Thursday, 21 November 2013

Board Appointments: A flawed process

Corporate governance is one of those things which shareholders take an occasional interest in but can really make a difference to your investment.  The way in which executives are remunerated is important as are the directors who represent YOUR interests on the board of the company.

However for reasons I have posted about before, people very rarely get involved in the decision making process of their company.  Retail shareholders rarely vote and all too often institutional shareholders rely on proxy advisers to tell them which way to vote.

I have recently come to realise that there is also an inherent flaw in this process.  Even if you ARE interested in the way the company is being run you have little input into WHO gets to run the company.

But...don't I get a vote as a shareholder?

In principle yes.  You get to vote on all resolutions that are brought to an AGM or other EGM.  You get to vote for directors that stand for election and if you want to you can vote for or against directors based on their decision making.

But there is an inherent flaw in the way these resolutions are structured

  • It is the directors of the company who effectively determine who and what gets included on the ballot
  • When it comes to new directors, the current board will propose ONE name and you get to vote on whether you want that person on the board
  • When it comes to existing directors, you are not given any alternative choices if you would like to see a director of the board replaced
Effectively the board has too much power over their own appointment

The board should be there to represent the interests of shareholders, but the way in which the election process is set up means that effectively the board is representing their own interests.  The process is structured so that you are given a false sense of choice.

Further you are given insufficient information
  • When an external candidate is proposed the board often recommends shareholders reject their appointment and gives the reasons why they should not be voted for.  You are rarely given the reasons why you should vote for this person
  • When the board talks about themselves they talk about you should vote for them not why you would consider note voting for them
  • Boards often talking about new potential members as having the skills that the board needs (e.g. financial, operational etc.) however they never give you a choice of multiple people who have the same skills - i.e. give investors a real choice about who they want to represent them
This all makes sense when you think about the fact that directors do not want to lose their very comfortable corporate jobs or reputations.

What is an alternative?

The solutions all have to do with the information available to shareholders.  There are two solutions which I find particularly persuasive
  1. Make disclosures around how board members voted on EVERY vote available
    • Individual board members can then be held to account for every bad decision that they made as a director in a very real and direct way
    • Boards cite confidentiality and business imperatives as the reason that there is not more disclosure about how votes are taken and what options are considered...but as owners of the company we are the ones who have the right to know how are boards are acting
  2. Make a full list of candidates available for every directors vote
    • Companies always talk about screening several candidates for a board before putting one up for election
    • I am all for them screening candidates but why don't they put up several candidates instead of just the one that they want - why don't they give the investors the choice about who they want representing them
    • Further if I don't like the existing members of the board I want real alternative choices - there should be real, credible alternatives put up for every single current board member
Boards are never going to do this of their own volition.  They are too interested in protecting their own privileged positions but it is something that is a real concern and which people should pay attention to.

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