If non-executive directors’ relationships with executives are complex, they appear relatively straightforward compared with how they relate to shareholders.

Most of the Financial Reporting Council’s Corporate Governance Code is concerned with the roles of the board and shareholders: regimes in the UK and US both expect boards to act in the interests of shareholders.

But there are responsibilities on shareholders, too.

The UK Stewardship Code imposes a duty to “hold the board to account for the fulfilment of its responsibilities”, which involves “more than just voting” and includes “monitoring and engaging with companies on matters such as strategy, performance, risk, capital structure, and corporate governance, including culture and remuneration”.

How this engagement with the board is supposed to take place is not spelt out, but the main code speaks of discussion, scheduled meetings and “keeping in touch with shareholder opinion”.

In practice, this is “a huge problem”, says Ken Olisa, chairman and founder of Restoration Partners, a boutique technology merchant bank: “The board is supposed to represent shareholders – but you never talk to them. You talk via intermediaries – so how can you possibly know what they want? That’s half the problem.

“The other half is that shareholders don’t particularly want to talk to directors. It’s a problem in the UK and even more so in North America.

“On one remuneration committee in Canada I said that, given all the fuss in the UK, I wanted to talk to the major shareholders to hear their views. It took about nine months to get the chairman and chief executive to let me talk to them. When I did, every one of them said it was the first time they had ever been asked about remuneration.”

Shareholders’ power reaches its height at an annual general meeting, when they are required to vote on the election of directors and a series of resolutions presented by the board and its committees, including the remuneration report.

The most recent exercise of shareholder power has focused on executive remuneration, as seen during the so-called “shareholder spring” of 2012, when a small number of high-profile company boards suffered embarrassing defeats.

“Those are not binding votes,” points out John Heaps, chairman of Eversheds, the law firm. “They are advisory. But they obviously have a big impact, not least because of their public nature.” He also points out that the vast majority of remuneration reports are quietly approved by shareholders.

Purposeful dialogue throughout the year is to be preferred, he says: “Better communication and engagement means that by the time you get to the point of a resolution at the AGM, the more likely it is to be passed.”

Mr Heaps says both the governance code, focusing on boards, and the stewardship code, covering shareholders, are encouraging greater dialogue.

But he highlights another problem with the relationship: “There has to be care taken when boards and shareholders engage because bringing shareholders ‘inside’ prevents them from dealing in the shares.

“So it cannot be a completely open and daily occurrence – there has to be care over what is shared and when.”

His firm has just published its “Eversheds Board Report: The Effective Board”, which finds “the relationship between the board and its shareholders is changing, with increasing dialogue between them. The majority of directors interviewed recognised that shareholder engagement is having an impact on board strategy and remuneration.”

It says directors believe these interactions are largely positive, although they would “welcome better alignment between the governance and fund management arms of institutional shareholders, as some directors expressed concern that they received conflicting views between the two”.

Bodies that organise investors and funds into groups, such as the Association of British Insurers, Institutional Shareholder Services, and others, reduce the number of separate voices and provide a channel for engagement.

“This is a good thing,” argues Mr Heaps, “because shareholders on their own find it difficult to have the impact they need.”

Peter Reilly, director for HR research and consultancy at the Institute for Employment Studies, sees the range of shareholder interests as a drawback: “Balancing long-term and short-term interests is a particular challenge.”

Another danger, he says, is too close a relationship between a director and shareholders: “Non-executives don’t want to be captured by a particular shareholder interest. Their independence might be compromised. They have to balance a number of competing interests and not be too swayed by any of them.”

Robert Hodgkinson, an executive director at the Institute of Chartered Accountants in England and Wales, believes too much onus is placed on shareholders to act as a “safety valve for society’s concerns”, for example over remuneration. “They can’t be the primary means of making sure things work,” he says.

“Directors should say what they’re doing and where they’re coming from. It’s not that they’re not interested in engagement – it’s more that you can’t engage everyone and keep everyone happy.” He says the board has to make business decisions, rather than further the interests of particular stakeholders.

His colleague Jo Iwasaki, ICAEW head of corporate governance, agrees: “Companies have to have their own perspective to make sure they will be successful over a long period.”


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