Annual Elections & Short-Termism

Annual elections of directors, do they ensure accountability to shareowners or encourage companies to concentrate too much on short-term returns. I was surprised to read the following in Responsible Investor (UK: stewardship elusive as pension funds buck governance code, 7/21/10):

Hermes, Railpen and the Universities Superannuation Scheme – with combined assets of £106bn (€126bn) – have written to companies in the FTSE 350 saying they would back them if they ignore the Financial Reporting Council’s recommendations on annual elections. The trio are worried that annual elections – a key, though controversial, plank of the FRC’s new Corporate Governance Code – could lead to a “short-term culture” and undermine collective decision-making.

The article goes on to say the National Association of Pension Funds, Confederation of British Industry and Standard Life Investments also favor terms of three years. The Council will review the code in three years, should US investor groups do the same?

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One Response to Annual Elections & Short-Termism

  1. James McRitchie July 25, 2010 at 5:06 pm #

    Manifest had an interesting response and alternative to annual elections. “We would like to propose that, rather than companies proposing each director for election each year, companies propose a single, annual resolution which obtains shareholder permission to continue with three-yearly terms – unless majority voted otherwise. This follows the same “opt-in” logic for EGMs to be held on 14 days notice – a subject which equally provokes division among shareholders.

    The benefit for companies and shareholders is that there is fair notice that shareholders appear to have concerns about board accountability and have a reasonable period of time to engage with each other to avert a ballot catastrophe. It’s a low-cost, high impact option which meets the spirit of greater accountability without disproportionate and overbearing costs.”

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