Oral statement to Parliament

Corporate governance reforms:rebuilding trust, empowering shareholders and protecting long-term value

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Introduction Good afternoon and thank you for inviting me to speak to you today. It must have been sometime since you have had a Coalition…


Introduction

Good afternoon and thank you for inviting me to speak to you today.

It must have been sometime since you have had a Coalition Minister come to address you or your predecessor organisations.

And even longer since a Liberal has been doing a job like this.

But it does give me one advantage: Liberals have got used to planning for the long term.

So I’m particularly comfortable with the title of today’s conference - ‘investment in the long-term’. More seriously, it must be the right theme as we emerge from the financial storm of the past couple of years.

And I’m here to talk about reforms that I hope will increase investment for the long term: reforms that you’ve made, reforms that we are planning, reforms that we want your advice on.

As Minister for Corporate Governance I want to work with you and your members to make sure we learn the lessons of the recent past, so we can continue to improve corporate governance in our country.

Don’t get me wrong: despite all the criticisms and the problems, I do think Britain’s corporate governance system has huge merits, and can point to many successes.

Yet we are still feeling the after-shocks triggered by the near collapse of the global banking sector and the recession that followed. One of those shocks has been damage to confidence in the corporate sector.

So that confidence needs to be rebuilt and our collective reforms to corporate governance can play a key part in that - they need to, in my view, because effective corporate governance is so crucial to the long term success of UK companies and the wider economy.

So I want to touch on 4 areas today: the stewardship code, our recent consultation on reforms to narrative reporting, part of the Treasury’s consultation on regulatory changes and takeovers.

Stewardship code

The Stewardship Code many people here made such an important contribution to is an important development. Institutional investors have a fundamental role to play in corporate governance. Of course, it’s boards who must need above all think strategically and take decisions for the long-term.

But to do this with confidence, directors need to be sure their major shareholders understand and support their plans. And I’d add, they also need to know you’re watching! Otherwise there could be a risk that some company decisions become short term and reactive.

Of course, there’s also a perception that, too often, investors focus on short-term gains at the expense of long-term value. While many studies over the years have tried to assess this issue - whether it’s true and whether it matters - I do think we can agree that it must help long term healthy growth if shareholders engage with the companies in which they invest.

Owning shares is after all a responsibility and it should be seen as one. And a key part of the message behind the Government’s “Big Society” programme is responsibility.

So you may not have realised it, but the Stewardship Code, published by the Financial Reporting Council in July, is in my view an indication of how investors can play their role in the Prime Minister’s Big Society. It is the first of its kind in the world and a major step forward. The Code demonstrates the UK once again leading the way.

Yet now it’s time for you and your colleagues - both shareholders and fund managers - to step up to the mark and embrace its principles.

That means making meaningful statements about meeting your
stewardship obligations; establishing clear guidelines on when and how you will act to protect shareholder value; and reporting regularly on your activities.

Crucially, the Code also encourages public disclosure of shareholders’ voting activities. Voting at company meetings is one of the most effective ways of providing long-term stewardship - I believe it is therefore important that all institutional investors disclose their voting records.

Placing these decisions on the public record boosts transparency and aids scrutiny. These in turn are the bedrock of effective corporate governance.

So, too, are open and honest relationships between directors and shareholders, where investors are willing to speak up when they think the strategy is wrong. The activism that has marked the recent AGM season is a welcome sign.

Shareholders need to rise to the challenge of effective stewardship - and their activism needs to be well-informed so it helps shape the right long-term strategy for the business.

Shareholder empowerment

That’s why shareholder empowerment is an important principle underpinning the Government’s work. And why it’s a key feature in our consultation on narrative reporting

Companies need to empower shareholders - big and small - by providing the information they need to act as effective stewards.

Our consultation on the future of narrative reporting, which closes on October 19, is all about equipping shareholders with the information they need to make well-informed decisions. That does not necessarily mean adding to the existing regulatory burden. Many of those I have spoken to tell me there is currently too much reporting, and the problem is that shareholders cannot see the wood for the trees.

