something here. Most boards do want to do the right thing but given the limits on the flow of information it is often difficult for them to know when considering an action what the right thing is, what negative unforeseen impact it might have or what other options there might be.

A stakeholder committee, if properly constituted and chaired, would at least give them a sounding board and its advice might save the board from doing things which might later come back and bite. In the current climate that could have considerable value.

Anthony Hilton is Financial Editor of the London Evening Standard

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