Autumn Term, 2010-11
Essay: (20% of total module assessment).
Submission Deadline: 29 November 2010 by 3.00 pm.
Critically evaluate this statement in the light of empirical evidence on shareholder activism in the UK and elsewhere, like the US. Also, comment on whether you think the latest Stewardship Code for institutional investors is likely to be effective in increasing shareholder engagement and good governance in the investee companies in UK.
Total essay length: 1500-2000 words max.
Suggested Approach to Essay:
You could start by defining what shareholder activism is and what it encompasses; then talk about the various types of shareholders, their modes of engagement, evidence on shareholder activism, concluding with a discussion on the likely effectiveness of the Stewardship Code and its recommendations for improving governance of companies.
Some Suggested References:
Solomon (2010), relevant chapter
Kim and Nofsinger (3rd edition), relevant chapter
Black, B and Coffee, J (1998) Hail Brittania: Institutional investor behaviour under limited regulation, Michigan Law Review, 92
Gillan, S and Starks, L. (1998) Survey of shareholder activism: motivation and empirical evidence, Contemporary Finance Digest, (Autumn, 1998) 2, 3 10-34
Kahan, M and Rock, E.B (2007), Hedge funds in corporate governance and corporate control, University of Pennsylvania Law Review, 155, 5
Not more regulation…..more responsibility, Independent on Sunday, 25 October 2009
In-depth corporate governance – investors show poor attendance record, FT Business, 9 November 2009
Financial: Investors get tough over bosses' tax deals: ABI move comes as 50p rate is introduced in April: Shareholder body also warns over stock awards, The Guardian (London) - Final Edition, January 9, 2010
Between the Lines: Empowering shareholders is long-term answer to short-termism The Scotsman, December 2, 2009, Wednesday, Pg. 4,
This list is only indicative and does not by any chance preclude the use of further material.#p#分页标题#e#
1. Shareholder activism resource
2. MORE DEVOTION DEMANDED OF DIRECTORS
BYLINE: VICTORIA MASTERSON
SECTION: NEWS; Pg. 72
LENGTH: 1513 words
A S THE annual general meeting season gets under way next month, board directors may rightly be more nervous than usual about their ritual bun-fight with investors. The banking crisis has prompted a fresh wave of boardroom scrutiny, with government-led calls for shareholders and non-executivehttp://www.ukthesis.org/dissertation_writing/ directors to sharpen their teeth. Regulators are currently consulting on a raft of changes including a new stewardship duty on institutional investors to play a more active role as business owners; new powers for non-executives to monitor risk and remuneration; and allowing shareholders to put whole boards or their chairmen up for reelection annually.
This renewed focus on corporate governance has far-reaching implications for all sectors and means more scrutiny than ever on the responsibilities, decisions and actions of company directors in both the PLC and private arenas. "The regulatory regime in the UK has, for obvious reasons, become much more aggressive in its approach to governance and regulators are now looking at all sorts of areas to make sure the people who make decisions are responsible for them," explains Joyce Cullen, chairman of law firm Brodies. "I think we'll see far more people coming for advice before they take on the role of director, rather than waiting until a problem arises. Prevention is better than litigation, potential prosecution as an individual or being struck off as a director. We're trying to help clients avoid all of that."
Cullen and her team have written and enacted two 'boardroom dramas' to highlight scenarios directors might come across. The ten-minute plays showcase seemingly routine board decisions which, six months later, produce disastrous consequences. They include the sign off of draft accounts containing a large debt due to the company on the balance sheet - it later emerges the sum was in dispute over the supply of defective goods and will not be paid, which pushes the company into insolvency.
Cullen explains: "Under the new Companies Act 2006 it is now possible for shareholders of that company to bring an action against individual directors rather than relying on the company itself to do so. We've not seen a huge increase in that sort of action so far, but I think shareholders are now much more aware of what their individual directors are doing and are much more willing to take action against them if they see a problem."
Allowing shareholders to petition the court to bring these 'derivative claims' was one of the most significant changes of the overhauled Companies Act, which completed its staggered implementation in October 2009. The act also sets out a new statutory code of directors' duties, obliging directors to take a wide range of external factors into account when making company decisions. These include a 'duty to promote the success of the company' - not just for its members as a whole, but also with regard to employees, suppliers, customers, the environment, the community and the likely future impact of any decision. #p#分页标题#e#
Banks and other financial institutions are at the blunt end of government efforts to clean up the boardroom, with directors facing a raft of additional rigours. These include new legislation on remuneration from the Treasury and a new code of practice on remuneration policies from the Financial Services Authority. "The fundamental change needed is to make the boardroom a more challenging environment than it has often been in the past," says Sir David Walker, the senior Morgan Stanley adviser hired to overhaul corporate governance in UK banks and financial institutions. "This requires nonexecutives able to devote sufficient time to the role in order to assess risk and ask tough questions about strategy. Institutional investors should be less passive and prepared to engage earlier if they suspect weaknesses in governance. They enjoy the privilege of limited liability whereas taxpayers have ended up assuming unlimited liability in respect of the big banks. Early preventive medicine through shareholder engagement can save everyone time and money later on."
