India: company law reform moves a step closer - Companies Bill 2008 approved by Cabinet

In 2005 the Irani Report, on the reform of India's company law, was published. Legislation to replace the Companies Act 1956 has been expected for some time. Its introduction has moved a step closer: today it was announced that the Companies Bill 2008 has been approved by the Union Cabinet and will be introduced in Parliament in October. 

The Government's announcement contains an overview of the purpose of the Bill: to provide the principles for the internal governance of companies and a framework for their regulation, administered by Central Government, but with a much greater role for shareholders.  Specific proposals include:

• The introduction of a new entity, the "one-person company".
  
• The abolition of shares with differential voting rights.
  
• Provision for the duties and liabilities of directors, with every company to have at least one director resident in India.
  
• At least one third of board directors to be independent [it's not yet clear to which companies this rule will apply; the Irani Committee proposed that is should apply to public listed companies and those taking deposits from the public]. 
  
• Insider trading by directors to be recognised as a criminal offence.
  
• Auditors' rights and duties to be explained.
  
• Class action suits by shareholder associations to be permitted.
  

Directors' liability discharge proposals - report published

Manifest, in conjunction with Morley Fund Management, has published a report titled "Directors' liability discharge proposals: the implications for shareholders". The report, to quote directly from it: 

.... addresses what for many investors has been a largely obscure issue, namely proposals to discharge directors of liabilities that routinely appear on shareholder meetings’ agendas in many European markets. We look at 13 European markets that have resolutions of this type – Austria, Belgium, Denmark, Finland, France, Germany, Greece, Luxembourg, the Netherlands, Portugal, Spain, Sweden and Switzerland; their legal basis and practical implications for shareholders in the voting context".

USA: financial regulation reform

The Wall Street Reform and Consumer Protection Act (also known as the Dodd-Frank Act after Senator Dodd and Congressman Frank and not, as posted earlier, the Restoring American Financial Stability Act) was yesterday signed by the President: see here.

The Act will bring about the most significant financial regulatory reform since the 1930s and also includes corporate governance measures. For example, Section 951 provides for a shareholder vote on compensation disclosure and Section 952 sets out requirements for compensation committee independence. For a more comprehensive summary of the Act see here and here.

UK: annual election of directors

Today's Financial Times newspaper reports, in an article titled Investors oppose annual board vote available here, that Hermes, Railpen and the Universities Superannuation Scheme have "written to 700 companies to encourage them to ignore new guidelines [in the UK Corporate Governance Code] that require the annual re-election of board members".

USA: the proxy voting system - SEC invites public comment

The Securities and Exchange Commission has published a paper inviting comment on the US proxy system: see here (pdf). The paper raises three broad questions:

• Should steps be taken to enhance the accuracy, transparency, and efficiency of the voting process?
• Should the SEC's rules be revised to improve shareholder communications and encourage greater shareholder participation?
• Is voting power aligned with economic interest and do the current disclosure requirements provide investors with sufficient information about this issue?

Further background information, including a short factsheet about the proxy system, is available here.

UK: remuneration votes to watch this week

Today's Guardian newspaper reports on four FTSE100 company annual general meetings being held this week where PIRC has recommended votes against the remuneration reports: see here.

Europe: bankers' bonuses and remuneration at listed companies

Yesterday's vote by the European Parliament on new rules governing bankers' bonuses - about which see here and here - has attracted a great deal of coverage in the media. Less attention has focussed on another resolution supported by MEPs yesterday regarding remuneration in listed companies, described in the relevant press release as follows:

.... in a non-legislative resolution drafted by Saïd El Khadraoui (S&D, BE), Parliament calls for remuneration policy principles to be extended to cover all companies listed on stock exchanges. It proposes that listed companies be required to explain their remuneration policies if their directors' pay is deemed not to follow certain principles aimed at removing incentives to take excessive risk or to take decisions based on short-term considerations. The resolution also proposes that shareholders be given greater control over the directors of a listed company.

Finally, 'golden parachutes' handed to directors in cases of early termination should be limited to the equivalent of two years of the fixed component of the director's pay and severance pay should be banned in cases of non-performance or early departure, says the resolution, which was adopted by 594 votes to 24 with 35 abstentions".

