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November 1 2016
Tomorrow’s Global BusinessPart Three: Governance & Regulation
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All above boardInsideCompanies face pressure to recruitmorewomen directors and communicate better with shareholders
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2 | FTReports FINANCIAL TIMES Tuesday 1 November 2016 FINANCIAL TIMES Tuesday 1 November 2016 FTReports | 3
Tomorrow’s Global Business Governance & Regulation Tomorrow’s Global Business Governance & Regulation
T he zeal to change corpo-rate culture shown bythe UK’s prime minister,Theresa May, and hergovernment has caught
company bosses off guard. But theproposed policies that have causedmost consternation are the ones play-ing on a raw human emotion to whichBritish sensibilities are especiallyprone:embarrassment.
Naming and shaming has become apopular tool for regulators aroundthe world. From clamping down onpay discrepancies to trying to makesupply chains more ethical, policy-makers have attempted to influencebusiness practice by exploiting com-panies’ obsession with protectingtheirbrand.
Such policies are popular with poli-ticians as they allow them to affectcorporate behaviour without appear-ing too heavy-handed. In straitened times, they also limit the need tocarryoutcostlyenforcement.
When Mrs May launched her cam-paign to become UK prime minister
in July, she said she wanted to bring inrules to make companies reveal howmuch their chief executive is paidcompared to the average worker. Thepolicy is based on one brought in lastyear by the US Securities andExchange Commission, which regu-latesmarkets.
The idea behind the SEC’s so-calledpay-ratio rule is to expose companieswhere executives earn vastly morethan average workers compared totheir peers and to embarrass themintochangingtheirpaypolicies.
Yet on both sides of the Atlantic,pay-ratio rules have been criticisedby business groups for being toocrude. “The good news is there’s onefigure everyone has to produce. Thebad news is it’s reductionist,” says RicMarshall, executive director of MSCIESG Research, which analyses globalgovernancetrends.
Companies often react badly tostate-sponsorednamingandshamingrules. This was highlighted by busi-ness groups’ response to UK homesecretary Amber Rudd’s proposed
rule forcing companies to work outwhat proportion of their workforce isforeign and then share that informa-tion with the government. Whenannouncing the policy at last month’sConservative party conference, MsRudd indicated companies wouldhave to make their findings public —infuriating business leaders andlobbygroups, intheUKandabroad.
Adam Marshall, acting director-general of the British Chambers ofCommerce, responded that busi-nesses “would be saddened if they feltthat having a global workforce wassomehowseenasabadgeofshame”.
Such was the outcry against thenaming and shaming aspect of thepolicy that Conservative politicians
were sent out to television studios toclarify that companies would not, infact, be forced to publish their ratiosof foreign workers. The data would beused only to help inform governmentpolicy, they insisted.
UK experiments with using thethreat of embarrassment to regulatecompanies have not always been socontroversial.
Earlier this year the governmentbrought in rules that will requirecompanies with more than 250workers to publish by April 2018 themedian and mean differencesbetween what men and women earn.Women earn a median 19.2 per centan hour less than men in the UK.Companies will also have to publishnumbers of men and women in eachsalaryquartile.
When it announced details of theplan in February, the governmentsaid it had not decided whether itwould publish league tables to iden-tify the worst offenders. Yet someemployers are fearful that such dis-closures will make them vulnerable
Politicians playthe shame game
Companies keen to protect their brands aremore likely tochange corporate behaviour under pressure, saysOwenWalker
I tmayhavebeeninspired judgment—orperhaps justaremarkablecoincidence—thatBritishprimeministerTheresaMaysetouthercommitmenttoreform
“irresponsiblebehaviour inbigbusiness”onlydaysbeforeMikeAshleyandthenSirPhilipGreenhadtheirreputationsshreddedbyUKparliamentarycommittees. InMrAshley’scase itwas forthe“Victorian”treatmentofemployeesathisretailer,SportsDirect,whileSirPhilipwasaccusedof“systematicplunder”ofBHS, thedepartmentstorechainheonceowned.
Butwhatcanrealisticallybedonetobosseswhosail closetothewindyetstaywithinthe limitsof the law?Theycanbenamedandshamed, thoughperhapstheydon’tcare.Theywill saythat themarket isthebestdiscipline—workers, investorsandconsumerscanwalkawayfromcompanies theydislike.
Inreality,“irresponsiblebusiness”meansdifferent things.Acompanymaybehavewithanadmirabledegreeofresponsibility to itscustomersbutat theexpenseof itsworkforce.Alternatively,whileanothercompanymaynotbefaultedfor its treatmentofcustomersandworkers, it couldtakeacavalierapproachtocarbonemissionsorpayingtaxtoahostgovernment.
Insomeareasthere is lessambiguity.Corporate irresponsibility inbanking ledtosystemiccollapseaffectingnumerousothercompaniesandmillionsofindividuals.Yet fewof thoseresponsiblefor the2008crisis sufferedanypunishmentbeyondreputationaldamage.Prolongedinquiriesprovokedexcoriatingcriticism,but littleelse.
Thefinancialcrisishas,however, ledtotwomajorregulatorychangeswithpotentiallywiderapplication.Bankerscannowbeprosecuted intheUKforextremerecklessnessevenif there isnomalign intent: thefinancialequivalentofmanslaughterratherthanmurder.AndUKtradersnowhavetotaketheirrewardsinstockredeemableafterseveralyears,maintainingresponsibility forpasttransactions.Thatprincipleofcontinuingresponsibility,withclawbacks,couldbeawayofentrenchingresponsibilitymoregenerally inbusiness, includingamongadvisers.
