PIRC publishes its 2015 Shareowner Voting Guidelines: some symptomatic changes of emphasis

Pensions & Investment Research Consultants Ltd (PIRC), the corporate governance and shareholder advisory consultancy, has published its “UK Shareowner Voting Guidelines 2015”. Many of the changes from the 2014 edition are symptomatic of current issues in investing and governance, so we’ve picked out some of the more interesting comments and amendments.

Directors’ remuneration

PIRC says that there is an conflict of interest in having an executive director of another listed company as a member of a remuneration committee. This conflict supposedly arises from the process of benchmarking pay against other firms – the argument being that an executive has a vested interest in pay inflation. It’s a point of view, though one with which many would take issue.

The board

On capital allocation, PIRC suggests that directors should as a matter of course consider whether it would be more appropriate to return capital to shareholders rather than invest it in the business. In an age of low yields, that will be welcomed by many income investors.

With regard to the difficult issue of chief executives stepping up to becoming chairman, PIRC (in common with many other corporate governance commentators) opposes that as a matter of principle, although it allows that there may circumstances – particularly if it is an interim measure – where it is acceptable. PIRC also says that finance directors should not be appointed as chairman of the same company. Is that perhaps a dig at HSBC, where the chairman, Douglas Flint, followed that path?

Finally on the board, PIRC opposes the company secretary also being a director. Although unusual in Main Market companies, that is not uncommon at AIM companies. PIRC’s view is that it can lead to a conflict situation, but many smaller companies would respond that, given limited resources for board and executive appointments, it would be better to manage and recognise the conflict rather than adopt a perhaps overly purist approach.

The accounts and audit

For the audit committee, PIRC would like a detailed reference to the results of agenda items covered by the committee, and more focus on and discussion of those areas where auditors have exercised discretion or interpreted accounting standards. That latter point is an important theme in the discussion around the audit committee’s role and the reporting of how it receives and deals with advice.

On the much-scrutinised question of auditor independence, PIRC agrees with the widely-held view that non-audit work and lengthy tenure may detract from an auditor’s independence.

Shareholder relations

The 2015 guidance has dropped two statements contained in the 2014 version. First, that PIRC expects companies to disclose the agenda or subjects discussed between directors and shareholder bodies. Second, that it would encourage shareholders to seek shareholder approval on dividend policy. Acting on those statements could pose legal difficulties for boards, as well as being potentially a little intrusive on how the board chooses to operate.

PIRC is a private company and its views have no force in law or regulation. However, its guidance is viewed with interest by many companies and investors. Some of its positions will not always be popular with companies, but – often because of that – they are an useful contribution to the governance debate.