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Is the UK witnessing a harmonisation of corporate governance culture and policy with the US?

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Written by Lela Cade, corporate governance advisory at Morrow Sodali


IN the US we are witnessing the adoption of what is being termed, common-sense corporate governance principles. Many of the biggest names in American business, including Warren Buffet, Jamie Dimon, Larry Fink and Mary Erdoes, put their names to a letter signing up to this new approach. Suggestions put forward in the letter include boards of directors being truly independent from the company and meeting without the CEO present on a regular basis, as well as promoting dual avenues of dialogue for large institutional investors to gain a closer understanding of company strategy and why investment decisions are made.

Recently, trust in public companies has been shaken on both sides of the Atlantic, despite each country’s evolving approach to corporate governance. Furthermore, added disruption is on the horizon in the UK following Teresa May’s proposed corporate governance overhaul, signaling a shake-up of the country’s business culture.

These changes have been endorsed by leading industry and political figures including Iain Wright, chairman of the Business, Innovation and Skills select committee and Sir Winfried Bischoff, chairman, Financial Reporting Council, who recently noted in The Corporate Culture and the Role of Boards, “There needs to be a concerted effort to improve trust in the motivations and integrity of business. Rules and sanctions clearly have their place, but will not on their own deliver productive behaviors over the long-term.”

Convergence of approaches

Differences lie in the US’s traditionally rules-based approach, with the UK considering adoption of a more rulse-focused system from a principle-based approach. The UK has traditionally prided itself on having a “comply-or-explain” governance model, which has been key in ensuring that businesses are resilient. This offers more flexibility in how provisions are followed using a less regulatory approach to governance. Conversely, US corporate governance culture has been influenced more by regulation following the Sarbanes-Oxley Act of 2002 (SOX), the Securities and Exchange Commission (SEC) and stock exchange guidelines such as NASDAQ and NYSE.

However despite structural differences, we are seeing a convergence of approaches across both markets. Both acknowledge their inherent limitations and recognise the need for boards to increase the level of investor trust. This mirrors a demand, in both Britain and the US, for increasingly transparent pay structures that reflect company performance, a move towards more diverse boards and greater access to, and communication with, directors.

Although there are indications of convergence, genuine harmonisation may be a step too far from the current climate. In the US, for example, stakeholder activism has been around for years, with investors usually mobilising and reacting quickly to proposed strategic changes. This is not often the case in the UK.

Shareholder activism

While the UK may not be witnessing the same levels of activism seen in the US, there is an argument to be made for investor activism becoming more prominent. Following the vote to leave the European Union, we have seen a degree of uncertainty enter the market in recent weeks. Brexit may well be a contributing factor for allowing shareholder activism to thrive by creating a precarious business environment. Already in the recent weeks following the referendum result, there have been several large M&A deals coming under pressure and scrutiny from investors seeking better terms.

There is an interesting paradox occurring in the UK. While the activism currently underway is happening within well-known British companies, those protesting tend to be overseas stakeholders, including from the US market. Uncertainty across the UK business landscape is unquestionably one factor allowing this behavior to become more prominent.

Irrespective of whether we are seeing activism increasingly being used as a tool to fulfill the needs of shareholders, these latest developments have resonated in a clear shift in awareness across boards in both the UK and the US. There is also a rise in opinion among stakeholders to move towards a more defined, coherent and transparent corporate governance structure within their organisations. While we know these markets are always evolving, an emphasis should be made on the latter factors in order to rebuild trust between business leaders and the public on both sides of the Atlantic.

We will have to wait to see the impact of Teresa May’s proposed changes to corporate governance practices and whether they further align the UK with the US. Regardless of the outcome, one thing is clear, boards must take steps now to increase communication channels on issues including company strategy, remuneration and diversity. This will serve to calm an increasing trend of investor activism and satiate investor concerns on an on-going basis, and ultimately avoiding high profile disruption similar to what can be seen in the US market.

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