ISS Special Report: Global Proxy Review First Quarter 2004

UNITED KINGDOM

By Michael Gray

The Myners Report

The most noteworthy first quarter development in U.K. corporate governance was Paul Myners issuing his report to the Shareholder Voting Working Group (SVWG) in early February. The report outlines a comprehensive action program to remove obstacles to casting votes by institutional investors at U.K. company meetings and details a series of actions required from: beneficial owners of shares, companies or issuers, company registrars, investment managers, custodians, and proxy voting agencies. The report also makes recommendations to the Department for Trade and Industry, the Financial Services Authority (FSA), and the Financial Reporting Council.

In a press release accompanying the report, Myners commented:

There has been continuing concern that the system for registering proxy votes at company meetings is not as efficient as it should be. Complications arise from the number of different participants involved and the confusing lines of responsibility. There is no single simple solution, no silver bullet to the problem of ‘lost votes.’ However, significant improvements can be achieved through concerted action by all interested parties. There is nothing inherently flawed in the pipework that carried votes from the investor to the issuer. What has previously been lacking is a commitment on the part of participants to make it work effectively.

Among the conclusions and recommendations contained in the report are:

Voting policy--beneficial owners should determine a voting policy and engage fully in its implementation;

Electronic voting--beneficial owners of shares should require their agents (custodians, investment managers, etc.) to have an electronic voting capability as part of their standard service conditions;

Registering title to shares--beneficial owners should consider requiring their shares to be registered in a nominee company with designation in their own name or some other unique designation, rather than in an undesignated omnibus nominee account;

Date for the appointment of proxies--the current 48-hour limit should be amended to two business days to take account of bank holidays and weekends;

Stocklending--borrowing stock for the purpose of voting is not appropriate as it gives a proportion of the vote to an agent who has no ongoing economic interest in the company.

Beneficial owners should be fully aware of the implications for voting if their shares are lent and, when a resolution is contentious, should recall the related stock;

Accountability--investment managers should actively exercise the votes in shares they hold or manage for beneficial owners and have a stated, public, and regularly reviewed policy on voting U.K. shares;

Voting resolutions at company meetings--best practice should be to call a poll (rather than a show of hands) on all resolutions at company meetings;

Disclosing the results of polls and proxy votes--quoted companies should disclose on their websites and in a summary in annual reports the results of polls of general meetings.

The FSA should make it a listing requirement for the results of polls to be disclosed as a regulatory announcement to the market;

Recognizing votes withheld--votes consciously withheld can be a useful tool in communicating shareholders' reservations about a resolution, provided there is a clear explanation to the company as to why the vote has been withheld. Companies should provide a 'vote withheld' box on all proxy forms;

Improving the powers of proxies--Company Law should be changed to give more rights to proxies so that they can speak and vote on a show of hands as well as a poll; and,

Scrutiny of polls--Company Law should be amended to require independent scrutiny of polls if requested by shareholders.

RREV-ing up Corporate Governance

Jan. 1, 2004, saw the launch of Research, Recommendations, and Electronic Voting (RREV). RREV is a new joint venture between the National Association of Pension Funds (NAPF) and Institutional Shareholder Services (ISS). Under RREV, U.K. investors will soon be able to access corporate governance analysis and electronic voting capability on a significantly wider range of companies, both in the U.K. and in some 80 other countries. The new company offers a substantially enhanced service both to institutional investors and fund managers already subscribing to the NAPF's Voting Issues Service and to U.K clients of ISS. The corporate governance policy and voting recommendations on U.K companies put forward by the new company to U.K and overseas clients are in line with NAPF standards.

Remuneration Reports

The hot topic of 2003 for U.K. listed companies was the first-ever opportunity for shareholders to make their opinions on Executive Remuneration clear. For the first time, listed companies were required to put the remuneration report to a shareholder vote, and some of the more contentious issues during 2003 centered on this vote.

In the fist quarter of 2004, RREV recommended votes against 21 U.K. companies on the issue. The primary concern raised in the vast majority of the cases was related to service contracts’ notice periods being in excess of the standards in more than half of the cases (the new Combined Code requires notice periods to be set at one year or less). Also featured were concerns over adequate disclosure in the report (three cases), failures of companies to link stock options and bonus plans adequately to performance (four cases), and concerns over executives–including Executive Chairmen, Chief Executives, and Finance Directors–sitting on company remuneration committees (seven cases).

One of the more controversial cases was that of WH Smith Group. There were significant concerns over the remuneration policy stemming from the appointment and pay of the newly recruited CEO, Kate Swann. She is in line for a cash-and-shares package worth GBP 2.7 million ($4.88 million) over and above her basic salary. Her package includes a payment of GPB 500,000 ($904,000) as compensation for loss of benefits under share schemes following her move from Argos-owner GUS in November 2003.

According to the Annual Report, Swann is entitled to a basic salary of GBP 475,000 ($858,800) a year. If she stays with the Company until September 2006, she will receive a further GBP 500,000 ($904,000) in WH Smith shares in two tranches of GBP 250,000 ($452,000). This is in addition to the payment for loss of compensation from her previous employment and her entitlement to shares not subject to the achievement of performance criteria. Additionally, departing CEO Beverly Hodson will also get a “minimum-guaranteed bonus” of GBP 220,000 ($397,760) if she is still CEO at the end of August 2004. She has also been guaranteed share options under the Executive Share Option Scheme 1999 to the value of three times her base salary, or GBP 1.43 million ($2.6 million).

Essentially, Kate Swann and Richard Handover will each receive base salary in the highest quartile of the FTSE 250/Retail and Wholesaler sector based on Inbucon data, despite being among the worst performers in the FTSE All Share and FTSE All Share/General Retailers Indices and the worst performer out of the 22-member FTSE 350 Retailers Index in 2003. In July 2003, Beverley Hodson was awarded a GBP 112,000 ($202,496) retention bonus for what was widely perceived as not being chosen to succeed Richard Handover as CEO. The Company subsequently responded that the amount was to retain her employment and to maintain stability in the run-up to Christmas. The argument in this case was that if the retention bonus was necessary, it should have been related to the Company's performance over the Christmas period and deferred until it was clear whether any predetermined targets had been met.

Beyond Beverley Hodson's retention payout, additional concerns were voiced concerning Richard Handover's move to Chairman after six years as CEO. The Company has stated that Handover will be working a five-day week and overseeing transactions in the United States that were begun while he was CEO. Despite his move to a Chairman role, he retains many executive duties for which he was previously responsible, consequently making him a de facto Executive Chairman. Handover will be paid exactly the same basic salary, GBP 465,000 ($840,720), in his role as Chairman as he was earning as CEO. Although he is not eligible to join the Company's 2004 LTIP, he will continue his pension entitlements, which provide up to two-thirds of his base salary upon retirement at the age of 60.