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Governance review open for business

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29th Oct 2010
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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 review will look to come up with proposals to ensure efficient and transparent allocation of capital and the long-term sustainability of UK companies. The call for evidence poses a series of questions (see left) on issues including the roles of directors and shareholders, directors' remuneration and the economic case for takeovers.

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.

Cable claimed that the UK led the world in developing high standards of corporate governance by creating the first stewardship rules for investors, the first corporate governance framework and a comprehensive takeover code.
 
But he added: "If leaders of big companies seem to occupy a different galaxy from the rest of the community, they risk being treated as aliens."
 
Chief executives' total remuneration had risen 14% per year over 1999-2009, while the value of the FTSE 100 had fallen by 1% per year and average earnings had grown by only 4%. "So perhaps it is time to return to Earth," Cable said.

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 a 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 Operating 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.

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