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Irish corporate governance: who’s watching who now?
18 October 2009 By Alan McDonnell
As part of the renewed Programme for Government, the Greens and Fianna Fáil have agreed to make many provisions of the Combined Code enforceable by law.
While many will agree with this, others argue that institutionalising governance through legislation will make it even more of a box-ticking exercise by companies that currently only pay it lip service.
They argue that good governance is not about imposing more rules and laws but is about improving behaviours and attitudes among the key players.
So, who are the key players? Those charged with oversight of governance practices, namely independent non-executive directors and institutional investors.
Much has been written about the failure of non-executive directors that led to the crisis in the financial sector, but little has been said about the dismal performance of institutional investors.
Section 2 of the Combined Code defines the role institutional investors should play if they have concerns about noncompliance with the code’s provisions by companies in which they have invested. It places specific responsibilities on institutional investors to engage with the boards of such companies to express their concerns.
The track record of engagement by institutional investors (who manage our pension and investment funds) can only be described as deplorable. There is little public record of them intervening with boards when poor governance was evident.
The representative body of institutional investors in this country is the Irish Association of Investment Managers (IAIM).
This organisation subscribes to the Statement of Principles: The Responsibilities of Institutional Shareholders and Agents, which requires them to engage with their investee companies when they have concerns about:
* the company’s strategy,
* independent non-executive directors failing to hold executive management properly to account,
* internal controls failing,
* inappropriate remuneration levels/incentive packages/severance packages and
* unjustifiable company failure to comply with the Combined Code.
When Sean Fitzpatrick was appointed chairman of Anglo Irish Bank, contrary to one of the main principles of the code, the IAIM said that it ‘‘understood the company’s rationale for making the appointment’’, and to compensate there was an agreement between IAIM and Anglo that an independent deputy chairman would be appointed.
None ever was. IAIM and its members remained mute. IAIM endorsed Jim Flavin’s appointment as executive chairman of DCC in 2007 for a ‘‘transition period’’, only to call for his resignation the following year after a Supreme Court ruling on insider dealing.
The IAIM last published a review of Irish listed companies’ compliance with the Combined Code in 2001,when it found: ‘‘IAIM considers that Irish companies have a very high level of compliance with the Combined Code. This shows that corporate governance is taken seriously by Irish companies, and underpins the creditability of the Irish market as a place to invest."
Since then the Combined Code has been updated in 2003 and 2008, but no further IAIM reviews were conducted.
There will be a further update by the Financial Reporting Council (FRC) in 2010 which is subject to consultation at present.
The IAIM made a very brief contribution to this consultation.’ ‘It is our view that institutional investors should be active but not routinely ‘activist’," it said.
There has been unprecedented destruction of shareholder wealth in Irish listed firms as a result of poor governance.
Irish investment managers should publicly set out their policies on how they will in future monitor and engage with these companies to ensure that this is not repeated. They should also define their policy on voting and voting disclosure.
These and other transparency requirements are key provisions of the Statement of Principles to which the IAIM members already subscribe.
IAIM members should be doing everything in their power to ensure listed company compliance with the Combined Code. They should be doing so in an open and transparent manner so as to promote investor confidence but, more importantly, to allay fears of cronyism.
Such fears could arise because major IAIM members are, in fact, subsidiaries of the same banks they are supposed to be monitoring.
In response to the global financial crisis, the Walker Review of Corporate Governance in UK Banks was published in July. Its recommendations called for a significant overhaul of the role of institutional investors as a corporate governance watchdog. They include:
* the Financial Reporting Council would be charged with separating the institutional investors section of the Combined Code into a separate but related code entitled ‘Principles of Stewardship’, which would define in greater detail what is expected of institutional investors,
* institutional investors should publish their commitment to the Principles of Stewardship, and describe their policies on engagement and how they seek to discharge the responsibilities that commitment to the principles entails and
* the FSA (the British Financial Regulator) would assume the role of watchdog of institutional investors compliance with the Principles of Stewardship and whether explanations of non-compliance are acceptable.
Interestingly, the Walker Review upholds the principles based, comply-or-explain model of corporate governance.
This begs to question the knee-jerk intentions of the renewed Programme for Government. T he IAIM will need to become activist if we are to avoid such folly. If they don’t, legislate, and hold IAIM responsible. Principles-based corporate governance is broken in Ireland, not because there is much wrong with the provisions of the Combined Code but more to do with the inadequate behaviours and attitudes of the people responsible for implementing and monitoring them.
One remedy worthy of debate is the appointment of the Financial Regulator as the watchdog of institutional investors.
Maybe then we might see transparent activism from the members of the IAIM, and an improvement in the performance of non-executive directors with whom they engage.
Alan McDonnell is a member of the Corporate Governance Association of Ireland
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