Business irresponsibility isoftenfoundinactivities thatarealreadyregulatedbutwhereoversight isweak.Companiesareobligedtocomplybuttheywill claimthat
theyhaveadutytotheirshareholdersnottoover-comply.
But if the legitimacyofprivateenterprise is tobeupheld,corporateresponsibilitymustbemorethanstayingjust therightsideof ineffective,under-resourcedregulators. Itmustalsocomprisemorethanusingdeeppockets tobrowbeat theauthoritieswithexpensivelitigationorruthlesslyexploiting legalandadministrativeambiguity.
Sowhat is tobedone?Oneapproachcouldbetostrengthenthestandardsarounddirectorships,ashashappenedalreadyforbankers.TheobligationsoncompanydirectorsundertheUK’s2006CompaniesActarewideandencompassmuchofwhatwecall responsiblecapitalism.Butthebar fordisqualificationishighandeventhemostegregiousbehaviour is tolerated.Directorshipscouldbetreatedasaprofessionwithstandardsandethics,andenforcedbyanoversightbody.
Asecondapproachwouldbetobuildontheadvancesalreadymadeincorporategovernance.However, relianceonnon-executivedirectorsandlong-terminstitutional investors topolicecompanybehaviour,alongwithmoretransparentandextensivereportingrequirements,havehadlimited impact.Wheningovernment, I sought tostrengthencorporategovernancearoundexecutive
pay, thoughhighlypaidfinancialintermediaries, remunerationconsultantsandnon-execshadlittleappetite forslowingthegravytrain. Iwould liketohavegonefurther ininvolvingstaff.MrsMayhascometothesameconclusion.Theproposalwillbedebatedfurther,but thefundamentalpoint is thatawiderdefinitionofstewardship isneeded.
Third,businessesshouldconsiderexamplesofgoodpractice indifferentformsofcorporateorganisation.Privatebusinessesoftenhave longer-termtimehorizonsthanpubliccompanies.Retailershavetheworker-ownedJohnLewisPartnershipasarolemodelandcomparator.Themutual financial sectoroffersalternativewaysofconductingbankingandinsurance—inspiteof theCo-operativeBank’s failure.Socialenterprise isgrowingrapidly insomeindustries,offeringanalternativetoshareholdercapitalism:doingwellanddoinggood.Weneedmore.
Thewriter isa formerUKbusiness secretaryandauthorof ‘After theStorm’
Ridding business of‘Victorian’ practicesOPINION
VinceCable
Making an example:Theresa Mayspeaking at theConservative partyconferenceToby Melville/Reuters
‘It ismore of a nudge fromregulators.Why not letshareholders become theenforcers?’
‘Corporateresponsibility mustbe more thanstaying just the rightside of ineffective,under-resourcedregulators’
InsideDecline and fall ofthe CEO-chairmanThe jointrole isdying outin mostparts ofthe worldPage 4
Boards open up totheir shareholdersEnergised investorsare demanding moreengagementPage 6
Women struggle toenter the boardroomGovernment diversitycampaigns often failunless supported bybusinessPage 8
Unlisted companiesset their own rulesPrivate companies areunder pressure toimprove governancePage 10
ContributorsDavid OakleyCorporate affairs correspondent
Stephen FoleyUS investment correspondent
Emily CadmanFormer FT economics reporter
Adam ThomsonFormer Paris correspondent
Kate BurgessCorporate correspondent
Leo LewisTokyo correspondent
Owen WalkerCommissioning editor, and authorof ‘Barbarians in the Boardroom’
Steven BirdDesigner
Alan KnoxPicture editor
All editorial content in this reportis produced by the FT. Ouradvertisers have no influence overor prior sight of the articles.All FT Reports are available at:ft.com/reports
to class-action lawsuits from femaleworkers.
The US is also in the process ofintroducing disclosure requirementsongenderpay.But theObamaadmin-istration is trying to take it a step fur-ther by forcing companies to providethesamepaydataforraceandethnic-ity. In announcing the proposal inJanuary, President Barack Obamasaid: “What kind of example doespaying women less set for our sonsanddaughters?”
P hilipRyan,apartnerat lawfirm Shoosmiths who spe-cialises in regulatorydefence, says disclosurerules are often accompa-
nied by financial penalties. Heargues, however, that the threat ofpublic embarrassment has so farprovedmorepotent thanfearof fines.
“The jury’s still out on whetherfinancial penalties really work. Theysend a message when they are consid-erable, but most companies are moreconcerned about the damage to their
brand — no one wants to be the out-lier in their industry,” he says. “Mostcompaniesaretryingtoshowtheyaregoodcorporatecitizens.”
Mr Marshall of MSCI adds that dis-closurerulesaredesignedtoputcom-panies under pressure from threemain groups. In the first instance it isthe board of directors, who may havebeen unaware of certain practiceswithin their companies. Then there isthe media, which will highlight out-liers and can influence consumersand politicians. The final group isinvestors, who have the power to voteagainst particular corporate policiesand also against directors they feelarenot tacklinggovernanceflaws.
“The aim here is not just to requirecompanies to disclose this informa-tion but to bring the pressure of pub-lic opinion,” says Mr Marshall ofMSCI. “But it’s via increased trans-parency and disclosure. It is more of anudge from regulators to try toimpact behaviour — which franklymakes sense. Why not let sharehold-ersbecometheenforcers?”
