QCA Corporate Governance Forum: Session 2 - How do different users judge a company’s corporate governance disclosure?

18th June 2018

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As part of our Year of Corporate Governance, we held our Corporate Governance Forum on 12 June 2018 at Haberdashers' Hall in central London, with over 80 small and mid-size quoted company directors in attendance.

Following the publication of the revised QCA Corporate Governance Code, the forum was particularly timely for small and mid-size quoted companies wishing to adopt good governance practices and comply with the recent changes to the AIM Rules for Companies – which will require all quoted companies to state which recognised corporate governance code they follow – coming into effect on 28 September 2018.

Please see below highlights from our second panel session, featuring:

  • Anita Skipper, Senior Analyst - Corporate Governance, Aviva, 
  • Rachit Gupta, Vice President - Research, Institutional Shareholder Services (ISS)
  • Mark Northway, Chairman, ShareSoc - UK Individual Shareholders Society
  • Georgina Brittain, Managing Director & Senior Portfolio Manager, J.P. Morgan Asset Management

Session 2: How do different users judge a company’s corporate governance disclosure?

Anita Skipper, Senior Analyst – Corporate Governance, at Aviva Investors, chaired the second panel session at the QCA Corporate Governance Forum, which examined how different users judge the corporate governance disclosures made by companies.

Rachit Gupta, Vice President – Research, at Institutional Shareholder Services (ISS), summarised the role that ISS plays in informing investors. He noted that investor trust and confidence was imperative to safeguarding the long-term interests of the economy, and ensuring that it was both sustainable and stable. He added that good corporate governance played a key role in facilitating this and that smaller quoted companies should take this task seriously.

Rachit added that ISS’s Proxy Voting Guidelines were regularly updated, and involved a public consultation process.

Mark Northway, Chairman of ShareSoc, stressed the importance of individual investors. He noted that individual investors’ shares in individual companies represent 12% of the stock market by value; this rises to 30% if funds are included.

He pointed out that many individual shareholders were often disenfranchised due to the fact that their shares are held by nominee companies. This meant that they are unable to fully exploit their shareholder rights effectively.

Mark commented that, as a result of these circumstances, smaller quoted companies should do all they can to ensure they engage with all shareholders and not only institutional investors.

Mark also stressed that while many individual investors acknowledge the fact that investing in smaller companies carried a certain level of risk – indeed, that was the reason they invest in such companies – they still wanted companies to show, through their corporate governance behaviour, that they understood their own discrete risks and had provisions in place to manage them effectively.

Georgina Brittain, Managing Director and Senior Portfolio Manager at JP Morgan Asset Management, explained that while corporate governance is not necessarily always the immediate concern of an investor, poor governance generally results in a poor investment.

She added that she seeks companies which outperform their peers; a dysfunctional board will lead to a badly performing company.

In the open discussion that followed, companies were keen to understand just how closely investors read the annual report. Georgina responded that although she seldom does – arguing that the document is often out of date by the time it has been finalised – the annual report was valuable in terms of containing important pieces of information in one place at a certain point in time. She also added that she placed great importance on broker research.

At the same time, Anita commented that analysts would certainly read the corporate governance content of a company’s annual report in full – including the chair’s statement.

There was a detailed exchange on the precise relationship between institutional investors and ISS. Rachit and Anita explained that while ISS had their own guidelines as a template upon which to base their analysis of a company’s corporate governance arrangements, many investors gave ISS their own customised requirements (such as with respect to board tenure or the number of women on the board) for ISS to advise on.

 

For more from the QCA Corporate Governance Forum 2018, see also:

  1. Highlights from keynote speaker, Jessica Ground of Schroders
  2. Highlights from the first panel session on the QCA Code in context: principles, disclosures and adoptions 

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