But the consultation is designed to ensure that reporting is sufficient, material, pertinent and timely. Providing guidance and incentives to improve existing practice. And removing unnecessary requirements where possible.

It means that, armed with all the facts, shareholders can then hold directors to account and be effective stewards for the business. And that includes linking actual pay to the company’s long-term performance.

That in turn is a powerful way of encouraging companies to focus on the issues that matter to their long-term success.

So we have three objectives we want to meet with this consultation.

Identifying what’s required to get the standard of narrative reporting up to the level of the very best.

Empowering shareholders with all the information they need to be active and committed company owners.

And achieving these aims without increasing the overall burden and cost of compliance on businesses.

Regulation

These issues - promoting strong boards and engaged shareholders - are particularly important when considered in the context of the financial crisis. After all, the failings of the financial institutions, their management and owners, were an important factor in bringing about the crisis.

And the Government recognises, of course, that significant changes are also needed to regulation. This is why the Government is consulting on the future of UK financial regulation. One option proposed is to join up the work of the Listing Authority and the Financial Reporting Council.

Creating a new companies regulator - perhaps better described as a Corporate Governance and Listing Authority - could provide real advantages in bringing together in one place those people considering different aspects of corporate governance.

After all, rules about listing, and rules concerned with corporate governance, audit and accounting, are all concerned with issuers of capital.

And companies have a different culture to large financial institutions, which requires an entirely different approach to their judgement of risks.

This approach would, for example, allow a consistent view between what companies say in offer documents, and what they report a couple of years down the track. That is not always possible at the moment.

The new regulator, if established in this way, would build on the FRC and UKLA’s track record of effective engagement with issuers, investors and their advisors. The government recognises of course that any move towards this model would have to be made in a way that would ensure companies can continue to raise the capital from the markets that they need to grow.

As I have already mentioned, we are consulting on this issue, and would welcome the views of all interested parties.

Takeovers and long-termism

Finally let me say something about takeovers. Our desire to empower shareholders is also informing our work on the rules regarding takeovers. As is our wish to get away from the short-term business strategies that have held too much sway in recent years.

A company should be much more than a series of short-term financial transactions. So we want a system of market regulation which accurately recognises its value.

But too many takeovers fail even by the limited criterion of shareholder value - often with serious implications for the people who work for the firms on both sides of the deal.

Please don’t misunderstand me. Of course this Government welcomes and is actively encouraging foreign investors who are interested in coming to do business in the UK. We will continue to enjoy the benefits of open markets.

But we want the takeover process to be more transparent. Directors to think about their long-term legal duties. Takeovers to be decided on the basis of long term shareholder value, not short-term speculation.
And we want all shareholders to be empowered to influence the outcome.

So we are committed to reviewing the factors that can be considered by regulators when takeovers are proposed. And which aspects of the framework could be tightened up. These might include higher merger fees. Or a pre-notification requirement for some deals, like those that exist in many other European jurisdictions.

The Takeover Panel has been looking at the way takeover rules operate as part of its review. The Government will set out its thinking later this year we will be focusing on three key questions.

Do takeovers make economic sense for the bidders?

Do target boards too often act as if their sole responsibility is to get the highest price?

And are takeover bids decided by investors with short-term horizons?

Conclusion

As we work through these issues, our conclusions will be informed by the same principles underpinning our broader efforts to renew the corporate governance framework.

A commitment to rebuilding trust. A determination to empower shareholders. And a focus on protecting long-term value.

This Government understands how tough it has been over the past two years, as companies of all sizes have had to fight their way back from the deepest recession for sixty years.

We are not going to do anything which makes that continuing task more difficult. We are certainly not in the business of weighing companies and investors down with more regulation and higher costs.

But we are going to shine a spotlight on corporate governance to further improve accountability and transparency

It’s quite a challenge to get it right. But it’s one worth taking on - because the long-term health of British business matters to all of us.