As we tweeted last week it's AGM season, so that means it's time for more consultations. Consultations are generally a good thing, even if the timing is a little inconvenient for shareholders. This article takes a look at the key takeaways from the UK's latest consultation but then poses some tricky questions about the evolving nature of shareholder/corporate relations in light of Barclay's tumultuous AGM.

The UK's Financial Reporting Council, the independent guardian of the UK Governance Code, has reached its two year review point and is now looking for views on a range of issues. There are five themes running through this consultation:

Remuneration

• Long-term Outlook: greater emphasis should be placed on ensuring that remuneration policies are designed to promote the long-term success of the company;
• Clawbacks & Holding Periods: companies should put in place arrangements that will enable them to recover or withhold variable pay if required, and should consider appropriate vesting and holding periods for deferred pay; and
• Committee Composition: new language to strengthen conflicts of issue protections.

Engagement

• If companies receive significant votes against any resolutions they should explain how they intend to engage with shareholders (on which, more below);

Risk  Management & Going Concern

• Companies should state in their financial statements whether they consider it appropriate to adopt the going concern basis of accounting and identify any material uncertainties to their ability to continue to do so;
• Companies should robustly assess their principal risks and explain how they are being managed and mitigated;
• Companies should state whether they believe they will be able to continue in operation and meet their liabilities taking account of their current position and principal risks, and specify the period covered by this statement and why they consider it appropriate. It is expected that the period assessed will be significantly longer than 12 months; and
• Companies should monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report.

Audit Committees & Audit Tendering

• Pending a review of  the implications of the recently agreed revisions to the EU Audit Directive and the new EU Regulation on the audit of public interest entities, the FRC has deferred consideration of audit tendering until its next review in 2016.
• It does however intend to consult separately on guidance to audit committees on how they could report on the findings of a review carried out by the FRC’s Audit Quality Review team.

Cutting Clutter

• In line with recent moves by Dept BIS to encourage better use of the annual report, the FRC is seeking views on the benefit or otherwise of moving some data and disclosures from the governance section of annual reports to websites.

So, If Engagement is a 'Good Thing'  Why 'Proceed with Caution'?

Let's just start by making something clear: yes, Manifest absolutely believes that engagement between companies and their owners is a very good thing - used correctly.

However, Barclays' tense AGM last week flagged up a concern that a number of investors have raised with us this year: twin track governance. In case you missed it, Alison Kennedy, a member of Standard Life's governance team, made a public statement about its voting stance. These public statements are rare; fund managers just can't make it to every AGM, there are just too many clumped together at the same time of year. Very disappointingly, Alison's openness promptly earned her a rebuke from both the Chairman, Sir David Walker and Remuneration Committee Chairman, Sir John Sunderland.

According to a number of reports from inside the meeting, Sunderland "appeared ruffled" by Alison's comments and he is said to have wished the concerns had been raised earlier in the bank's private consultations with large shareholders. Sir David later told reporters there was "just a bit of irritation" over the episode. But we're not sure why. In all honesty, the board's reaction comes across as an attempt to put the blame for a remuneration row back on investors because their engagement wasn't good enough.

Ruth Sunderland of the Financial Mail has sprung to Alison's defence and points out that "the row over who said what and when is irrelevant. The annual meeting is a legitimate forum for any shareholder to hold directors publicly to account. There is no requirement to give advance warning. Whatever Sunderland’s intentions, it is unfortunate that he gave the impression of wanting to gag Barclays’ owners."

Strong stuff indeed. although possibly not unexpected from the Daily Mail; but for the UK's right and left wing newspapers to be in complete agreement is quite a turn-up. As The Guardian's Jill Treanor notes: '(Sunderland) appeared to reprimand Kennedy for speaking out in a public meeting rather than raising her concerns during the private consultations'.

None of Barclay's board should have been remotely surprised. Standard Life's policy on voting and engagement is not only in the public domain, Standard Life's stewardship web pages are probably some of the most resource rich pages a company looking for guidance could possibly wish for. Pages 7 and 8 of their governance policy is clear about voting procedures, speaking at meetings and "In the event we vote our clients’ shares against a resolution at a shareholder meeting we will always use best endeavours to inform the company beforehand and explain the reasons when it is practical and cost effective so to do." 

Leaving aside the high profile politics of the Barclays' meeting, Alison's treatment at the hand of ruffled City 'Grandees' raises a number of serious issue that require careful consideration - for the protection of all shareholders.

The push for greater engagement, while good, comes with a price. In its current state of development, there are few best practice guidelines for engagement and there appears to be something of a "free for all" taking place. Companies, not unsurprisingly, don't want to fall foul of losing binding votes and so are issuing consultations at an astonishing rate. This means that it then falls to the governance teams to review and, hopefully, respond in a sufficiently meaningful way so that companies can react and take steps to address concerns. This then raises questions:

• Is it right for only 'large' shareholders to be consulted in this way?
  • Retail shareholders can represent 30% of some share registers but are rarely considered - probably hindered by their assets being locked away in omnibus nominee accounts against their wishes;
  • Small boutique fund managers may have more interesting views that the major houses.
  • The Wisdom of Small Crowds can be astonishingly insightful and a refreshing antidote to the powerful effect that 'Group Think' can exert
• Are investors being put under undue time pressure to give support to proposals without the full context of the full annual report and explanations?
• What if events or circumstances change after the consultation?
• Do investors have enough resources to effectively run two or possibly three AGM seasons: one during the consultations, again at real AGM time and then afterwards if the outcomes is poor?
• Do consultations inappropriately include some shareholder voting research services for consultation but not others?
• Do consultations pit the fund managers against the governance teams - it is not unusual for the fund manager to be approached for support when the governance teams has expressed doubts.
• Should all companies consult every year or only when there are changes pending?
• Do we risk the reputation of governance in the eyes of civil society, the ultimate beneficiaries of equity markets?

Selective briefings create a significant regulatory hazard. There is a key principle in the market that shareholders should all have the same information at the same time, it's why in the UK we have regulatory news services and in the USA, filings with SEC EDGAR are expected.

Griping about governance directors is just one step along from griping about proxy analysts. What the gripes amount to is discomfort about governance and accountability full stop. Investors are entitled to express their views either privately or in public - they are, after all, accountable to their clients, the investors for their stewardship strategies and would equally be rebuked if they were not seen to act, Something that Sir David Walker was at pains to emphasise in his review of the Banking Crisis in 2009. For readers new to the UK governance field,  it was The Walker Review which led to the launch of the Stewardship Code and all the attendant procedures around writing to boards when voting against resolutions.

As it happens, on the day, not everyone shared Standard Life's views; but that is the nature of the market, not everyone is going to agree all the time. It is surely better that there is an open and healthy discourse of disagreement, rather than one which only takes place behind closed doors or resorts to public put-downs.

Attempts to suppress open discussion or debate will detract from the UK's reputation for good governance - one of the few financial services exports which appears to have attained global praise in recent years. While the UK has managed to stave off the worst litigious excess of  US proxy "battles", now is not the time to retreat back to the pre-Cadbury cozy City club-ishness.

In summary, this is not a call for less engagement, simply a call for principled, thoughtful engagement which is a means to an end, not an end in its own right.