4 | FTReports FINANCIAL TIMES Tuesday 1 November 2016 FINANCIAL TIMES Tuesday 1 November 2016 FTReports | 5
Tomorrow’s Global Business Governance & Regulation
T he observation by 19thcentury historian LordActon that “power tendsto corrupt and absolutepower corrupts abso-
lutely” seems appropriate when ana-lysing one of the most significanttrends in corporate governance — thesteady demise of the “all-powerful”executive.
Overthepastdecade, the jointchiefexecutive/chairman has become adying breed. Globally, the number ofnew appointees holding the chiefexecutive/chairman role has droppedto a record low as corporate govern-ance best practice moves towards theidea that the two most senior roles ata listed company should be split, saysStrategy&,aconsultingarmofprofes-sionalservicesgroupPwC.
The UK’s corporate governancecode advises against combining thetwo posts. Only one company in theFTSE 100 — Hikma Pharmaceuticals— has one person, Said Darwazah,sharing the chief executive and chair-manroles, saysresearchgroupMSCI.
The US is one of the few industrial-ised countries where a joint chiefexecutive/chairman is still commonat the biggest groups, although theirnumbers generally are falling. Halfthe companies listed on the S&P 500have one person holding the com-binedrole.
“Having a separate chief executiveand chairman is becoming a globalstandard for almost everyone,” says Per-Ola Karlsson, a partner at Strat-egy&. “Governance codes around theworld presume that it is best practice.But in the US, progress has beenslow.”
He attributes this to the differentmindsetofAmericans.Theyaremoreinclined to believe that someoneholding both roles can deliver greaterefficiency and better performance,while not compromising the princi-ples of good corporate governance, hesays.
JamieDimon,chiefexecutive,chair-man and president of JPMorganChase, the US investment bank, is aprime example of a business leaderwho gives weight to the argument thatone person in the joint role can deliverresults.
Thebankhasconsistentlybeenoneof the top performers among theworld’s financial groups since hetook on the post of chairman in 2006,
adding to his existing role of chiefexecutive.
However, the bank has not avoidedscandals. It suffered large losses aftera series of derivatives transactionsentered by a trader, nicknamed the London Whale, went wrong. Thisprompted several investigations intothegroup’s internalcontrols.
Similar failures have promptedother companies and business lead-ers to emphasise the importance ofhaving a separate chief executive andchairman.
Tom de Swaan, chairman of ZurichInsurance, argues that big financialgroups should separate the rolesbecause of their complexity.Although Mr de Swaan took upthe joint role at Zurich temporarilylast year after the departure — and
subsequent suicide — of chief execu-tive Martin Senn, he insists that it ishealthier tosplit thepositions.
“One of the most important roles inbeing a chairman is to have the rightmanagement in place,” he adds. “Thesecond thing is to make sure the com-pany strategy is being executed effec-tively. It is hard to carry out theseroles properly if you are the chiefexecutiveaswell.”
Some big investment groups, suchas UK asset managers Schroders,Legal & General Investment Manage-ment and Aberdeen Asset Manage-ment, strongly support separateroles.
JessicaGround,globalheadofstew-ardship at Schroders, puts it simply:“The chief executive is there to runthecompany, thechairmanis there to
run the board. These are two differ-entactivities.”
Clare Payn, head of corporate gov-ernance in North America at LGIM,adds: “Having one person do bothsuggests the chief executive can marktheir own homework. The big listedcompanies are often very compli-cated institutions. The CEO does nothavetimetoactaschairmanaswell.”
Findings are mixed over whether acompany performs better with sep-arate or joint roles. One factor thatcomplicates this analysis is that com-panieswithpoorresultsoftenbring ina joint chief executive/chairman toturn round performance. Between2011 and 2015, the lowest performingcompanies globally appointed 50 percent more joint chief executive/chairmen than the highest perform-ing companies, according to Strat-egy&.
Other research by MSCI shows thatcompanies where the roles are com-bined tend to lag behind in the longterm.
Over 10 years, average total share-holder returns were 225.8 per cent atthe groups where the roles were com-bined and 361.9 per cent at the com-panies where they were separated.These figures were calculated as ofDecember312015.
The most recent data, published inAugust by Credit Suisse, also showthat separating the roles may benefitperformance. Of the 400 non-family-owned companies on the S&P 500,those with separate chief executivesand chairmen delivered an average of7.4 per cent annually over the 10
years to January 2016 compared with5.3 per cent for companies with thesamechiefexecutiveandchairman.
However, there are no hard data toindicate which groups fare best whenit comes to preventing scandals andimproving corporate governance,says Mr Karlsson of Strategy&. “Iwould say that a separate, independ-ent chairman would give a company abetter chance of avoiding a majorscandal. But I have found no strongevidencetoquantify this.”
Until there are firmer data backingthe separation of the posts, the jointrole is unlikely to become completelyextinct. Some investors, particularlyin the US, will happily back an “all-powerful” holder of both roles — aslong as they are delivering strongresultsandreturns.
All-powerful leaders are dying outDual positionsSplitting thechief executive andchairman roles canbe good for returns,saysDavid Oakley
‘The chief executive isthere to run the company,the chairman is there torun the board. These aretwo different activities’
Share price performance of companies with split vs combined CEOand chair positions at non-family owned S&P˜°° companie s (rebased)
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CombinedCEO-Chair
SplitCEO-Chair
Companies with separate chief executives and chairs haveoutperformed those that combine the roles over the past decade ...
