Written evidence from Baillie Gifford (CGV0108)

 

Baillie Gifford & Co. was founded in Edinburgh in 1908 and is one of Scotland’s largest independent investment management firms, 100% owned by the current partners, all of whom work full-time for the firm. As a long-term, active investment manager, we take stewardship seriously and therefore have an interest in the ongoing development of corporate governance guidelines.

 

Executive Summary

 

 

Directors Duties

 

Is company law sufficiently clear on the roles of directors and non-executive directors, and are those duties the right ones? If not, how should it be amended?

 

  1. The requirements of company directors under current UK company law are clear. There are no obvious areas where additional legislation is required.

 

Is the duty to promote the long-term success of the company clear and enforceable?

 

  1. The duty to promote the long-term success of the company is clear, but enforceability of this requirement is more challenging.

 

  1. Even a well intentioned board can find it understandably difficult to clearly define priorities. When it comes to reviewing shareholder expectations, the definition of short-term versus long-term can be a challenge and some boards may be reluctant to act in the interests of truly long-term success due to the impact on short-term financial results.

 

  1. For all but the most egregious issues there have been very few examples of enforceability beyond a change in personnel.

 

How are the interests of shareholders, current and former employees best balanced?

 

  1. If a company is acting sustainably and responsibly, shareholders will usually benefit in the long run. Companies may at times prioritise different groups over others, but over the long run they will need to take account of the interests of all stakeholders.

 

How best should the decisions of Boards be scrutinised and open to challenge?

 

  1. Shareholder consultations undertaken by board members, either directly with the largest holders or collectively through groups such as the Investor Forum, are useful in this respect, allowing a dialogue to develop where a greater understanding on issues and concerns from both the company and shareholder perspective can be gained. It is important for a relationship of trust to develop between shareholders and boards to support future engagement on key issues.

 

  1. One of the main avenues for shareholders to scrutinise board decisions is to use their voting rights at the annual general meeting. Shareholders hold directors to account when there are failures resulting from decisions made by the board. Companies should also acknowledge and respond when there has been significant shareholder dissent on proposals at company meetings. Directors should be prepared to explain and defend difficult decisions in the short term, for the long term benefits.

 

Should there be greater alignment between the rules governing public and private companies? What would be the consequences of this?

 

  1. There is already considerable alignment between the legal and regulatory environment for public and private firms. The case for further alignment should be considered on an issue by issue basis.

 

Should additional duties be placed on companies to promote greater transparency, e.g. around the roles of advisors. If so, what should be published and why? What would the impact of this be on business behaviour and costs to business?

 

  1. Companies already have a responsibility to disclose the most material risks and issues concerning their business. Transparency is generally positive however it is unclear whether further disclosure requirements would help to improve performance.

 

How effectively have the provisions of the 1992 Cadbury report been embedded? How best can shareholders have confidence that Executives are subject to independent challenge?

 

  1. Overall, UK companies have made good progress in embedding the recommendations of the report and the UK still remains one of the leaders in corporate governance. The ‘comply or explain’ approach encourages an open, thoughtful and flexible solution that has been copied in many other jurisdictions.

 

  1. A completely inadequate board structure is now a rarity amongst large UK companies. However, it is ensuring that the spirit of the guidance is met where more needs to be done; having a textbook board structure is not a guarantee of a well run company. Directors need to act responsibly and ethically, considering the impact of their decisions on all business stakeholders - employees and customers included.

 

  1. It is important that shareholders have the opportunity to meet independent board members as a way of building confidence that executives are being appropriately challenged.

 

Should Government regulate or rely on guidance and professional bodies to ensure that Directors fulfil their duties effectively?

 

  1. Regulation can only go so far in ensuring that individual directors fulfil their duties effectively. Whilst professional bodies do have a place in ensuring that directors behave responsibly, it is still down to the individual to do so.

 

Executive pay

 

What factors have influenced the steep rise in executive pay over the past 30 years relative to salaries of more junior employees?

 

  1. A number of different factors have contributed to the rise in relative executive pay. Globalisation and the accompanying increase in international mobility of executives, combined with increased pressure on companies to deliver short term results has played a significant role. 

