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Let the battle commence

September 5, 2016

 

Chris Philp proposes to introduce Swedish style Shareholder Committees to help to deal with the 'ownerless corporations' of Public Companies. The shareholder committee - which would comprise the top 5 shareholders, the Chairman and an employee - would have three roles: pay policy and packages ratification, questioning the Board on strategy and recommendations upon the appointment and removal of directors.

 

According to The Independent Director author Gerry Brown, “It is a good first step since institutional investors who own more than 80 per cent of equity market capitalisation in the UK do not on the whole have a very good record of engagement with the companies in which they invest. Sadly this has had a deleterious effect on corporate governance because there is not a serious dialogue between the investors and the Directors of companies.”

 

“However, there are four serious methodological, logistical and strategic problems with the Philp initiative in its current form. These are:

(1) Fund managers do not currently get involved with companies due to lack of time and capacity. An individual fund manager may be responsible for investments in many companies and it is estimated that it is not possible for them to engage in more than 5% of these. So what exactly is going to change to facilitate the involvement in Shareholder Committees?

(2) Some institutional investors – notably hedge funds - are known for their short term holdings so there is little or no incentive to invest time in shareholder meetings

(3) The UK stock market comprises investors from around the world making their physical presence at shareholder meetings and involvement in companies extremely difficult.

(4) Fragmented share holdings mean the top 5 shareholders would often own less than 30% of the company so how could they be said to effectively represent all shareholders?”

 

An even more fundamental issue is that the proposal seeks to deal with the symptoms of the problem rather than its cause. The really critical issue is that we have so many company scandals - Tesco, BHS, Sports Direct, RBS and BP - founded on abuses of executive pay and malfunctioning Remuneration Committees since we do not have sufficient really effective company boards. The cost of this to society is enormous including major losses in shareholder value, increased pension deficits, redundancies and taxpayer bailouts. 

 

Brown continues, “An immediate and cost-effective solution stares us in the face, namely strong Independent Directors. There is not enough awareness about the hugely important role which they play. It’s an ignorance that the Philp proposal in its current form again confirms.

Hopefully the Philp proposal will be the beginning of the debate about the real issues of how we can really improve the effectiveness of our companies.”

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