... and the proportion of companies with combined chief executive-chairs isdeclining all around the world, though Europe has had the fastest pace of change
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EuropeNorth
AmericaChina
and rest of Asia JapanGlobal
average
Incoming CEOs who hold the joint title of CEO and chairman (%)
FT graphic Sources: MSCI ESG; Bloomberg; Credit Suisse research; Strategy& ˆ°˙˜ CEO Success Study
Combined role: global trend has turned
6 | FTReports FINANCIAL TIMES Tuesday 1 November 2016 FINANCIAL TIMES Tuesday 1 November 2016 FTReports | 7
D uring a series of secretdiscussions over the pastyear, a small number ofUS business grandeestried to hash out some of
the longstanding areas of tensionbetween companies and their biggestshareholders.
They included some of the mostimportant chief executives in USbusiness: Jeff Immelt of General Elec-tric and Mary Barra of GeneralMotors from corporate America, plusinvestment management leadersLarry Fink of BlackRock and Van-guard’sBillMcNabb.
They were joined by two executivesstraddling both camps: Jamie Dimon,who convened the meetings and runsJPMorgan Chase, a bank that includesone of the world’s largest asset man-agers, and the investment guru War-ren Buffett, whose Berkshire Hatha-way is both the largest US conglomer-ate and a significant investor in the
likes of Coca-Cola and Wells Fargo.Having long been accused of being
asleep at the wheel, institutionalinvestors around the world are takingmore interest in the way their portfo-liocompaniesarerun.
In the past half-decade, the UK hasexperienced two so-called share-holder springs, where investors havevoted against executive pay deals atWPP, the advertising group, and BP,the oil major. In Germany, theVolkswagen emissions scandal hashad shareholders demanding govern-ance reforms. Meanwhile, in the US,activist hedge funds have found iteasier to gain support from otherinvestors for demands that compa-nies institute capital allocation plansthataremoreshareholder-friendly .
The restlessness is not surprising.Investors used to be able to do “theWall Street walk”, to sell their sharesand walk away if they did not like acompany’s strategy or trust its boardto look after their interests. But therise of passive investing has made thisapproachlesseffective.
About a third of the money in theUS equity market is now in funds thatown all the companies in an index.Vanguard, which runs the largestequity fund, and BlackRock, owner ofthe iShares range of exchange traded
funds, together typically hold stakesofmorethan10percent inthebiggestUS companies, whether they likethem or not. They believe they have aduty to their funds’ investors toengage with companies and keepthem focused on doing right by share-holders.
Forward-looking global companiesare embracing, rather than resisting,more communication with share-holders. After all, no one wants toreceive public criticism at a share-holder meeting or, worse, be defeatedwhen an activist tries to storm theboardroom.
It is fast becoming best practice fordirectors to engage with significant
shareholders rather than relying oninvestor relations teams, says Doug-las Chia, a former corporate secretaryat Johnson & Johnson who now runsthe Conference Board GovernanceCentre,aresearchassociation.
“The requirement for annual say-on-pay votes was the catalyst, and
forced directors to understand this isa new paradigm,” says Mr Chia.“Directors still make the ‘floodgates’argument, that if they talk to someshareholders they need to talk tothem all, but typically companiesstartwiththetop10largest.”
In the US, shareholders are gainingtools for holding boards to account —a growing number of companies areallowing long-term shareholders whohave a minimum 3 per cent stake tonominate directors for election — butboth sides hope that these measuresshould only be used as a last resortand will be unnecessary if both sidesunderstandeachother.
Forging good relations with share-holders can take a variety of forms,however,anddifferentconstituenciesof investors require different things.Passive shareholders are prioritisingdiscussions about the quality and theprocesses of the board, who are theirmainrepresentativesandresponsibleforholdingmanagementtoaccount.
“Boards have always been the mostimportant aspect of governance,”says Glenn Booraem, head of corpo-rate governance at Vanguard. He saysmuch of what Vanguard has workedfor historically has been based on therules that govern the election andreplacement of directors. “Now we
have got all the rules in place, we havegot to look at the boards we are get-ting,” he adds. “The rules govern howwe can get rid of bad directors, but wewould just as soon not have bad direc-tors inthefirstplace.”
General Electric, which won thecategory for large companies at thisyear’s IR Magazine awards for bestinvestor relations, has given increas-ing space in its annual reports to theskills it requires of its board of direc-tors, and what each individual mem-ber brings to the boardroom. Thedirector recruitment process is join-ingthedesignofexecutivecompensa-tionasastapleofdiscussionsbetweencompaniesandtheirshareholders.
The private meetings arranged byMr Dimon had a public outcome. Thegroup released a statement of “com-monsense principles of corporategovernance”, which stated “robustcommunication of a board’s thinkingto the company’s shareholders isimportant”, that “asset managersshould raise critical issues to compa-nies as early as possible” and thatshareholders had a right to expectthat directors understand their mainconcerns. Investor relations — whichused to be primarily about talking toshareholders — are now about listen-ingtothem,too.
Boards learn to listen to investorsDirectorsEnergisedshareholders areputting pressure oncompanies to engage,writes Stephen Foley
‘Boards have always beenthemost importantaspect of governance’
Business grandees: Mary Barra, Jamie Dimon and Jeff Immelt discussed improving shareholder relations —Getty Images/Bloomberg
Tomorrow’s Global Business Governance & Regulation
8 | FTReports FINANCIAL TIMES Tuesday 1 November 2016 FINANCIAL TIMES Tuesday 1 November 2016 FTReports | 9
Tomorrow’s Global Business Governance & Regulation Tomorrow’s Global Business Governance & Regulation
R MVishakha,an insuranceindustry veteran withmore than 25 years’ expe-rience, was appointed lastyear to head Legal & Gen-
eral’s Indian joint venture, IndiaFirst.Shenearlydidnotmakeit.