 

  1. With growing market volatility and international competition, investors have become more willing to reward genuinely exceptional performance with significant performance awards. Whilst the figures involved are high by relative standards, they can still represent good value given the improved overall financial performance of the firm. The relative pay disparity with more junior employees has also been accentuated by historically slower wage growth for workers in a range of sectors, so any relative company pay discussion has to consider reward across all levels of the business. 

 

  1. The role of remuneration consultants does not appear to have always been positive, encouraging relative pay inflation for executives. Increased disclosure on remuneration does not appear to have curbed the level of reward at the executive level, and may have actually contributed to an increased quantum of compensation as companies’ benchmark their executives’ pay against international peers. A desire from remuneration committees to provide above median reward levels appears to have contributed to a ratcheting up of overall compensation levels.

 

How should executive pay take account of companies’ long-term performance?

 

  1. We believe that the approach taken should be right for the context and culture of each company, and therefore an element of flexibility is required in creating a remuneration policy that reflects a company’s growth strategy.

 

  1. Long term incentive plans with increased retention periods are still the preferred structure for rewarding long term performance, assuming that targets are appropriate, clear and stretching. 

 

Should executive pay reflect the value added by executives to companies relative to more junior employees? If so, how?

 

  1. It is reasonable to expect different structures and sizes of reward for key executive roles relative to more junior employees, not least because of the additional demands placed on senior roleholders. However there should preferably be a consistency of experience across all levels – good individual performance should be rewarded when the company does well, regardless of level.

 

What evidence is there that executive pay is too high? How, if at all, should Government seek to influence or control executive pay?

 

  1. The ratio between executive team pay and median salary has been increasing as executive salaries, bonuses and LTIPs have increased, but this does not necessarily mean that pay is ‘too high’.

 

  1. There are two different factors to consider here when considering whether pay is too high: first, are current levels of executive pay detrimental to performance, either by rewarding poor performance, needlessly increasing costs or by negatively impacting on the culture or reputation of the company? Investors should rightly be expected to hold companies to account in this respect.

 

  1. The second factor is whether high executive pay is harmful to society, through increasing inequality, social unrest or other issues. Investors are not best placed to review this aspect of relative pay. Government-led efforts to restrict pay in the banking sector have however had mixed results, and we would caution against adversely reducing the flexibility of UK companies facing international competition for talent.  

 

Do recent high-profile shareholder actions demonstrate that the current framework for controlling executive pay is bedding in effectively? Should shareholders have a greater role?

 

  1. Concerted shareholder action understandably tends to focus on extreme cases rather than the majority of companies pay policies. Overall, the current framework does appear to have helped to catalyse action in these situations.

 

Composition of Boards

 

What evidence is there that more diverse company boards perform better?

 

  1. There is currently limited evidence to demonstrate that more diverse company boards perform better over the long-term, however this may be due to the limited number of genuinely diverse boards that can be used as a sample base for study. It is definitely an area that would benefit from further research. In an increasingly complicated, globalised business environment it is logical to assume that more representative boards will make better long-term decisions.

 

How should greater diversity of board membership be achieved? What should diversity include, e.g. gender, ethnicity, age, sexuality, disability, experience, socio-economic background?

 

  1. This process should be led by the Chairman and the nominations committee, but board make-up should not turn into a box ticking exercise and board recruitment should not discriminate on any grounds.

 

  1. Board diversity should include the full range of background, outlook, skills and experience that are relevant to the composition of a suitably diverse board. Consideration should also be given to the context and location of the key business units and their respective markets.

 

Should there be worker representation on boards and/or remuneration committees? If so, what form should this take?

 

  1. We do not have a strong view on this. A number of our international holdings already have such mechanisms in place, and there is no consistent discernable differentiation in terms of performance or stakeholder outcomes at these companies. Worker representatives could potentially add value, but it would depend on the skillset and motivation of the individual.

 

What more should be done to increase the number of women in Executive positions on boards?

 

  1. Improved gender representation throughout the entire organisation should be on the agenda of all boards. We do not believe a quota for women on the board would be helpful but companies should commit to ensuring the board make-up is appropriate given its primary businesses, geographic spread of operations and markets, and employee base.

 

 

26 October 2016