The Walker Review has ignited something of a bonfire under the UK's current "Guidelines" based approach to corporate governance monitoring and enforcement. Leaving the politics of the debate aside for a moment, there is a genuine practical consideration for adopting a more formal approach to "Best Practice Guidelines" - ongoing suitability.

Over the past 20 years the various UK investor protection committees (IPCs) have been a central part of the soft regulation landscape. In the absence of a formal regulatory home, the collaborative approach has offered a time and effort-saving way of encouraging issuers to "do the right thing". As such, these soft laws were framed with the best of intentions.

But time moves on and markets and market practices change, which calls into question the ongoing suitability of "Best Practice" principles.  Investors domiciled ex-UK have different experiences and approaches to governance and they are now bringing their views to bear at the UK ballot box. What the data from those ballot boxes is telling us is that there appear to be a number of unintended consequences in UK best practice which are in need of review. The next question is, who should take ownership of that review process in a globally diversified world of share ownership?

Let's take a look at one of the most high profile governance issues - executive remuneration and consider some of the unintended consequences of the current regime.

From an investor perspective, a significant proportion of the blame for spiralling pay has been put at the door of remuneration consultants. However, in recent years the UK has published a series of guidelines and recommendations designed to encourage alignment between investors and companies. So another view to consider is that remuneration consultants are acting entirely rationally and simply responding to the Best Practice environment which is being created for them and exploiting the guidance to their clients' best advantage.

As a case in point, Manifest revisited an article published in January 2008 analysing a circular from Clifford Chance which was a response to the then recently updated ABI executive remuneration guidelines.

Among the points that the Clifford Chance circular was suggesting Remuneration Committees should consider were:

• That in recent years, the “toughness” (their quotes) of performance targets have gradually been eroded;
• That recent share price falls had a silver lining in that more options and/or LTIP awards can be granted within individual share option limits;
• That since an LTIP plan is inherently more valuable than an option grant, many companies may wish to seek shareholder approval to increase LTIP grant limits to levels that were previously only found in option plans;
• That the ABI recommendation that where two or more performance conditions apply, that consideration should be made to making them interdependent, would be unlikely to be embraced by companies; and
• That companies, where the share price had fallen significantly, may benefit enormously from the adoption of private-equity style plans.

The wording of circulars seeking incentive share plan approval generally promises an increased alignment to the interests of shareholders. The thrust of that article, however, could not be more different – it seemed to prioritise higher levels of remuneration rather than an alignment of interests.

It could be that the strict usage in the UK of the ABI’s executive remuneration guidelines have had the unintended consequence of offering remuneration consultants and remuneration committees guidance on how best to sell the scheme as non-contentious, yet, at the same time, offer a significant upward ratcheting of remuneration levels. Further, the simultaneous use of multiple schemes by companies makes the use of total remuneration analysis by investors more important for keeping an eye on remuneration levels.

Indeed, the ability to offer greater number of shares under the individual participation limit after a share price fall, as currently in use in the UK, has been noted before. The dot.com crash proved this point as Manifest’s pay database shows. It is not entirely unreasonable to suggest that the current format of individual participation limits encourages a ‘boom and bust’ cycle. If awards can be made over a significant number of shares towards the bottom of the cycle, the potential gains on these awards will outweigh the potential gains from awards closer to the top of the cycle, and thus will be more favoured by participants.

If this is indeed the case, where is the alignment of interests between shareholders and executives? If any more evidence is needed then the stock-option backdating scandals in the US market should give us pause for thought.

Other markets do things slightly differently. In Australia, the institutional investor guidance on long-term incentives previously recommended that explanations be offered where individual participation exceeded 100% of salary. Revised guidelines in April 2007 took a somewhat different approach – suggesting that ‘Entitlements under an equity plan should be reasonable, taking into account the total remuneration package of an executive and reflect that executive’s position and level of responsibility. Although equity plan design will vary, the level of reward that an executive may be entitled to if they achieve their performance benchmarks should generally be consistent with equity plans for companies of similar size, industry and complexity’.

In light of Clifford Chance’s comments and the alternative approach now taken by Australian institutional investors, is it time to ask whether the current focus of UK institutional investor guidelines on individual limits (expressed as a percentage of salary taking a market value basis of valuation) should be diminished in favour of a total remuneration based approach? The more engaged companies already take this approach in many of their pre-AGM consultations for proposed amendments to share plans.

While the Australian approach to executive reward requires a little more work on the part of investors and proxy advisors, it does appear to offer the right ingredients for successful investor oversight. But, for as long as a single shareholder group promotes one view of "Best Practice", and for as long as issuers feel the need, real or perceived, to meet that view, shareholders with progressive views will be excluded from the debate.

The UK is well regarded in world markets for its high standards of corporate governance; but that's no cause for complacency. Maybe it's time to question the assumption that one shareholder constituency has all the answers and whether a more representative approach to best practice could benefit us all. The coming weeks will see whether The Institutional Shareholders' Committee and its constituent bodies can rise to that challenge or whether the Financial Reporting Ccouncil would be the proper home for inclusive shareholder representation. Reading through the Walker Responses it would seem the latter is the more acceptable way forward.

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