Simon Lowe
Presently, it is not mandatory for companies quoted on AIM to comply with the principles of the Combined Code. However, the need for additional disclosures and transparency by AIM quoted companies is supported by Sir Derek Higgs, who was quoted in Internal Auditing and Business Risk Magazine
(August 2006) as requesting ‘more disclosures against benchmarks – a light version of the code’ for AIM companies.
The Grant Thornton review of corporate governance adoption by thirty-five AIM companies in the south-west of England showed an encouraging result, with 75 per cent of the companies commenting on how they complied with the Combined Code. Few AIM listed companies made statements regarding the relationship between the role of Chairman and Chief Executive, and only one company provided sufficient information regarding performance evaluation of the board, committees and individual directors. Only one company disclosed that it had an internal audit department, with 23 per cent commenting on the required annual assessment for the need for an internal audit department. Disclosures on external audit services, structure of committees and corporate responsibility were largely omitted.
As investors become increasingly sophisticated and the demand for transparency grows, corporate governance in AIM companies will come under greater scrutiny. This will meet fierce resistance, as it is the less regulated environment which is seen as having been one of the main drivers behind AIM’s recent rapid growth.
Roles and responsibilities
Shareholders (particularly institutions) look to the disclosure requirements of the Code and related guidance to ensure companies are being governed in line with best practice. Investors may overlook their responsibilities actively to take part by encouraging companies to do more.
Effective shareholder engagement is not a new concept. The Cadbury Report states:
If long-term relationships are to be developed, it is important that companies communicate their strategies to their major shareholders and that their shareholders understand them. It is equally important that shareholders play their part in the communication process by informing companies if there are aspects of the business which give them cause for concern.
Institutional investors
The UK market is somewhat different from the larger European and US markets in that, in the UK, the majority of shareholders are the financial institutions who control in excess of 60 per cent of total capital.14
14The Europaeum’s ‘Restructuring Corporate Governance: The New European Agenda’ report, 2005. www.europaeum.org
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Is the UK model working?
Section D of the Code provides guidance concerning shareholder relations, particularly with institutional investors. The main principle regarding dialogue with institutional shareholders15 states: ‘There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.’ The supporting principles take this one stage further, stating: ‘The board should keep in touch with shareholder opinion in whatever ways are most practical and efficient.’ The main focus of meetings with shareholders continues to be around company strategy and performance updates. So where is corporate governance mentioned? Investors’ comments suggest they do not feel well informed about the corporate governance processes in the companies in which they invest. But do they care? And if they do care, what are they doing about it? Ultimately, shareholders can vote with their feet. If they dislike a company’s governance principles and systems and feel so strongly about them, they can divest.
One of the key rights of shareholders is to elect, challenge and remove the directors where their actions in managing the company are not satisfactory. This is accepted in law but we rarely see any evidence that this happens in practice. Companies seek to avoid bad publicity at all costs, and institutional investors generally prefer backroom diplomacy and influence.
Shareholder rights in the UK versus the US
Despite many rights of shareholders being accepted internationally, there remain significant differences. For example, Table 11.1 shows the key differences when comparing the UK with the US position.16
Shareholder responsibilities
The Institute of Chartered Accountants in England and Wales (ICAEW) has compared the respective responsibilities of directors and shareholders: ‘Directors are responsible for acting in the best interests of the company for the benefit of shareholders. Shareholders, in turn, empower directors to lead the company in a fiduciary capacity, whilst maintaining a degree of decision-making control through incorporation rights.’17
While directors’ responsibilities are defined and supported by numerous principles and laws in the UK, there is more debate around the responsibilities of shareholders since there are no published guidelines. The lack of guidance on shareholder responsibility does not help global investors in today’s markets. As a result, conscientious investor bodies such as PIRC and the Association of British Insurers (ABI) are increasingly voicing their views and expectations
15Section D.1 Combined Code, July 2003.
16‘Shareholder Responsibilities and the Investing Public’ (ICAEW), June 2006.
