Pensions Investment Research Consultants (PIRC) has just published the 17th edition of its UK Shareholder Voting Guidelines, replacing the version published last year. PIRC is an independent research and advisory body that provides services to institutional investors on corporate governance and corporate social responsibility. Its Shareholder Voting Guidelines represent its independent judgement of good corporate practice in accordance with the law. PIRC applies the guidelines to all listed companies that it covers on the UK market (including those incorporated outside the UK).
The main highlights of the new guidelines are:
The board
• Composition: PIRC's view is that transactions with subsidiary companies are always related party transactions.
• Appointments: PIRC believes that open advertising should be encouraged for all appointments to the board.
• Diversity: PIRC views the Davies disclosure recommendations as a minimum and will look for disparity between the gender balance on the board and within the workforce.
• Conflicts of interest: PIRC believes that some directors' conflicts of interest are never justifiable and will not support the election of directors with such conflicts. In PIRC's opinion conflicts are an issue where there is a major controlling shareholder.
• Company secretaries: PIRC recommends that the company secretary's role and responsibilities should be disclosed in the annual report and accounts.
• Non-UK registered holding companies: PIRC will consider whether specific issues need to be addressed for companies not incorporated in England and Wales.
Annual report, accounts and audit
PIRC considers that the banking crisis revealed systemic problems in accounting standards, which it believes are now contrary to the true and fair view standard of the law.
• Accounting standards: PIRC is critical of accounting standards, which it believes have been set contrary to the true and fair view standard of the law. PIRC's view is that IFRS has been delivering profits which fail to give a true and fair view and that such "distorted" profits have been used to justify inappropriate remuneration. PIRC will not support approval of the annual report and accounts, the re-election of any member of the audit committee or the finance director if it is clear, or suspected, that a company's adherence to IFRS means the accounts do not provide a true and fair view.
• Risk management and internal control: PIRC continues to question certain aspects of the model of internal control statements in annual report and accounts, required by the Listing Rules and the UK Corporate Governance Code (Code). In particular Code Provision C.2.1 requires directors to include a statement in the annual report and accounts that it has reviewed the effectiveness of its internal control systems (referred to in the guidelines as Turnbull statements), which must be reviewed by the auditors (LR 9.8.10R(2)). PIRC recommends that directors take independent legal advice on making a Turnbull statement. Where directors have signed Turnbull statements but there are accounting problems or irregularities where there is a consequential loss, PIRC may vote against the re-election of the full board so that a new non-conflicted board can take the necessary action.
• Audit committees: PIRC has difficulties with new Code Provision C.3.8 which requires the annual report and accounts to include a section describing how the audit committee has discharged its responsibilities. PIRC interprets this provision as stating the audit committee has distinct responsibilities separate from the board.
• Auditor rotation: In PIRC's opinion, the amendments to the new Code Provision C.3.7, recommending that FTSE 350 companies should put the external contract out to tender every ten years, do not go far enough.
• Reporting by auditors: PIRC believes that auditors are not reporting properly that the accounts of the parent company and the group give a true and fair view due to the defective accounting standards.
Shareowner rights, capital stewardship and corporate actions
• Maintenance of capital: PIRC will pay particular attention to the capital/share price dynamic when considering board composition, pay and accounting matters.
• General meetings and court meetings: In the case of an acquisition or merger, PIRC will pay attention to the independence of the board and the extent to which independent due diligence has taken place. If a clear minority is disadvantaged PIRC may recommend that the objection is lodged at the court meeting.
• Political donations: PIRC will not support resolutions to approve the making of political donations or incurring political expenditure unless companies specify where they intend to spend the amounts for which the authority is sought.
Directors' remuneration
Following the "shareholder spring of 2012", PIRC concludes that there has been a market failure with directors being paid more than they are worth and remuneration committees have failed to work. PIRC has therefore made significant changes to its guidelines on directors' remuneration. The key changes include:
• Long-term incentive plans (LTIPs): PIRC's view is that such schemes do not align with the interests of shareholders. Following its analysis of LTIPs, PIRC has concluded that they are inherently flawed and no longer fit for purpose as they are not long-term, do not incentivise directors and can be amended and manipulated by remuneration committees. Therefore, PIRC will no longer support new LTIP based schemes.
• Other performance indicators: PIRC believes that non-financial performance indicators in pay schemes should only be invoked if financial performance is satisfactory.
• Voting positions: In addition to LTIPs, PIRC makes it clear that it will not support:
o Executive director bonus schemes which include performance targets that represent responsibilities that should be part of the director's role.
o Pay schemes where "quartile" benchmarks are driving the setting of pay.
o Remuneration schemes, or the re-election of a director, where a director receives rewards following a capital raising.
• Remuneration consultants: PIRC believes that the remuneration consultancy industry is responsible for the majority of remuneration schemes and the performance of the industry shows many of the conflict issues associated with auditors. Therefore, PIRC will not support any directors' remuneration reports, the approval of the annual report and accounts, the re-appointment of the auditors or the re-election of the chairs of the remuneration and audit committees if the audit firm is also the remuneration adviser. PIRC will also not support remuneration schemes where there is a likely liability, or likely contingent liability, for any element of deferred pay that has not been provided for in the accounts.
• Remuneration committees: PIRC's view is that directors are undertaking activities economically similar to dealing in close periods by setting scheme targets for directors' awards at times when directors have insider information.