UK: the Tesco plc AGM

Tesco plc held its annual general meeting last Friday. Whilst the advisory vote on the remuneration report was passed a little under half of the shareholders failed to support it. 52.9% of votes were cast in support of the report, 31.9% against and the remainder were withheld. A significant rebuke. The votes results are available here.

Japan: remuneration disclosure

Earlier this year, Japan's Financial Services Agency adopted new rules increasing the disclosure obligations of listed companies with regard to governance structure, directors' remuneration, cross-shareholdings and voting results: see here (pdf). The BBC News website reports - see here - on the disclosures which are beginning to be made with with regard to remuneration.

USA: 'say on pay' votes lost at KeyCorp and Occidental Petroleum

Two more American companies, in addition to Motorola, have lost 'say on pay' votes this year: KeyCorp and Occidental Petroleum. See the results here and here.

USA: the predictive qualities of corporate governance ratings

Recent research published by academics at Stanford University's Rock Center for Corporate Governance has considered the predictive ability of corporate governance ratings. The authors report:

"The providers of the ratings make strong claims regarding the ratings’ value in predicting future bad outcomes (such as accounting restatements or shareholder suits) and firm performance. These ratings, often provided by proxy advisors, are also used in formulating recommendations that can be influential in shareholder voting. We provide the first independent assessment of four prominent commercial corporate governance ratings. Prior evidence on individual ratings has generally been backward-looking, raising the distinct possibility that the ratings reflect past firm performance but are unable to predict  accounting restatements, litigation, and future performance. We examine the ability of ratings produced by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services), GovernanceMetrics International, and The Corporate Library to predict future performance. With the possible exception of ratings by Audit Integrity, we find that most ratings have either limited or no success in predicting firm performance or other outcomes of interest to shareholders".

For further information see:
Research article | Abstract | Rock Center home page |

UK: contracts for difference - general disclosure regime proposed by the FSA in respect of long positions

In November 2007 the FSA published a consultation paper titled "Disclosure of Contracts for Difference", which discussed the possible market failures (inefficient price formation, distorted market for takeovers and diminished market confidence) arising from non-disclosure of Contracts for Difference (CfDs) and the regulatory options available to address those failures. In this paper the FSA noted (at para. 1.8):

Despite the growth in the market, CfDs mostly remain outside the regulatory framework governing disclosure. This framework exists primarily to provide to the public accurate, comprehensive and timely information about changes in major shareholdings in companies issuing shares. The current disclosure requirements are therefore referenced to direct and indirect control of voting rights attaching to a share".

The FSA has today published a statement explaining its position following the end of the consultation period. In this statement the FSA explains:

We have concluded that our objective of addressing the market failures the [consultation paper] identified in relation to voting rights and corporate control can best be addressed through a general disclosure regime. Therefore we have decided to implement a general disclosure regime of long CfD positions, based on Option 3 in the consultation paper, but with two significant modifications: [1] in relation to aggregation and disclosure thresholds; and [2] in relation to an exemption for CfD intermediaries".

The FSA proposes setting the disclosure threshold at 3%., which is in line with the existing requirement with regard to voting rights in listed securities found within DTR Rule 5.1.2 (part of the Vote Holder and Issuer Notification Rules (DTR 5) within the FSA Handbook). A further consultation period has begun - on the technicalities of the proposals - and the FSA plans to publish a further statement and draft rules in September. The final rules will be published in February 2009.

For further information see:
FSA press release | FSA policy statement | November 2007 consultation paper | November 2007 consultation newsletter | FSA Handbook: DTR5 | Financial Times newspaper article | Times newspaper article | 

UK: Institutional Shareholders' Committee statement on auditor liability limitation agreements

The Institutional Shareholders' Committee has published a statement concerning auditors' liability limitation agreements. The ISC notes:

• Agreements should be proportionate, and provide a limit for liability that is fair and reasonable.
  
• Companies should recognise that they are not obliged to enter into agreements if they are not suitable.
  
• Companies should justify to shareholders the benefits of concluding agreements in advance of putting them to a general meeting vote. 
  
• When audit committees discuss these agreements with auditors, they should seek to assure themselves that audit quality will be preserved and enhanced.
  
• Shareholders will not want to see their preference for proportionate liability agreed at holding company level undermined by other forms of agreement lower down the group structure.
  
