19/07/2010

By Graham Buck

Three major institutional investors are urging companies to ignore new corporate governance guidelines that will require the annual election of board members, claims the Financial Times.

It says that Hermes, Railpen and the Universities Superannuation Scheme have written to 700 companies urging them not to comply with the proposed new code and pledging to back FTSE 350 companies that flout it

Under the code, released by the Financial Reporting Council in May, companies would be required to submit directors for reelection each year. The code would be enforced using the “comply or explain” principle similar to that use by the previous combined corporate governance code.

The annual re-election proposal has already sparked opposition from corporations and investors who claim the move would promote a short-term culture and undermine collective decision-making. Last October, a submission from Hermes suggested that “annual elections could…act as a distraction for both directors and their owners in their mutual task to maximise value over the longer term”.

The letter was described as a call for “less regulation and more dialogue” by Colin Melvin, chief executive of Hermes Equity Ownership Services.
“What we need is for companies and shareholders to work together,” he said. “This is a well-meaning move but it’s in the wrong direction and we are concerned it will promote short-termism.”

He added that investor challenges at Marks and Spencer, Tesco and Prudential over recent weeks have already demonstrated that pension funds are willing to take on a more active role.