17‘Shareholder Responsibilities and the Investing Public’ (ICAEW), June 2006.
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Table 11.1 Shareholder rights: comparison of UK and US positions
|
|
|
Areas of difference |
In the UK |
In the US |
Shareholder |
Rights issue (new shares offered in proportion to |
No such law in place – no pre-emption rights. |
pre-emption rights |
existing shareholders first so as not to dilute their |
|
|
ownership). Shareholders can pass a special |
|
|
resolutiona and vote to disapply this rule if a 75% |
|
|
majority is achieved. |
Directors are elected by a pluralityc of the votes cast by |
Director appointment |
Right to vote to appoint or remove (and replace) a board |
|
and removal |
director by a simple majority of votes cast on an |
the shares entitled to vote in the election of a meeting |
|
ordinary resolution.b |
at which a quorum is present. |
|
If not re-elected may not be immediately reappointed. |
Under the plurality voting system an uncontested |
|
|
director is elected on the basis of a single affirmative |
|
|
vote regardless of the number of votes withheld. The |
|
|
US system of plurality voting does not enable |
|
|
shareholders to vote against the election of a director |
|
|
and they must instead rely on the number of votes |
|
|
withheld to express their dissatisfaction. |
|
|
Directors remain on board until a successor is named. |
Nomination of |
Shareholders have a basic right to nominate a director, |
Company to exclude shareholder proposals related to |
directors |
by a simple majority of votes cast on an ordinary |
the election of new directors from the management |
|
resolution. |
proxy statement. The practical effect of this is that |
|
|
shareholders wishing to propose nominees to the |
|
|
board must personally incur the costs for the proposal |
|
|
in soliciting and bringing in other shareholder |
|
|
support. The company can counter-solicit its |
|
|
disagreement with the nomination. |
|
|
|
Shareholder |
The Code provides that the Chairman should ensure that |
communication |
the views of shareholders are communicated to the |
|
board as a whole.d |
|
As principal trading occurs at the same time in London, |
|
there are no rules on shareholders acting together. |
Submit shareholder |
Have support of 5% of the votes, or if there are at least |
proposal |
100 shareholders who hold shares in the company on |
|
which there has been paid up capital, on average not |
|
less than £100 per shareholder. |
Votes |
Only votes ‘for’ and ‘against’ are counted as being cast. |
|
Votes ‘withheld’ are not counted (but this is currently |
|
under debate) and proxies are excluded unless a poll |
|
is called. |
|
‘One share, one vote’ is the system by which resolutions |
|
are voted upon, but this is restricted to the |
|
shareholders in actual attendance at the AGM. |
Shareholders are obliged to follow SEC rules governing communication with each other on voting issues (due to possible numbers and locations of traders) and where shareholders acting together collectively hold more than 5% of the issued share capital they must file Form 13-D with the SEC.
Must own for at least one year, $2000 in market value of share; or 1% of the company’s issued share capital, whichever is less
All votes (including proxies) are counted as being cast, including votes ‘for’, ‘against’ and ‘withheld’.
Proxy service providers can influence the outcome of proxy fights and are becoming increasingly prominent.
aPassed at a general meeting of which at least 21 days’ notice specifying the intention to propose a resolution as a special resolution has been given. A special resolution requires a 75 per cent majority. It is required for important matters such as alterations to the memorandum or articles of association, a change of name, or
areduction of capital to be approved by the court.
bUsed for all matters unless the Companies Act or the company’s articles of association require another type of resolution. Passed by a simple majority of members who are entitled to vote at a meeting, notice of which has been properly given. Voting may also be allowed by a member’s substitute known as a proxy. The length of notice required for an ordinary resolution depends on the kind of meeting at which the resolution is to be discussed.
cEach voter is allowed to vote for only one candidate, and the winner of the election is whichever candidate receives the largest number of votes.
dSupporting Principle D1.1 from the Combined Code, July 2003.