• Companies should use the specimen principle terms for agreements which have been laid out by the FRC. 

For further information see:
FRC guidance on auditor liability limitation agreements | ISC | ISC statement | ISC press release |

Australia: shareholder engagement and participation

On June 23, Australia's Parliamentary Joint Committee on Corporations and Financial Services published a report titled Better shareholders – Better company: Shareholder engagement and participation in Australia. The Committee considered several issues including the barriers to effective engagement by shareholders in the governance of companies, the engagement of institutional shareholders and the selection of directors. The report makes many recommendations including:

• ASIC should establish best practice guidelines for company annual general meetings and for clear and concise company reporting.
• The government should investigate an alternative regulatory framework for small incorporated companies and not-for-profit organisations.
• The government should investigate the most appropriate regulatory framework for ensuring that stock lenders retain the voting rights attached to the lent shares.
• The government should amend the Corporations Act to exclude shareholder directors from voting on their own remuneration packages either directly or by directing proxies

The Australian Government has welcomed the report: see here.

USA: 'say on pay' vote at the Motorola general meeting

Motorola Inc., incorporated in Delaware, held its annual stockholder meeting earlier this month. The voting results are available here. Stockholders were given a non-binding vote on the company's remuneration policy. Although more votes were cast in support of the policy (887,793,923) than against (855,021,547) it was defeated when the number of abstentions (201,440,789) were taken into account. This would appear to be the first time that an American company has lost a 'say on pay' vote (although there is currently no legal or regulatory obligation to provide such a vote).

The abstentions were included in determining whether the resolution was passed because the company's bylaws (Section 4, page 5; available here, pdf) provided that "the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, except as otherwise required by Delaware law, the Certificate of Incorporation, or these Bylaws".

In the absence of such a provision a default rule is provided by Section 216(2) of the Delaware General Corporations Law as follows: "[in] all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders". For judicial discussion of Section 216, see Licht v. Storage Technology Corp., et al. (C.A. No. 524-N, 2005): here (pdf).

UK: annual election for directors? - what the papers say

The Financial Reporting Council is expected to publish the revised Corporate Governance Code this week. A report in yesterday's Sunday Times newspaper (see here) repeats the suggestion made in the Daily Telegraph last week (see here) that the FRC has decided that it is desirable for boards to be subject to annual re-election by the shareholders (presumably subject to 'comply or explain'). But yesterday's Independent on Sunday offered a more cautious view in a short report - available here - titled "Annual directors' vote in doubt".

UK: SIG plc shareholders reject remuneration report

SIG plc held its annual general meeting today. The resolution seeking approval of the company's remuneration report failed to receive the support of a majority of the shareholders: see here. In a statement published after the meeting - available here - the company noted its disappointment and promised to consult further with shareholders.

Executive pay

Several recent posts on this blog (here and here, for example) have highlighted the debate about executive pay in America and Europe. This debate is considered in a couple of articles in this week's Economist. In the first, "Let the fight begin", it is argued that shareholder "say on pay" votes should become the norm and are preferable to Government intervention (it would be surprising if The Economist argued otherwise). In the second, "Pay attention", there is discussion of the debate about executive pay in Europe and the development of "say on pay" rules within the European Member States. The article notes:

By law in the Netherlands, Sweden and Norway, shareholders get a binding vote on compensation packages; in Britain they get a non-binding vote. Some Spanish and Swiss firms are voluntarily starting to offer shareholders a vote".

Hong Kong: Companies Ordinance Rewrite - second consultation phase launched

The second consultation phase for the Companies Ordinance Rewrite began today and will last until 6 August 2010. A consultation paper has been published - see here (pdf) - along with parts of the draft Companies Bill (see here). A full list of the phase two consultation questions is available here (pdf).

The Xstrata plc annual general meeting

The Xstrata plc annual general meeting was held yesterday in Switzerland (the company's shares are listed on the London and Swiss Stock Exchanges). Much attention was focused on resolution 3 - the approval of the company's remuneration report - given the controversy over remuneration policy at the company. Just over 70% of shareholders voted on this resolution and of those 31% voted against the report. This is noteworthy given that such resolutions are usually passed with little dissent. The AGM results are available here (pdf). For further background about remuneration at the company, see here.