An addition to the stock exchange's listing rules should be a guide to good practice. Instead its forerunner pulls its punches and invites misinterpretation, says Paul Manser. Paul Manser is a corporate partner at Taylor Joynson Garrett.
Will the London stock exchange's proposed “supercode” improve corporate governance?
Formulated by the Hampel Committee, and a consolidation of the recommendations of the Cadbury, Greenbury and Hampel committees, it will constitute a set of principles of good governance, accompanied by a code of best practice.
These will be appended to – although not form part of – the listing rules. Listed companies will be required to provide sufficient explanation as to how the principles in the supercode have been applied in their annual report and accounts, in addition to the reasons for any non-compliance with the code on best practice. This is intended to result in meaningful disclosure.
However, the Hampel Committee's emphasis on bland principles, rather than detail, makes it likely that a number of the requirements may result in uninformative statements.
The combined code seeks to tackle legitimate concerns which have been publicly expressed about the role of directors, directors' remuneration, accountability and audit, and the role of shareholders and their relations with companies. But is it successful?
In general, the supercode follows the Hampel Report and fights shy of any extreme recommendations in order to maintain flexibility. For example:
There is no requirement for shareholders to vote – institutional shareholders are only reminded of their “responsibility to make considered use of their votes”.
Although the separate roles of chairman and chief executive officer are acknowledged, there is no explicit recommendation that each position should be held separately, merely that “no one individual [should have] unfettered powers of decision”.
Shareholders are not required to approve the remuneration committee's report: it is left to the directors “to consider each year whether the circumstances are such that the AGM should be invited to approve the policy” in the remuneration report.
On certain key points, the supercode suffers from vagueness and ambiguity. It is true that, in a number of instances, reference to the Hampel Report itself or even to the Cadbury or Greenbury reports may assist clarification. But is this intended? If so, is it right?
In view of its specific annexation to the listing rules, the combined code should surely be drafted so as to be entirely self explanatory and free standing – cross references to external documents should not be required.
As a result, if the supercode remains in its current form, companies, corporate finance lawyers and other professional advisers may face difficulties of interpretation. Take three of the principles:
(i) The principle of proper communication between a listed company and its shareholders. This states: “companies should be ready, where practicable, to enter into a dialogue with institutional shareholders based on the mutual understanding of objectives.”
What does this mean? The code on best practice does not attempt to provide any assistance and the analysis in the Hampel Report does not, of itself, give any practical help.
Of equal importance is that no account is taken of the realities of disclosure of inside information, the requirement to ensure that the market has simultaneous access to the same information and the principle of equal treatment of all shareholders. It is highly likely that the implementation of this principle, if retained in its current form, will create more difficulties than benefits.
(ii) Principle AV states that the appointments procedure to the board must be “transparent”. The code is silent as to what this means but the Hampel Report unhelpfully states that “decisions should be taken, in reality as well as in form, by the whole board”. What should be transparent?
In the annual statement to shareholders, is it intended that the procedure itself should be explained or is it the practical implementation of the procedure which is to be described? A similar difficulty arises in relation to the procedure for developing executive remuneration policy and fixing remuneration packages which is also required to be “transparent”.
(iii) Principle AVI requires all directors (without exception) to submit themselves for re-election at least every three years. Most listed companies' articles of association will include annual one-third retirement by rotation provisions. These will be broadly comparable to, but in practice may not be entirely consistent with, the proposed three-year rule. The combined code should be clarified to reflect what most listed companies already require of themselves.
Detail in the code is also lacking. Take these two examples:
Companies should establish nomination committees for new directors “unless the board is small” (code A.11). No attempt is made to define what constitutes a “small” board. In any event, the exemption would allow, rather senselessly, a large company with a small board to avoid the requirement.
Newly appointed directors are to be subject to election “at the first opportunity after their appointment” (Code A.12). Does this mean at the first AGM (so as to accord with most articles of association and the listing rules), the first EGM or otherwise? Clarification would be useful.
An underlying purpose of the Hampel Report was to support a self-regulated system of corporate governance, rather than an approach dictated by legislation. Has the supercode achieved this objective? It appears that the Government is still considering.
The DTI's consultation paper on company law reform, published after the Hampel Report, states that “some legal underpinning” may be needed in relation to the duties of directors, the conduct of AGMs and shareholder control over directors' pay.
It seems likely that some legislation will be introduced.