After being on the longlist, MsVishakha was left off the initial short-list, and reinstated only after execu-tives from L&G’s London headquar-ters complained about the lack offemale candidates. Ms Vishakha wasthen given the opportunity to wowthe appointment board during herinterview.
It is a story that “illustrates thewhole ethos around our move tochange our hiring practices”, saysLesley Martin, L&G’s head of diver-sityandinclusion.Aspartof itsaimtoincrease thenumberof seniorwomenfrom 35 per cent to 40 per cent by theend of 2017 and to parity by 2020, theinvestment and insurance groupinsists there is a woman on every sen-iorappointmentshortlist.
“It’s not about positive discrimina-tion, it is about the getting the widestpossible talent pool and a differentperspective,”MsMartinsays.
Policies like these are still needed
more than 45 years after the UK’sEqual Pay Act came in, which wasdesigned to ensure equality in theworkplace and prevent discrimina-tion, particularly on pay. Despite asurfeit of charters, targets andreports, female executives are still anuncommonsight inboardrooms.
Fewer than 10 per cent of executivedirector roles at the UK’s 100 biggestpublic companies are held by women,according to Cranfield School of Man-agement. The number of women inexecutive director roles has increasedonly modestly in the past five years,even while the overall proportion offemale directors has risen from 15 percent of board seats in 2012 to 26 percent today.
Improving representation in theexecutive layer — both in the board-room and among other senior leader-ship roles — is now the main focus ofthe government-backed Women onBoardscommission.
The new head of the commission,Sir Philip Hampton, told the Finan-cial Times this year that he was deter-mined to “kick-start” the initiativeafter data suggested progress hadstalled.
But for every company that is
already going beyond nationaltargets, there are others where it isclear — even if they are not preparedto say so publicly — that they are notyet convinced of the argument thatdiverse leadership teams bring busi-nessbenefits.
When the UK’s Equality andHuman Rights Commission surveyedtop corporations anonymously thisyear, it found that while three-quar-ters had board diversity policies,around two-thirds of these did nothave any targets or objectives. Oneanonymous FTSE 250 company,which has no women on its board,told the EHRC: “The company’s pol-icy is to make appointments on meritand for this reason the setting of spe-cific, measurable targets is not con-sideredtobeappropriate.”
This belief that targets and merit-based hiring are incompatible is asourceofexasperationformanycam-paigners. Simon Collins, chairman ofprofessional services group KPMG,which along with the governmentsponsors the annual Female FTSEBoard Report, said at the launch ofthis year’s study that the push formore diverse senior teams “isn’t amoralcrusade”.
“I have no doubt that including amore diverse mix of experience andopinion within our leadership teamand throughout our organisation willmakeusamoreprofitable,aswellasamoreresponsible,business,”hesaid.
That is the attitude of retail groupKingfisher, parent company of homeimprovements retailer B&Q. It hasone of the most gender-balanced sen-ior leadership teams in the FTSE 100,with women holding four board seatsout of the nine in total, and half of thepositions on the group executivecommittee.
Its chief financial officer, KarenWitts, stresses that finding the bestpersonfor the jobregardlessofgenderis always the priority. But the com-pany also recognised that womenaccount for around half of its custom-ers and make about three-quarters ofhome improvement decisions. Assuch it is vital for the company to“develop a management team and apipeline of talent that reflects the way
Women still struggleto join boards wheretargets are absentGenderDespite government initiatives, the number of femaleexecutive directors has increased only slightly, finds Emily Cadman
The French governmentreceived a gift from its 13.4 percent stake in telecoms groupOrange in April: overnight, thevoting rights attached to theholding increased to morethan20percent.
The seemingly magicalincrease, which also affectedholdings in the group by otherstate entities, happened cour-tesy of France’s so-called Flor-ange law, which made double-voting rights automatic forlong-term investors in listedcompanies unless shareholdersspecificallyvotedtooptout.
Yet more than two years onfrom the controversial bill’sapproval, and as long-termshareholders start to reap therewards of their holdings thisyear, broad oppositionremains.
The law — which took itsname from the disputebetween France’s Socialist gov-ernment and ArcelorMittalafter the Luxembourg-basedsteelmaker tried to shut amill in the north-east com-mune of Florange — was sup-posedly designed to rewardand encourage long-term
shareholders. The hope wasthat this would give greaterstability to boards to set com-panystrategyandgovernance.
Last year, a throng ofFrance’s largest listed compa-nies voted on the issue at theirannual shareholder meetings.Double-voting rights wereadopted at companies such asRenault, Engie and Vivendibut shot down at other groupssuch as BNP Paribas andL’Oréal.
Overall, however, thenumber of companies withdouble-voting rights changed
only slightly because such pro-visions have long been com-monplace in French business.Before the law, 22 members ofthe CAC 40 had double-votingrights, compared with 26 afterthe lawcameintoforce.
Loïc Dessaint, chief ex-ecutive of Proxinvest, whichadvises investors on votesand corporate governance,argues that the relativelysmall change was the result ofrelentless communicationfrom his company to investorsover what he consideredto be the negative effects
of double-voting rights.“We spent a lot of time
explaining things in Franceand abroad, and everyonerealised that they would bediluted,” he says. “It was clearin the minds of most investorsthat itwasaterriblemove.”
