Chiefs in contract war with investors
2 August 1999
16 October 2013
8 July 2013
18 March 2014
29 July 2013
26 June 2013
John Farr, head of employment, Herbert Smith
David Cheyne, corporate partner, Linklaters
Alasdair Simpson, senior partner, Manches & Co
The swift departure of Mirror Group boss David Montgomery was taken as a sign of a new era of "shareholder activism", with bolshy institutions removing chief executives when they are displeased with their performance.
A new wave of shareholder influence started with top City fund manager Alastair Ross Goobey's attack on three-year rolling contracts back in 1993. Today, his campaign for "one-year rollers" has broad institutional support.
So is there a growing trend, and is it a good thing? And what is in it for the lawyers?
John Farr, Herbert Smith's head of employment who advised Montgomery and is an expert in boardroom disputes and terminations, says: "There's undoubtedly a changing environment, which started with Alastair Ross Goobey. Now, 50 per cent of service agreements are one-year terms.
"That's had a knock-on effect on directors' compensation for loss of employment. We've recently been consulted by a number of chairmen and chief executives who have been affected by these changes, and want to improve their contractual terms in various ways.
"For a director who's under pressure, there's advice on his position and how secure - or otherwise - they are; how they should act in terms of corporate governance; and getting them the best compensation."
He continues: "It's probably fair to say shareholder activism is a good thing, in that it keeps company boards up to the mark. But institutional shareholders have their own agenda, and their interests may be short term.
David Cheyne, corporate partner at Linklaters, says: "I'm not sure that shareholder activism is a bad thing, or that it should really concern boards. It's not likely to interfere with the running of a company unless the shareholders are dissatisfied.
"Institutions have historically been slightly reluctant to put their head over the parapet when a takeover bid is on the table. I think the main difference now is that they're more inclined to say to a bidder: 'OK, we'll back you'.
"There's also a slight change in terms of them being publicly prepared to stand behind a bid. Perhaps they're also prepared to be a bit more aggressive. In some ways, the Mirror Group situation is a classic example."
Disenchanted fund managers are unlikely to call in the lawyers, except in extreme circumstances, in which case they may wish to, say, call an EGM, says Cheyne.
Manches & Co senior partner Alasdair Simpson heads the firm's corporate and employment group. His client list reads like a Who's Who in the City, and he advised Barclays Bank chief executive Martin Taylor in negotiations over his recent departure. "Ten years ago, senior executives rarely consulted lawyers to button down their contracts when they took on a new position. They only came to see us when things went wrong. Now, nearly half my work is negotiating the package on the appointment of an executive. These have become more sophisticated."
On the Montgomery case, he comments: "It's naive to believe that the removal of Montgomery signals the start of a new era... What was different about the Mirror Group crisis was the public profile adopted by certain institutions to achieve the desired objective. Once Montgomery realised that institutional support had evaporated, he realised he was 'dead'."
He says of the future: "The watershed in terms of 'active shareholder involvement' will come if funds insist on their direct nominee having a place on the board. Their current involvement in the appointment of non-executive directors is more passive... I doubt whether in the foreseeable future many, if any, of them will seek direct representation."
He warns: "Active shareholding has one potential disadvantage. The institutions are driven by performance... This gives rise to the risk that their investment policy will be focused on the short term."