|Posted on July 26, 2013 at 5:15 AM|
There are multiple reasons why now is a good time to think about a 'good governance index' for the UK's plcs. So it's just as well that moves are afoot to create one.
Ken Olisa, chairman of Restoration Partners, the merchant bank that gives advice to technology companies, is in talks with Simon Walker at the Institute of Directors about next steps. If it looks as if I am focusing on personalities here, it is because sometimes they do matter when it comes to bringing about change.
As far as Ken Olisa is concerned, you can refresh your memory with this recent Guardian story, which also explains a bit about the 'good governance index' and why it is needed. My 2011 interview with Mr Olisa for the FT will also give you an insight into him. His boardroom experience at ENRC has certainly contributed to his thinking on boardroom behaviour, and how to police it better.
Even Russia's Sberbank believes that poor corporate governance is an enervating force for companies. A new report by its Investment Research arm says: "Second-rate corporate governance acts as a ‘tax’ on Russia’s most innovative companies when they try to raise capital. Despite attractive valuations, the study says the perception (and reality) of corporate governance risk is the top concern for investors when it comes to investing in Russian equities.
Mr Olisa told me: "Our code of corporate governance in the UK has been our biggest competitive advantage over the last 20 years, but it needs policing. At the moment it's like telling people there's a 'speed limit' without telling them exactly what it is - if you're not British, you don't understand it being about behaviour, not rules."
The FRC's CEO, Stephen Haddrill, recently spoke - also in an interview with me for the FT - about the importance of focusing on behaviour not rules, for effective regulation.
There are many players on the UK stage when it comes to influencing the ethos of our corporate governance, important because it maintains the country's lure for investors as well as its standard for doing business.
Sarah Wilson, is CEO of Manifest, the proxy voting agency and a leading source of governance intelligence and data. She suggests that although markets talk a lot about 'good governance', it might be time to talk about 'sub-prime governance' and how it damages business reputations, drags down returns and undermines the confidence of government and the general public in the City and investment.
By 'sub-prime' she means: sub optimal and providing lip service, ignoring investors' engagement - in other words, bare compliance.
And here is Sarah Wilson on the 'Good Governance Index':
"Manifest has submitted a conceptual framework for consideration based on a rigorous review of existing indices. Approach follows strong stewardship principles based on investor preferences rather than minimalistic following of rules. Some companies will find it challenging as it may take them out of their comfort zone as it will blend corporate governance, remuneration governance and sustainability or extra financial issues.
There would be an annual rebalancing process based on the annual report disclosures and new IPOs will need individual consideration based on their documentation. We would like to apply the criteria at pre-IPO stage to ensure 'market readiness'.
The traditional market weighted index approach has been problematic and investment banks have gamed the system to let their clients into a "must invest" index. More pension fund trustees should be reviewing the benchmarking so that fund managers have more latitude - slavish index following has little to do with the objectives of your fund if you are looking 35 years out.
If the market is surprised at how long companies have stuck with their auditors then the 'stickiness' of index use is equally surprising. There is an inherent conflict between the ownership of the FTSE index family and the stock exchange as a trading platform which is sometimes over-looked. (my emphasis)
We believe we're the right partner because of our long standing commitment to objectivity and independence of analytical process. We don't engage with companies, we let the data tell the story. We have an outstanding client base of the most thoughtful shareholders on a global scale and we are independent of any NGOs/trade associations or special interest lobby groups. (my emphasis)
The BIS report just out shows a clear need to up the game on stewardship. The Good Governance Index is Manifest's contribution to making a positive difference."
Thank you Manifest. Food for thought and a good weekend everyone.