Mr Dessaint and other crit-ics of the law argue that dou-ble-voting rights favour biginvestors over small. He addsthat they often lead to minor-ity shareholders eventuallycontrolling companies withrelativelysmall stakes.
“The large shareholders end
Some French equities are more equal than othersDual-class shares
The government hasbenefited from itsdrive to bring indouble-voting rights.By Adam Thomson
upcontrolling themainbulkofthe voting rights,” he says. “Itdoes not promote long-terminvestment but instead pro-motes big owners who, most ofthetime,areFrench.”
One of the biggest benefici-aries of the law was Frenchindustrialist and billionaireVincent Bolloré, who managedto have double-voting rightspassed at his media and con-tentgroup,Vivendi.
More than half of Vivendi’sshareholders voted to strikedown double-voting rights atlast year’s annual generalmeeting, but that was stillbelow the two-thirds majoritythat the Florange law requirestoblockits implementation.
As a result, Mr Bolloré, whohas ramped up his Vivendi
stake over the past two yearsandisbyfar thegroup’sbiggestshareholder, will have 29 percent of voting rights by nextApril, according to his BolloréGroup. But that should rise sig-nificantly in the coming yearseven if he keeps his equitystake the same since more ofhis equity holding qualifies fordouble-votingrights.
Shareholders in severallarge French groups votedagainst the introduction ofdouble-voting rights. As wellas L’Oréal, the cosmetics com-pany and one of the country’sbiggest businesses, propertydeveloper Unibail-Rodamcoand construction group Vinciwereamongthem.
But Veolia, the water andwaste management group,
Engie, the energy company,and Orange were among ahandful of businesses thatopted to take up double-votingrights.
So did Renault, the Frenchcarmaker, in which the gov-ernment controversiallyboughtanadditional5percentstake to boost its holding toabout 20 per cent. It did this inthe run-up to the company’sannual meeting to try to guar-antee that double-votingrightswere implemented.
Some 60 per cent of thecompany’s shareholders votedagainst the Florange law — aclear majority but still shy ofthe66percentrequiredtostopdouble-voting rights beingimplemented.
Catherine Salmon, a Paris-
based executive director atproxy voting adviser Institu-tional Shareholder Services,arguesthat thefact thegovern-ment was a significant share-holder in each case is far fromcoincidental.
“The French state is a bigbeneficiary of the law becauseit allows it to reduce its holdingin the companies while keep-ing itsvotingrights,”shesays.
The French government isunder pressure from Brusselsto reduce its fiscal deficit tobring it in line with EU rules. Itis also committed to partici-pating in planned capital rais-ings at majority state-ownedutility EDF and energy com-panyAreva.
As a result, the Frenchgovernment is looking for
additional sources of income.The French government has
yet to sell its stakes in its port-folio of 77 companies, whichwas worth more than €77bnlast April, according to APE,the holding company for thestate’s investments. But it hasalready hinted that it may doso infuture.
The changes may benefit theFrench government in theformofprovidinggreater flexi-bility to reduce its sharehold-ings, but Mr Dessaint has nodoubt that it is a bad move inthe longrun.
“It’s a terrible sign for inves-tors because it looks very pro-tective,” he says. “When youhave double-voting rights inplace, it is a sign that you don’twanttoplaybymarketrules.”
FT graphic Source: MSCI ESG Research as of September ˜°˛˝
Countries with gender quotasare among the countries withhighest ratios of women onboards in the world ...
... they also have highnumbers of companieswith at least threewomen on boards ...
... and early adopters have agrowing number ofcompanies where the CEO,CFO or chair is a woman
° ˜˙Qatar
South KoreaIndonesia
UAE (˜°˛˜)JapanBrazil
RussiaTaiwanMexico
ChileChina
PhilippinesHong Kong
PolandSingapore
TurkeyThailand
India (˜°˛˝)Malaysia (˜°˛˙)
SwitzerlandSouth Africa
Netherlands (˜°˛˙)Germany (˜°˛˙)
USIreland
Spain (˜°˛˝)Denmark (˜°˛ˆ)
Israel (˛ˇˇˇ)Canada
UKAustralia
Belgium (˜°˛˘)Finland (2008)
Italy (˜°˛˝)Sweden
France (˜°˛˙)Norway (2008)
° ˜˙ ˙° ˆ˙ ˛°° ° ˜˙ ˙° ˇ° ˛°°
Per cent Per cent Per cent
Condoleezza Rice, member of the boardof directors at Dropbox since ˜°˛˝Photo: Rob Kim/Getty Images
Women at the top: the quota e�ect
Quota in place or planned (date)
50%(total equality)
‘Amore diversemix ofexperiencewill make us amore profitable business’
our customers live and shop,” shesays.
Kingfisher operates a formal lead-ership programme aimed at men andwomen. It also runs an informalwomen’s network, which offers sup-port for female managers, with thehelpofexecandnon-execdirectors.
Ms Witts says the company hasdone “pretty well” in ensuring a more
balanced executive team, but adds:“We know there is more that we cando to bring more women through allthe way from the shop floor to themostseniorroles.”
While the likes of KPMG, King-fisher and L&G are making progress,those British companies that have nointerest in change have seen onepotential threat removed after the
UK’s vote to leave the EU. The possi-bility of formal gender quotas hasbeen much discussed in recent yearsin Brussels. But Brexit would meanany action would now be unlikely toaffectBritishcompanies.
