31 January 2023 Corporate governance concerns mount for FTSE 100 companies

Corporate governance concerns mount for FTSE 100 companies​

What do you need to know this week?

A conflict is simmering in the City.

On one side are institutional shareholders like pension funds, insurance giants, and other financial institutions that invest the public’s money. On the other are the board of directors of the FTSE 100 companies, the largest 100 publicly traded companies in the UK, who oversee businesses’ executive leadership teams.

The simmering dispute came to a head the week before last, when the Financial Times broke a story stating that The Investor Forum, (which represents investors with more than £800m in UK equities) had submitted a letter to the chairs of the board of directors of the FTSE 100, calling for a new group to be formed to address shareholder concerns over stewardship and corporate governance. At the top of the list are concerns related to excessive executive pay and “overboarding”, which refers to company directors that sit on too many boards.

This comes off the back of a report published in November by a PR and lobbying firm, Tulcha Communications Group, entitled The State of Stewardship. The report highlights the frustration of the chairs of companies like HSBC and Tesco as to what they view as overly-interventionist investors which obligate the board to comply with “box-ticking” exercises related to compliance and ESG with little regard to the longer-term business objectives.

Why is this important for your interviews?

This dispute cuts to the heart of the relationship between company shareholders and company management. Accordingly, it is a dynamic area of law and business that lawyers play a vital role in facilitating. It is therefore an important development to watch, as the outcome of any changes to laws or customary practices will have wide-ranging impacts on the corporate landscape. Understanding the dynamics at play will demonstrate to interviewers your commercial understanding.

At its most basic level, the stake of the dispute relates to a fundamental question at the heart of market economies: how much oversight should the effective owners of a company (shareholders) have over those tasked with actually managing the company’s business (the board, who in turn oversees the management)?

At the scale of the largest UK-listed companies, this relationship is governed by a mixture of company law and regulation, quasi-legal regulatory oversight (e.g. the UK Stewardship Code), and conventional practices. Given both sides’ frustration in recent months, we may be at a corporate governance inflexion point, at least as far as UK publicly traded companies are concerned.

FTSE 100 boards feel that investors are stifling the power of the board to govern the management of the business. Institutional investors argue that FTSE boards refuse to acknowledge the increasing scrutiny investors face from their clients related to matters of ESG compliance.

Take the matter of executive compensation, which refers to the pay packages CEOs and other top executives receive subject to the board’s approval.

Institutional investors, who ultimately manage the money of savers like you and me, feel that excessive increases in remuneration in a cost-of-living crisis is a bad look. That is, they worry that by investing the public’s money in a company whose board approves unreasonable executive pay packages, public investors will pull their savings out of these funds and into asset managers with better ESG credentials.

But from the perspective of the board, according to the State of Stewardship report, UK publicly traded companies are struggling to recruit executives and board directors because of what they view as uncompetitive restrictions on remuneration. As one chair stated in an interview, “We have been trying to recruit a divisional president for the US but found it impossible to get close to the required compensation, within the UK pay restraints”.

Resolving this dispute is important because the future of UK publicly traded companies may be at risk. Over the last decade, the number of UK IPOs has decreased while the number of take-privates by private equity sponsors has increased, resulting in fewer publicly traded companies. Protracted disputes between shareholders and FTSE boards risks further eroding investor confidence in the UK’s equity market.