From June 2010, some of Walker's recommendations are expected to be enshrined in a revised Combined Code - the City's good practice guide on corporate governance. They include the annual re-election of the chairman or whole board; externally facilitated board evaluation reviews every three years; and measures to ensure performance-related pay is aligned to the long-term interests of the company and its policy on risk. To ensure the board is 'well-balanced and challenging' there are also proposals to incorporate new principles on the leadership of the chairman, the roles, skills and independence of the nonexecutive directors and their level of time commitment.
Although the Combined Code applies specifically to those with a stock market listing, the proposed changes will inevitably filter down to smaller companies quoted on the Alternative Investment Market and bring implications too for privately owned businesses. "A lot of the detail in the code isn't applicable to private companies but high level principles like having a proper balance on the board should probably apply to all organisations," suggests Financial Reporting Council spokesman Chris Hodge. He points out unlisted sectors including building societies and mutual insurers have already voluntarily adopted the Code's principles.
Danielle Harris, a professional support lawyer at Maclay Murray & Spens, welcomes the continuation of the Code's principles-based and 'comply or explain' approach. However, she acknowledges that, if revised in line with the FRC's proposals, the new Code will have significant implications for directors in a number of areas. "The changes to the Code place more emphasis on non-executive directors having the time needed to devote to their companies," Harris says. "The FRC didn't dictate a number of days but they are strengthening the Code so directors have to give sufficient commitment to companies. It is down to the remuneration committee when they appoint that director, and to the shareholders, to see that the board has directors who are giving sufficient time and attention to their role." #p#分页标题#e#
The proposed externally facilitated board appraisals will also carry cost implications, while putting either the chairman or the whole board up for re-election every year could have major consequences. "If they go down the whole board route, that's pretty significant," Harris suggests. "It could be quite disruptive. It's certainly giving shareholders some real teeth and a regular opportunity to use them."
Malcolm Wood, company secretary and general counsel at Standard Life, agrees a longer-term approach would make more sense. He says: "One change which looks likely to come in is the proposal that either the whole board should submit itself to annual election at the AGM, or the chairman should do so. Some companies already adopt this practice but it has been argued that the existing threeyear rotation provisions make more sense - especially when companies are encouraged to avoid short-term thinking http://www.ukthesis.org/dissertation_writing/and make thoughtful succession plans for the key positions in the company."
Another development likely to be adopted is the establishment of risk committees in banks and other financial institutions. Wood agrees this is a 'logical' step and one already being adopted by many companies in the sector.
With so much now expected of company directors, one recently established executive search specialist is launching a range of services for new and would-be directors, including skills-based training, board evaluation and peer-to-peer networking to share real boardroom experiences. Livingston James, which has offices in Edinburgh and Glasgow, believes there is a gap in the market for a range of director training, particularly for entrepreneurs and retiring blue chip executives who may be seeking a portfolio of external board directorships for the first time.
"Typically these professionals have reached the end of their career and probably have a pension and a choice in the kind of work they can do," explains Livingston James director Andy Rogerson, the former UK and Ireland chief executive of recruiter Hudson UK. "They come asking about a portfolio job and would like to be a non-executive but have never done it before. Is getting your first nonexecutive appointment the right time to start learning to be a non-executive director? No, it's not. There should be a structure in place before that stage to introduce what's expected of you. At the moment that doesn't exist."
Rogerson and his co-director Jamie Livingston, hope to build communities of directors who can support and mentor each other. "You want to be able to liftthe phone to ask someone whether they, or someone they know, has had to deal with a particular scenario before," Rogerson continues. "You shouldn't assume you'll know everything you need to know at the end of day one, or that you'll be able to make a decision based on previous experience."
board appraisals will also carry [...]#p#分页标题#e#
LOAD-DATE: March 2, 2010
GRAPHIC: Chris Hodge, Financial Reporting Council Chris Hodge, Financial Reporting Council
3. Risk control rises to the top;
Company boards are being forced to give more power to executives who monitor the dangers to their businesses, writes James Ashton
BYLINE: James Ashton
SECTION: APPOINTMENTS;FEATURES; Pg. 6
LENGTH: 965 words
Warren Buffett, the world's most famous investor, doesn't mince his words when talking about risk. In a recent letter to shareholders of Berkshire Hathaway, his investment vehicle, the "Sage of Omaha" poured cold water on the idea of beefing up boardroom risk controls to ensure companies don't go astray.