Domestically, the Conservativegovernment has been clear it has noappetite for introducing legislativetargets. In a letter to the FT in August,
Greg Clark, the new UK business sec-retary, wrote that while the “wholegovernment” was behind efforts toincrease female representation, “gov-ernment alone cannot force a changein corporate culture; this must bebusiness-led”. It would therefore beno surprise if the gap between themost and least gender-balanced com-paniesweretowidenfurther.
All aboard: RM Vishakha (left),and Lesley Martin (below)Richard Boll/Getty Images
Vincent Bolloré: double-voting rights at Vivendi
10 | FTReports FINANCIAL TIMES Tuesday 1 November 2016 FINANCIAL TIMES Tuesday 1 November 2016 FTReports | 11
Tomorrow’s Global Business Governance & Regulation Tomorrow’s Global Business Governance & Regulation
When Japan’s corporate gov-ernance code was being draft-ed in early 2015, one of itsauthors, Scott Callon, said outloud what everyone else wasthinking: conservative,opaque and intransigent corp-orate Japan would never ac-ceptsucharadicaldocument.
His observation was metwithdeafeningsilence.
Both the June 1 launch dateand the code itself were ordersfrom the very top. This was acritical strut of prime ministerShinzo Abe’s “Abenomics”campaign to revitalise the Jap-anese economy, Mr Callon wastold by one of the senior mem-bers of the committee, and anon-negotiable piece of thereform agenda. If Japan Inc didnot like it, tough.
The governance code, andthe associated stewardshipcode that defined the newresponsibility of shareholders,remains for many observersone of the most unambiguoussuccesses of Abenomics. Thecodes were introduced as partof the wider Abenomics effortto boost the performance ofthe Japanese stock market,encourage companies toincrease capital expenditureand tempt citizens to shift partof their bank savings into risk-ierassets.
Progress on compliance hasnot been as fast as the originalproposers of the code hadhoped, and more broadlypolitical momentum is flag-ging, but it is neverthelesshighly visible. Some 80 percent of large and midsizeTokyo-listed companies nowhave two or more independentdirectors — a tenet of the gov-ernance reforms — up 21 per-centage points from the yearbefore the code was intro-duced.
The number of listed com-panies that have establishednomination committees todetermine top executive posi-tions has expanded more thaneightfold since 2014 to 475.Companies that had neverpublicly uttered the phrase“return on equity” now feelunder pressure to highlightthat metric in their annual
reports. Share buybacks havesurged since the code cameinto force, and by the end ofJuly had already surpassed thetotal for thewholeof2015.
Levels of shareholderengagement are also rising.According to Mitsubishi UFJMorgan Stanley Securities, afinancial services company,shareholders objected to there-election of management in26 cases this year, three timesasmanyastheyearbefore.
Perhaps the two codes’greatest impact, said analystsat Nomura in a report pub-lished in August, has been to create “evolutionary share-holder activism” — not theadversarial style of activismthat generated such a bittercorporate backlash in the2000s, but the emergingexpectation that companiesand investors will “build ami-
cable relationships marked byconstructivetension”.
Nicholas Benes, head of theBoard Director Training Insti-tute of Japan, was the originalproposer of a corporate gov-ernance code to the Abe gov-ernment. He says that whatthe stewardship and corporategovernance codes have done —and where some of the moretangible evidence of change isemerging — is in giving inves-tors an accepted “language”with which to talk to compa-niesandtoexpressconcernsorraisegovernance issues.
“In the past, investors thatdid this [feared] they might belabelled ‘activists’ and compa-nies could avoid meetings andshut down informationaccess,” he says. “The corpo-rate governance code meansthey can’t easily do that anymore — if the investor wants to
ask those questions, he justuses the language of the codeto ask how compliant theyreally are, or what alternativepractices theyemploy.”
For some, the success of thegovernance code is an anom-aly in an Abenomics pro-gramme now largely on theropes. More than 18 monthssincethecodecameintoeffect,the broader environment inJapan has changed — in manyways for the worse. Mr Abe’sadministration, thoughbuoyed by a July victory inUpper House elections, seemsless bulletproof than it didwhenthecodewasbrought in.
The global economy is notproviding the following wind itonce did, and structuralreforms are taking longer thanthe government hoped to crys-tallise into real change. Mean-while, the Bank of Japan’s deci-sion in January to introducenegative interest rates to theworld’s third-biggest economylooked desperate to analystsandinvestors.
Despite the strength of theTokyo stock market — up 60 per cent since Mr Abe came topower — it has becomefashionable among Japan-watchers to highlight themany metrics by which Abe-nomics and the accompanyingmonetaryeasingpoliciesof theBoJ are stuttering. The failureto free Japan from deflation
permanently is foremostamongthose.
There is also scepticism onthe true success of the corpo-rate governance code. Whilemany companies have signedup to the code, and even intro-duced their own guidancestatements to signal their com-pliancewith its spirit, Japanesecompanies have a long historyof disguising opposition to ref-ormswithsuperficialconsent.
But the governance codemay have produced sufficientenvironmental change to off-set that, says Mr Benes, whoadds that companies that justpay lip service to the code andproduce only a few short sen-tences to describe how theycomply with the code are“walking intoatrap”.
“They are opening them-selves up to potential criticismfrom shareholders, analystsand the media that they needto have real substance and pol-icies to show before they bragabout ‘full compliance’. That ishowcodeswork,”hesays.
Companies will be expectedto satisfy the spirit of the code,Mr Benes adds. “In thissuddenly transparent market,these firms may be publiclysingled out as bad examples,for saying they comply whenthey are not really compliant,”he says. “This is where theshame aspect of Japanese soci-ety isveryhelpful.”
