Governance review open for business

Business secretary Vince Cable this week formally launched a review into corporate governance to tackle the market short-termism that fed into the global financial crisis.

At the CBI conference on Tuesday, Cable unveiled a formal call for evidence on short-termism in UK equity markets.

The 38-page document A Long term Focus for Corporate Britain (443kb PDF) should “produce a rounded account of the issues that may be causing a dislocation between what is best for the ultimate owners, the incentives of their agents, and what is best for managers”, he said.

Key questions

● Do UK boards have a long-term focus – if not, why not?

● What action, if any, should be taken to encourage a long-term focus in UK equity investment decisions?

● What would be the benefits and costs of more transparency in the role of fund managers, their mandates and their pay?

● Are shareholders effective in holding companies to account over pay?

● Do boards understand the long-term implications of takeovers, and communicate the long-term implications of bids effectively?

The Department of Business Innovation and Science project will accept evidence over the next 12 weeks, with discussion closing on 14 January 2011. Given that timescale, some of the government’s planned measures could make their way into spring Budget announcements.

The review paper explains that the current governance framework is set out in the Companies Act 2006 - itself the result of a major review under the last government. The current rules are designed to reduce the information asymmetries that arise from the principal-agent relationship enshrined in law, the review notes. Shareholders have right to the information they need to hold managers to account; “This relationship lies at the heart of equity markets,” it notes.

Elsewhere, a parallel project on the future of narrative reporting is looking to beef up the Operarting and Financial Review - without increasing the regulatory burden on business - so shareholders are better able to carry out their responsibilities.

In the wake of the financial crisis, questions have also been asked about the role of auditors, including suggestions that audits do not address the issues of most concern to investors. These issues are being considered by the House of Lords’ Economic Affairs Committee in a separate inquiry on Auditors: Market concentration and their role.

Continued...

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