A “supercode' too far?

The Hampel Report will mean extra time and expense for small companies and Hampel's own colleagues are not complying with it, according to Paul Cliff. Paul Cliff is a corporate partner at Edge & Ellison.

The London Stock Exchange last month put a new “supercode” on corporate governance out for consultation.

It was the result of the final report of the Hampel Comm-ittee on corporate governance, led by Sir Ronald Hampel, published last January.

Representing the next stage in the development of the regulatory framework for corporate governance applicable to companies listed on the London Stock Exchange, the Hampel Report followed on from the Cadbury Report and the Greenbury Report (which focused mainly on “fat cat” directors' salaries and share options).

Business has become increasingly aware of corporate governance as an issue and headway has been made since corporate collapses like Barings, Maxwell and Wickes. We have largely moved away from the dark days of the so-called “fat cat” pay awards and alleged abuse of share options, particularly in the privatised utilities.

Hampel recognises that things have moved on. The report itself addresses four key areas directors, directors' remuneration, shareholders and the AGM and accountability and audit with the key objective of substituting principles for detail whenever possible.

Some see Hampel's approach as softening the rules, but the general view is that the new framework is more enlightened, practical and in some cases involves stronger controls.

“I don't see anything macho in producing a revolution,” said Sir Ronald Hampel in response to his detractors.

The Stock Exchange's supercode draws together the relevant parts of the Cadbury, Greenbury and Hampel Reports. It considers the amendments to the existing listing rules required to implement the Hampel Report's recommendations.

The DTI and the Treasury are both currently reviewing aspects of company law and Secretary of State Margaret Beckett has promised a wider review.

Although all this activity will take time to complete, all Public Limited Companies (PLCs) concerned with best practice should start to regard Hampel as the standard now.

Hampel does not recognise any express distinction bet-ween companies based on size. Many smaller listed companies face onerous and expensive measures to comply with the recommendations of the report. Smaller companies will see as much regulation, if not more, than they saw previously. Bodies such as CISCO, which represent the interests of smaller PLCs, will undoubtedly issue their own set of recommendations (as they did after the Cadbury Report was published), appropriate for smaller companies.

One of the key areas of the Hampel Report directors' remuneration is just as relevant to smaller PLCs, which themselves are just as vulnerable as larger PLCs to poor corporate governance. While con ceding that levels of remuneration should be sufficient to attract and retain directors of suitable quality, Hampel specifically recommends that committees should devise perf ormance-related pay schemes suitable to the company. Rewards from such schemes should not be excessive.

President of the Board of Trade, Margaret Beckett recently called for more rigorous criteria to be applied to boardroom pay and incentives, and told companies that they should take into account the effect on employee morale of “unwarranted pay increases at the top”.

However, not all smaller plcs have performance-related pay schemes suitable for their particular company. In any case, these will prove expensive to implement if not already in place. The Hampel Report's recommendations for smaller companies imply further expense with regard to AGMs. Hampel advocates AGMs with full private investor participation. A full business presentation should be made at the AGM. Chairmen of audit and remuneration should also be available to answer questions and the AGM should be followed by a written resume of proceedings.

Resumes should subsequently be made available to shareholders on request. The Hampel Report also suggests that companies take a closer look at the role of their non-executive directors, stressing the importance of independence Hampel recommends that the majority of non-executive directors be independent, regardless of a company's size.

At least one third of the membership of the board should be made up of independent non-executive directors. British Aerospace has just announced its decision to retain its top two positions as executive posts which conflicts with corporate governance guidelines. The Greenbury Committee felt that chairmen operating with a chief executive should be non-executives, to reduce the risk of the type of conflicts that bedevilled the plans for the Glaxo merger with SmithKline Beecham a distinction favoured by the Hampel Committee. Interestingly, Sir Ronald Hampel is a British Aerospace non-executive director.

The Hampel Report has received mixed reviews. A spokesperson for corporate governance lobby group PIRC said: “If Ronnie Hampel set out not to make history, he has succeeded.”

The CBI however, believes that Hampel's report has dealt with the main current corporate governance agenda and supports the main conclusions of the Hampel Committee's final report. The CBI has stated that the report provides a viable framework for good practice in corporate governance. In overall terms, the Hampel Report could have imposed different levels of regulation for different sizes of company.

There was scope for Hampel to relax the rules for smaller plcs, but he deliberately chose not to do that. The report puts the onus on shareholders, and institutional shareholders in particular, to determine what con stitutes compliance in the context of any particular company.

Hampel does recognise that smaller plcs will have genuine difficulties in meeting some of the recommended courses of action. But this should not be seen as exempting smaller companies from the need to change.

As stated earlier, smaller plcs are as vulnerable as any large company to the sort of abuses which are caused by poor corporate governance. Smaller companies should begin a critical review of the key aspects of their corporate governance systems, taking professional advice where necessary.

During the three stages of regulatory review outlined earlier, which will clearly take time to complete, smaller plcs are able to look at their own corporate governance procedures in the light of the Hampel Report and start to address some of the areas where they do not comply.

My own advice is to start that process as quickly as possible especially with regard to directors' remuneration, non-executive directors and AGMs.