Company shareholders around the globe will become more powerful, if what the Swiss and the U.K government are planning to do in 2013 is to become a precedent. Nonetheless, a few critics such as Neal Lipschutz, senior vice president and managing editor of Dow Jones Newswires perceives think the plan is misguided.
US Shareholders are increasingly winning the war of declassification of boards as initially featured in some of our posts; a perfect prerequisite of what the two nations (U.K and Switzerland) intend to implement.
David Einhorn's Greenlight Capital returned -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500. According to a copy of the fund's letter, which ValueWalk has reviewed, longs contributed 5.2% in the quarter while short positions detracted 4.6%. Q2 2021 hedge fund letters, conferences and more Macro positions detracted 3.3% from Read More
What exactly is the IMPLICATION of such a Policy, and Why does Lipschutz feel that the idea goes too far?
The citizens of Switzerland will go on a referendum in the first quarter in 2013 according to Lipschutz, on giving shareholders in public companies the mandate to virtually, exercise the role of the board of directors. This includes things such as making the decision for executives remuneration as well as evaluating their performance. All this will be achieved through a simple majority vote. Lipschutz is of the opinion that this will technically render the board redundant.
The U.K will publish the new policy via the Financial Reporting Council (FRC) of the country. The council wants public companies to base directors’ remuneration (including covering base pay, bonus, long-term rewards) with company performance.
The U.K policy focuses on the following areas:
- The policy, if implemented, will give shareholders binding votes on pay policy and exit payments, so they can hold companies accountable and prevent rewards for failure, which could be a move to boost corporate governance in public companies.
- Boost transparency so that what people are paid is easily understood, and the link between pay and performance is clearly drawn. Amy Goodman a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP notes on Hardvard Law School’s Blog that, this will also help compare the executives’ pay with that of other staff.
- Ensure that reform has a lasting impact by empowering business and investors to maintain recent activism.
Under the the current plan, shareholders have a non-binding opinion over directors’ performance and pay, a situation that could soon change if other countries follow the proposal of U.K and Switzerland. However, the Dow Jones V.P notes that, implementation of bonus claw backs would be a better method.
He also claims that given shareholders’ return on investment is largely pegged to the company’s stock performance; it could result in an unfair judgement, because a company’s stock price may not necessarily be directly proportional to directors’ performance over a certain period.
From a different perspective, U.K Business Secretary Vince Cable highlighted the following benefits:
At a time, when the global economy remains fragile, it is neither sustainable nor justifiable to see directors’ pay rising at 10 per cent a year, while the performance of listed companies lags behind, and many employees have their pay cut or frozen.
He states “In January, we kicked off a national debate aimed at encouraging shareholders to become actively engaged as company owners in aligning directors’ pay with performance. I have been greatly encouraged by the ‘shareholder spring’ and I want to see that momentum sustained. That is why I am bringing forward legislation to strengthen the powers of shareholders through a binding vote on pay.”
The tables are indeed turning in the boardroom battle between the directors and shareholders, and the latest developments can only result in favor of the latter, a scenario that could result in companies without boards, or more interestingly, where everyone is a board member.
Lipschutz notes that this is likely to put-off management executives from vying for positions in public companies, which in my opinion, would eventually result in non consistency in leadership, and results.