"If Berkshire ever gets into trouble, it will be my fault," he wrote. "It will not be because of misjudgments by a risk committee or chief risk officer."
With decades of experience, Buffett long ago excused himself from complying with the latest whims of corporate governance. After last summer's review of boardroom best practice in financial services by Sir David Walker, most other companies don't have that luxury.
Managing risk was meant to be at the heart of a well-run board. The financial crisis showed that often it wasn't. To address risk governance, Walker, a former Treasury mandarin, recommended that companies should establish a risk committee, appoint a chief risk officer, include a separate risk report in their annual report and accounts and draw on external consultants' advice when evaluating strategic moves such as acquisitions.
In the wake of the banking crisis, nobody argues that taking a fresh look at boardroom controls is not a good idea.
In fact, risk committees for banks are already mandatory in America. Even two years ago, 70% of American financial institutions placed the responsibility of oversight of risk with the board, up from 57% in 2002, according to Deloitte's Global Risk Management survey.
However, recruiters think that British companies still have a way to go to make Walker's suggestions effective.
"The recommendations just do not fit together well enough and need to focus on the big issue of behaviour more than rules that are seen as bureaucratic and inhibiting growth," said Noorzaman Rashid at Harvey Nash, the recruitment consultancy.
David Peters at Heidrick & Struggles, the headhunter, said: "Although it's certainly a useful framework, committees without requisite clout are just talking shops.
"The true test of whether companies are taking risk seriously is the seniority of the risk officer. Unless he or she is a board member, or reports direct to the finance director, chief executive or chairman, the company's commitment to tackling risk is questionable in our view."
The importance of the role seems to have taken root in America, and the role of a chief risk officer (CRO) is recognised at the highest level.#p#分页标题#e#
A survey last year by the Professional Risk Managers' International Association and Capital Market Risk Advisors found that 70% of CROs reported to the chief executive, 14% to the finance director, and 16% to the chairman.
Regardless of some misgivings, Walker's proposals have started to take effect in Britain. From this month, Standard Chartered, the emerging-markets bank, split its board audit and risk committee to fall into line. The group's CRO reports to Richard Meddings, the finance director.
Aegon UK, the life and pensions company, took a different approach. Late last year it appointed Mark Laidlaw, its finance director, as its first CRO. At rival Aviva, the role went to Robin Spencer, head of its Canadian business.
Rashid thinks that finding the right candidate to fill the risk role will quickly become challenging. "The problem businesses will face is the shortage of highly qualified and experienced CROs," he said.
"These people will need to be able to challenge the board's decisionmaking as well as behaviour that has contributed to the recent economic turmoil. Moreover, they will need to be clear about the new and emerging plethora of rules and regulations, which they have to advise on.
"The danger is that CROs may be seen as being too bureaucratic and lose the confidence of the board."
Of course, many banks already had CROs before the crisis. For example, Robert Le Blanc has been CRO at Barclays since 2004. Many others have been replaced in the past two years. The new breed have typically taken on greater powers.
Nadia Swann, financial regulation partner at Linklaters, the City law firm, has concerns about how Walker's idea of a CRO maintaining "total independence" can be fulfilled.
"How will this work in global structures where complex risk tolerances need to be developed in close conjunction with the business and where an ill-informed risk is more likely to be an imprudent one?" she said.
It also means greater responsibility on directors who must focus on the composition, remit and performance of the risk committee.
At the same time, the rethink of risk management calls into question the ability of non-executive directors to cope with additional responsibilities.
"The recent recommendations place stress-testing capital, monitoring liquidity and business model sustainability directly at the door of the boardroom," added Swann. "Do all the directors on the board feel they have the skills and experience to take this on?"
Another potential pitfall is focusing so much on risk that it becomes an issue only for the risk committee, instead of a concern for the whole board. Peters at Heidrick & Struggles believes the solution is for directors to address the culture that runs through a company - perhaps
LOAD-DATE: March 15, 2010
GRAPHIC: Going against the flow: Warren Buffett believes that the control of risks is the ultimate responsibility of the chief executive
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