Code gives Abe a rare reason to be cheerfulJapan
Governance andstewardship reformshave been successful,reports Leo Lewis
‘These firmsmay bepublicly singled outas bad examples.This is where theshame aspect ofJapanese society isvery helpful’
The right direction:Japanese prime ministerShinzo Abe’s corporategovernance reforms havebeen well receivedTomohiro Ohsumi/Bloomberg
N early 70 years ago REThompson, a small Brit-ish family business inWhitchurch, Hamp-shire, started making
vacuum and leak test equipment. In1968, it began to focus solely on man-ufacturing aerospace and industrialcomponents. Today the business isstill owned and managed by theThompson family, but it produces theboxes that house the power manage-ment system of the F35 joint strikefighter, one of the UK’s biggest mili-taryprocurementprojects.
In the past five years it has invested£7m in equipment, doubled turnoverand is on track to double revenuesagain. “The plant is already running24 hours a day, seven days a week,”says Michael Thompson, managingdirector and a third-generation fam-ilymember involvedinthebusiness.
RE Thompson is still a small busi-ness, turning over less than £20m ayearwithabout50employees.But it isgrowing fast and to many observers itlooks like a well-run company, bal-ancing the long-term interests of staff,owners,customersandregulators.
Its governance, though, is very dif-ferent from that prescribed in theUK’s corporate governance code forbig, publicly quoted companies withtheir extensive boards of executiveand non-executive directors. MrThompson and his wife are REThompson’sonlydirectors.
In this regard, RE Thompson is likemany UK companies that are not list-ed on tradable equity markets. Theyrange from the John Lewis Partner-ship — employing thousands of staff— to private-equity owned ventures,familybusinessesandsole traders.
Many bigger private businesses dohave multiple directors. John Lewisaims to comply with the rules thatapply to listed businesses. It has 15directors, two of whom are non-exec-utives.
That is well beyond what is legallyrequired. Section 154 of the Compa-nies Act states only that private
companies must have one directorand that public companies must havetwo.
However, Susan Ralphs, managingdirector of the Ethical Property Com-pany, says she could not do withouther board of six directors, the otherfive of whom are non-executive. “Thenon-executives give us another levelof expertise,” she says. “They are notimmersed in the day-to-day but arestill wedded to our success. They holdus [executives] to account and theyrepresentourshareholders.”
The Ethical Property Company hasambitions ultimately to list on Aim,the London Stock Exchange’s juniormarket. It makes about £400,000 ayear in pre-tax profits from rentingproperty to voluntary organisationsand developing eco-friendly build-ings. In recent years it has raisedabout £14m from 1,400 shareholdersinfive issuesandmaywell raisemore,says Ms Ralphs. The company is partof the LSE’s Elite programme, whichaims to promote better governanceandhelpcompaniesgrow.
Even businesses that are not tryingto raise capital will benefit from hav-ing external directors on boards, saysthe UK’s Institute of Directors. Theeffect on companies “should not beunderestimated”, it says.
Oliver Parry, the IOD’s head of gov-ernance, argues directors with wideexperience help managers spot prob-lems, lessen wastage and preventassets from being misappropriated.In essence, governance guardsagainst rising agency costs, mini-mises risk and enhances the reputa-tionandconfidence inagroup.
Effective governance frameworksdefine the roles and responsibilitiesand distribute power between share-holders, boards, managers and otherstakeholders. “Especially in smallercompanies, it is important to recog-nise that thecompanyisnotanexten-sion of the personal property of theowner,” theIODsays.
The IOD set out a governance codefor unlisted companies about six
years ago. Now, in the wake of thescandal over the collapse of BHS,which has put jobs and pensions ofthousands of workers in jeopardy, MrParry is working with Deloitte, theconsultants, tobeef itup.
“This is all about reputation —maintaining it and enhancing it,” saysMr Parry. The rate of high-profileinsolvencies is, he says, feeding “aperception that companies are notbeing run very well and that some-thing is systemically wrong with gov-ernance”.
Mr Parry acknowledges that thecosts of implementing the full codecould be punitive for small busi-nesses. The IOD proposes a two-tierregime, he says, but the principles ofgood governance are the same for allcompanies,bigandsmall.
However, not all private businessesare convinced of the need to havenon-executive directors, as MrThompson pointsout.
“It may be a good thing to have asounding board but it can be difficultand creates conflicts. I’d find an out-sider [on the board] a hindrance,”saysMrThompson.
Unlistedcompaniesplay by theirown rules
Private businessThe BHS collapse highlightsthe need for stricter scrutiny. ByKate Burgess
Many so-called “Sox-lite”private US businesses havevoluntarily adopted Sarbanes-Oxley, the regulatory regimeintroduced for public companiesafter the Enron and WorldComaccounting scandals to boostcorporate accountability. TheseSox-lite groups do so as a wayof boosting investor confidence.A US study by PwC found thatby 2012 four-fifths of unlistedcompanies had voluntarilyadopted certain governancepractices. When companies didnot bring in directors fromoutside to provide independentvoices, they still encouragedtheir executives to broadentheir experience by joiningboards of public companies, thestudy showed. KB
Rise of voluntarycompliance in US
Family affair:MichaelThompson isthe thirdgenerationfamily memberinvolved in hisbusinessDavid Parry
‘It may be agood thingto have asoundingboard but itcan bedifficultand createsconflicts’
12 | FTReports FINANCIAL TIMES Tuesday 1 November 2016
