Written Evidence from Fidelity International (CGV0107)
We are pleased to have this opportunity to respond to your Corporate Governance Enquiry. Fidelity International (“Fidelity”) has £223 billion of assets under management with approximately £16 billion invested in UK listed equities and with almost all of these funds being under active rather than passive investment mandates.
Fidelity manages funds all over the world and an important observation we would like to make at the outset, is that the standard of corporate governance observed in the United Kingdom compares favourably with every other major market in the world. There is nonetheless always room for improvement and we welcome the Select Committee’s review of this important topic.
Executive Summary
Directors’ Duties
Composition of Boards
Executive Pay
The duties of Directors are set out in the Companies Act 2006 and Directors are required to have regard to a wide range of factors in addition to the specific interests of the Members. These duties apply to all of the Directors, non-executive as well as executive, and include the interests of employees, suppliers, customers, the community, the environment as well as the reputation of the company. We believe that these duties are well articulated and that properly observed are well suited to protecting the interests of all stakeholders. In particular we favour the model of the Unitary Board with all of the Directors having the same obligations and would be nervous of any steps which give specific duties to individual Directors. To the extent that the Select Committee feels that Boards are falling short in fulfilling their existing obligations, then a program of guidance and education should go a long way towards achieving your objectives.
It has been suggested that employees should be represented on Boards and remuneration committees. We are fully supportive of the principle that the voices of employees should be adequately represented at a senior level, but for the reasons given above we would be concerned with the appointment of employee Directors or any differentiation in the responsibilities of existing Directors. We would nonetheless encourage the creation of mechanisms which facilitated the incorporation of employee and consumer perspectives into Board debates. These could take a variety of forms but might include the creation of dedicated Board committees to address these issues.
You also ask how the decisions of Board should best be scrutinised and open to challenge. As an active investment manager we maintain intensive contact with all of our investee companies including at least two formal meetings a year supplemented by site visits and numerous ad hoc calls. Where there are particular issues giving rise to concern, or when we want a broader perspective of a particular situation, we will seek meetings with Chairmen and/or Independent Directors to deepen our dialogue. Notwithstanding this contact, the reality is that Directors and not shareholders run companies and this is as it should be. Shareholders will inevitably have less information and there is no evidence to support the view that shareholders have better judgement than Directors. There is also the additional challenge that shareholders rarely hold a unanimous view on commercial issues. On those relatively rare occasions where defined differences have emerged between companies and shareholders, the Investor Forum is well positioned to coordinate a shareholder response to the matter in question.
We fully agree with the view that diverse Boards make good Boards but it is important that diversity is defined correctly. To us, intellectual diversity and diversity of experience are the key factors, although specific factors such as gender, ethnicity, age and socio-economic background will all be components in this determination.
In choosing its Board, a company is trying to identify a group of people with the appropriate mix of commercial skills to lead the business so as to ensure its long term success, and diversity is just one of the factors to be considered. We believe that the current market-based approach to encourage Board diversity is the correct one, and we are confident that over time we will continue to see progress towards more identifiably diverse Boards. We are strongly opposed to quotas of any sort and believe that the selection of Directors should at all times be primarily dedicated to “promoting the success of the company” as dictated by the Companies Act.
It has been suggested that shareholders should have a greater role in the identification and appointment of new Directors but we do not believe that a major international market such as London lends itself to this approach. From time to time we do intervene in investee companies and seek meaningful input into the appointment of new Directors, but this is the exception rather than the rule and will almost always reflect a specific circumstance. As shareholders we are not well equipped to understand a Board’s detailed requirements and we do not have the skills of head hunters. In particular, it would be a challenge to select the Directors of global businesses who face the requirements and demands of markets around the world. We also need to be mindful of the increasingly international nature of share registers and the potential reluctance of overseas investors to become directly involved in the Board selection process. Within the London Market itself, the importance of a small number of passively managed funds could result in most Directors of public companies being chosen by a small group of the same individuals if shareholders were given a central role in this process.
A further consideration to take into account is the inherent conflict between the restrictions imposed by the European Market Abuse Regulations and the shareholder obligations set out in the Stewardship Code. The Stewardship Code encourages shareholders to exercise more oversight over their investee companies, which from time to time will require companies to share price sensitive information with shareholders, but the Market Abuse Regulations make it increasingly difficult for shareholders to accept this information and this can be a limiting factor to the level of engagement that is aspired to under the Stewardship Code. In particular, if shareholder responsibilities were ever to be increase then this problem could quickly become acute.
Executive pay (and the pay of Directors in particular) has received much attention from companies, shareholders, regulators and politicians, yet having increased at a rate far above that of many other professions for many years it remains elevated and a source of public dissatisfaction. We are acutely conscious of our duty as a shareholder and as a custodian of the savings of millions of people to introduce more discipline into this area. The objective and the challenge is to bring about real and measurable change in remuneration practise and we think that our experience in the last couple of years provides guidance as to how this might be achieved on a wider scale.
In 2013 we informed all of our UK and European investee companies that, without exception, we would only support the pay of companies who were prepared to extend their holding periods for long-term incentive plans to more than three years and in 2015 we extended this minimum period to five years. We made this a red line voting issue and in 2014 we voted against the pay of 55% of the FTSE350 companies in which we were invested, in 2015 we voted against the pay of 60% of FTSE350 companies and year to date 2016 we voted against 54%. The result of us taking such an intransigent stance have nonetheless been very encouraging and from the start of 2013 when only 4 FTSE100 companies had share holding periods of five years or more, this figure has now risen to 48 and we are confident of further progress next year. Within the FTSE350, the equivalent figures have risen from 6 to 118 over the same period.
We are only a single shareholder but lesson we have drawn is that if shareholders take a clear stance, on a single issue, and back that up by voting action then companies can and will change. This is not a magic bullet but the alternative method of engaging with companies on a wide range of pay-related issues and then adopting a nuanced approach of when to vote for and against pay resolutions does not appear to have produced similar results. If other shareholders were to adopt a similar stance on other pay-related issues then we think more progress could have been made. Ultimately companies may face difficulties if they face a range of conflicting red line issues from different shareholders but we are currently a very long way from this situation. Under our approach a single shareholder should only focus on a single issue but there is a target rich environment for shareholders to choose from.
Government has given shareholders greater powers to oversee Directors’ pay and we have used these powers to our best ability. We do not think that additional powers are necessary at this point but are fully supportive of initiatives such as disclosing and justifying the pay multiple of the Chief Executive relative to median employee pay or the pay multiple of the Chief Executive relative to the next layer of management below the Board. We would also be very supportive of any moves to further extend award retention periods and believe that this reduces the need for so much performance conditionality and complexity. As conditionality is reduced, one would hope that quantum would also decline as recipients are more assured that they will actually receive their awards in the fullness of time.
We are conscious that we have not addressed all of the questions you have raised but we hope this submission will nonetheless make a constructive contribution to your debate on these matters and please feel free to contact us at any time if you have any questions.
Trelawny Williams
Head of Corporate Finance
26 October 2016