Royal London Asset Management highlights corporate governance red flags ahead of this year's reporting season
14 March 2016
With this year’s reporting season upon us, Royal London Asset Management highlights the biggest corporate governance challenges facing companies.
Supported by the findings of ongoing research, Ashley Hamilton Claxton, Corporate Governance Manager at Royal London Asset Management, names the companies seen as the leaders and laggards in each area.
1. Sustainability through succession planning:
When an executive leaves a company, disruption is inevitable. However, there are steps that can be taken to prepare companies. One option is for companies to showcase the full strength of their executive team, providing investors with visibility to the team below-board level and effectively managing the ‘star’ element associated with some CEOs.
“We applaud companies that think about the executive pipeline in their succession plans, as it is an issue that is all too often lost and overlooked.
“A leader in this area is BT, which has shown real leadership on succession planning by providing investors with good visibility of the executive talent below the board level.
“It goes without saying that companies with the greatest succession risks are those where the founder or long-serving executive still plays a pivotal role in running the business. A succession process led by a strong chairman is essential in this case.
”In general, founder firms are a major concern for us, where the superstar CEO phenomenon limits a boards’ willingness to discuss the un-discussable. Companies like Glencore fall into this category.”
Having to make speedy hires to replace unexpected departures, as was the case with BG Group, can be an expensive process as companies need to encourage a new executive into a company quickly. This process often leads to non performance-related cash incentives being provided, the so called ‘golden hello’. This falls foul of the best practice of clearly tying rewards to future performance.
2. Executive pensions:
An area of ongoing concern is generous executive pension payments. Companies that grant executives cash payments, in lieu of pension, upwards of 30% or 40% are not uncommon in the FTSE. This raises concerns and questions about pension fairness, with staff below the executive level often receiving a fraction of this amount in their pension pots.
“Royal London Asset Management is becoming increasingly concerned about the extremely generous pensions that continue to be awarded to executives. We do not think executives should receive preferential treatment with regards to pension payments. Companies should strive to achieve pension fairness for all staff, regardless of seniority.
“Lloyds Banking Group stands out as a laggard on this issue offering a pension benefit of 50% of base salary to the CEO. HSBC should be commended for finally addressing its long-standing pension issue by reducing the cash pension entitlement from 50% of salary to a slightly more acceptable level of 30%. Companies like EasyJet on the other-hand pay more reasonable executive pensions, with executives receiving a 7% contribution, the same as employees.”
RLAM will consider voting against remuneration reports where we consider executive pension payments to be excessive, unless there are truly extenuating circumstances.
3. Future proofing and preparedness:
Shareholders need to be assured that companies have the right people in place to ensure sustained business growth well into the future. There are two areas where boards need to do more to future-proof their businesses – climate change and data privacy.
Following the adoption of the universal climate agreement at COP21 in Paris, companies need board members to challenge traditional executive thinking about the future of the world’s energy mix in order to succeed.
“We believe that the two companies which lead in this area are the European utility companies Engie and Iberdrola. Both companies should be praised for their strategic thinking around the energy transition.
“Glencore has traditionally been behind in this area, but we are heartened to see that they are working with shareholders this year to try to improve their strategic response to climate change. In our view, the boards of all oil, gas and energy companies need to up their game in thinking about and planning for the world's changing energy needs.”
On the issue of data privacy and the digital economy, consumer-facing businesses need tech-savvy boards in order to tackle tricky emerging issues that can create significant business risks.
“The limited number of individuals on boards who understand technology, let alone are experts, is worrying. We very much want to see companies embrace and position themselves to better understand the world’s rapidly changing technological trends by recruiting board-level experts and dramatically increasing board training.
“Currently we do not see any companies leading in this space. It is certainly an area we will keep a close eye on as we go into this reporting season. We hope to be able to report on the positive steps in next year’s update.
“All companies need to be attentive to this issue, but banks and retailers face the highest risk when it comes to data privacy and cyber security given the sensitivity of the customer data they hold.”
In conclusion, Ashley Hamilton Claxton commented:
“As a large investor, Royal London Asset Management has a responsibility to use its influence to promote positive corporate behaviour to the benefit of its clients and the wider community. This year we will continue to take an active approach to voting and engagement with corporates and industry regulators to improve best practice.”
For further information please contact:
Corporate PR Manager
0207 506 6791
07919 171 953
About Royal London Asset Management (RLAM):
Established in 1988, Royal London Asset Management (RLAM) is one of the UK's leading fund management companies, providing investment management solutions to both wholesale and institutional clients such as not-for-profit organisations, local authorities and the insurance sector.
RLAM manages over £83.1 billion of assets and employs 75 investment professionals. It invests in all major asset classes including UK and overseas equities, government bonds, investment grade and high yield corporate bonds, property and cash.
About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with Group funds under management of £83.1 billion. Group businesses serve around 5.3 million policyholders and employ 2,958 people. (Figures quoted are as at 30 September 2015).
The Group is currently moving all of its UK and Ireland life, pension and investment businesses under a new version of the Royal London brand. The Group's independent wrap platform will remain branded Ascentric.