March 20, 2013 6:52 pm

A step too far for US companies

Attitudes shifted after the shambles of 2008

The US has always had one of the purest forms of what is known as the Anglo-Saxon model of corporate governance: if an investor doesn’t like something, they can sell their shares.

In that system there has been little time for the more collaborative and prescriptive Swedish approach. John Wilcox of Sodali, a corporate governance consultancy, says that “from the perspective of Wall Street, it would be just crazy”.

Yet since 2008, when poor oversight of large banks and insurers plunged the US economy into recession, attitudes have begun to shift. “From the perspective of people who lost a lot of money during the financial crisis, it might be attractive as part of a broader set of reforms,” says Mr Wilcox.

The Dodd-Frank financial reforms passed in 2010 contained several measures designed to push corporate governance towards a more European, regulatory-led approach. For instance, all US listed companies must now hold a “say-on-pay” vote to approve executive remuneration arrangements. The vote is purely advisory, and before its introduction corporate governance advocates were divided on whether it would have any effect.

Yet the vote has become a lightning rod for investor dissatisfaction, allowing shareholders to express anger without having to mount an expensive campaign to oppose management. The surprise No vote at Citigroup last year preceded the departure of Vikram Pandit, its chief executive.

Many investors also credit it with encouraging companies to improve the quality of their relations with shareholders. Michael McCauley, head of corporate governance for the Florida state pension fund, says that “companies have become more proactive and purposeful in their engagement”.

But social and environmental considerations that might achieve consensus in a small country such as Sweden may be a step too far for US companies, which have very large and fragmented shareholder bases with a wide variety of views. “In the US, we have a pretty well defined idea of fiduciary responsibility,” says Linda Scott of Governance for Owners.

Indeed, investors tend to bridle at a suggestion that they might not consider the long-term health of the companies that they are invested in. As more large public pension funds embrace cheap index-based stock investing, removing the option to sell, they must necessarily be engaged.

“Institutional investors really don’t outsource decision making to the proxy advisers,” says Mr McCauley.

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