Governance in focus: Be good, because investors are watching more closely

What do Martin Sorrell’s pay cheques, the controversial closure of the British retailer BHS and a mass brawl at a Kuwaiti shareholder meeting all have in common?

It sounds like the beginning of a bad joke. But while the three cases are very different, each throws a spotlight on an undeniably serious topic: corporate governance.

The field, defined as the system by which companies are directed and controlled, has a relatively brief history in the UAE and in mature markets such as the United Kingdom, and its principles can vary by country.

Despite that, corporate governance codes, such as those outlined in an updated UAE resolution issued in late April, have certain themes in common. Most set standards of accountability and transparency for publicly listed companies, outline the need for independent non-executive directors and female board members, have guidelines on audit committees and relationships with shareholders, and set best practices on remuneration policies.

Corporate governance is designed to ensure companies steer a steady ship, and crucially, help investors to make informed decisions.

“It’s for the investor,” said Simon Lowe, the chairman of the Grant Thornton Governance Institute in London. “At the end of the day, for someone to make a judgement as to the worthiness of a company in which they are going to invest, its reliability – basically, they want to understand how that business operates.”

The importance of corporate governance was this month underlined in stark terms by the British MP Iain Wright, who is one of those leading the investigation into BHS, which collapsed with a £571 million (Dh3 billion) black hole in its pension programme. “Effective corporate governance in BHS was almost entirely absent,” he told the UK parliament.

Remuneration policy, often the most studied aspect of corporate governance reporting, has also come under the spotlight following the latest shareholder revolt over Sir Martin’s £70m pay package as the head of the advertising multinational WPP.

Pirc, a London-headquartered corporate governance and shareholder advisory, this month urged shareholders to reject the “excessive” pay package – as they duly did, with 33.5 per cent voting against it at WPP’s June 8 annual general meeting. This follows a number of investor revolts at other UK groups, prompting some to suggest another “shareholder spring”, such as that seen in 2012, is rising.

Mr Lowe, who is also the author of the annual Grant Thornton Corporate Governance Review, said large UK investors tend to scrutinise carefully companies’ corporate governance practices. And they are not just looking at executive pay, but other areas such as non-audit services fees.

“A lot of the institutions over here, be they pension funds, investment managers or others, very often have separate corporate governance teams. They’re reviewing the companies in which they are invested and they will be making recommendations as to how the investment managers should actually vote at the AGM,” he said.

“A couple of years ago … there was a huge uproar and protest votes against remuneration – of course, always the hottest of topics. But the institutions will very often vote against many of the other areas as well.”

Mr Lowe pointed to guidance published in 1992 by the Cadbury committee as the “starting point” to today’s UK Corporate Governance Code.

Such regulation is constantly evolving, he said, pointing to additions such as the principles concerning risk management and internal control. Like evolution, changes in corporate governance involve plenty of time – Mr Lowe said it takes UK companies an average of four to five years to implement changes in the code.

A fundamental tenet of the UK corporate governance code is “comply or explain”, he said. That means a company is not required to meet all the principles of the code, as long as it explains why it could not.

That contrasts with the approach taken in the United States, given the mandatory regulations on public corporations, some of which, such as the Sarbanes-Oxley Act of 2002, were enacted as a reaction to scandals at companies including Enron and WorldCom.

“‘Comply or explain’ has now become accepted and enshrined within European law. Whereas you go to the States and it really is proscriptive,” said Mr Lowe.

And so where do we stand in the UAE in terms of corporate governance, and why was there a fight at a Kuwaiti shareholder meeting?

Most companies listed on the Abu Dhabi Securities Exchange and Dubai Financial Market were from late April 2010 obliged to comply with a 2009 resolution, regulated by the UAE Securities and Commodities Authority (SCA), covering governance rules and corporate discipline standards.

An updated resolution, issued in Abu Dhabi on April 28 this year, outlines the rules in light of the 2015 Federal companies law. The new resolution details the possible penalties for breaches, which range from a warning notice to financial penalties and referral to the public prosecution. But the 55-article resolution does not apply to foreign-listed companies, while some parts of it do not apply to banks and financial services companies subject to Central Bank supervision.

Fause Ersheid, a senior analyst and researcher at the Abu Dhabi Centre for Corporate Governance, said awareness of corporate governance had increased since the centre was formed around – significantly – the time of the global financial crisis.

He said all listed companies that are required to adhere to UAE corporate governance rules are complying. But it is a “mixed bag” in terms of those that go above and beyond what is required, he said.

Mr Ersheid said UAE corporate governance regulations are “in line with best international practices”. Despite that, shareholders in the Arabian Gulf market are generally less demanding of good corporate governance standards, he said.

“Investors themselves are oblivious to corporate governance,” he said. “Unfortunately, here in the region, we still don’t have that sophisticated investor that will, for example, punish companies that have a weak corporate governance structure by divesting in them, and reward companies that have good governance by investing.”

He contrasted this with the investor revolts seen in other markets – such as the “shareholder spring” in the UK.

“There is more shareholder activism going [on globally] now. There are shareholders asking [for] more governance. They are questioning the executive pay. And they kind of force companies to be more responsible. Here in this region it’s still lagging behind,” said Mr Ersheid.

“Unfortunately I don’t see any sign [of this changing, but it] could in the future. You’ve really got to take into consideration that this region barely started – like, 10 years ago – in corporate governance.”

But there have been cases where shareholders in the Gulf react badly – very badly.

Last year, a video circulated online of a fight at the annual general meeting of a Kuwaiti investment company, which was said to have reported a 94 per cent loss. “Now that’s what you call a real shareholder revolt,” was one British newspaper’s take on it.

The chaotic scene raises serious questions about corporate governance and investor relations (IR). Will there be more shareholder activism in the Gulf – and will that bring a corresponding focus on corporate governance?

Oliver Schutzmann, the chief executive of Dubai’s Iridium Advisors, which specialises in IR, says it is “still early days”. But he pointed to the fact that many international investors hold shares in Gulf companies – and so there is already demand for good corporate governance and IR, which he views as two distinct but overlapping fields.

The Kuwait brawl aside, Mr Schutzmann considers real “shareholder activism” to be some way off in the Gulf region.

“It’s probably still a tad early … before we actually see some shareholder activism around IR and corporate governance, specifically around the management consultation fees and all those things that turn the corporate world upside down in Europe,” he said. “But it will definitely come, as the markets get more sophisticated and regulations are more strictly enforced.”

Mr Schutzmann said corporate governance codes in the Gulf had been largely inspired by those in western markets, with regional adaptations. But he said it is not desirable to adhere to everything being established overseas – especially in regard to executive pay.

He cited the furore over Sir Martin’s huge paycheque, pointing out that the WPP boss is credited with doubling the company’s market capitalisation to £20bn over the past five years. And so the complaints over pay, he said, do not make sense.

“If you’re in a fast-growing market like we are here [in the Gulf] you really need to compensate people well, otherwise they’ll find an opportunity somewhere else tomorrow and move on,” he said.

“There’s a big stink about Sir Martin Sorrell collecting [£70m]. What people fail to see is that [he doubled] the value of the company in five years. And everybody’s screaming about the compensation for that.

“Well, can you please find me another Martin Sorrell to do that job again?”

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