Unrest over Schroders' decision to appoint ex-CEO as chairman
In March, Schroders plc, the FTSE 100 asset management firm, caused consternation in corporate governance circles when it announced that Chief Executive Michael Dobson would relinquish his post but stay on as Chairman.
Initial reaction to speculation that Mr Dobson would relinquish his role as CEO after 14 years indicated that this was a sensible and measured change. He is, after all, 63 years old and it was reportedly an open secret among investors that Peter Harrison, his successor, was regarded as heir apparent – and there was concern that he would get restless and move on if he did not get the top job soon.
Once the announcement was made that Mr Dobson would become Chairman – a move said to 'flout' UK corporate governance guidelines − Glass Lewis, the Institute of Directors, the Investment Association, ISS, PIRC and various unnamed investors all queued up to criticise the proposal.
So what is the corporate governance guideline that Schroders has supposedly flouted? The UK Corporate Governance Code provision A3.1 states: 'A chief executive should not go on to be chairman of the same company. If exceptionally a board decides that a chief executive should become chairman, the board should consult major shareholders in advance and should set out its reasons to shareholders at the time of the appointment and in the next annual report.'
The reason for this restriction is that it might be difficult for the new CEO to set a new strategy for the company and to make his own mark with his predecessor effectively acting as his boss. One investor was quoted as describing it as like having a 'back seat driver'.
But a new strategy may not be the board's intention. Appointing an internal successor as CEO might suggest that they are happy with the current one.
In Schroders' 2015 Annual Report, the Chairman, Andrew Beeson, comments that: 'A Chief Executive becoming Chairman is unusual in corporate governance terms and we have consulted with shareholders and considered the provisions of the UK Corporate Governance Code in making this decision. The Board unanimously believes this is in the best interests of the Company and its shareholders, with his appointment ensuring stability and continuity with clients, shareholders, strategic and commercial partners and regulators.'
Lord Howard of Penrith, Senior Independent Director of Schroders, who led the search for a new chairman on behalf of the board, also explained the decision: 'It is clear to the Board that Michael Dobson is the outstanding candidate for the role. Michael Dobson brings continuity at a time of change and the Company will retain his experience and expertise, which make him particularly well qualified to assume the Chairmanship as judged by the Board's criteria.
'The Board is confident that the transition of roles by both Peter Harrison and Michael Dobson will be effective and that the Chief Executive/Chairman relationship will thrive under the new arrangements ... The Board recognises that the UK Corporate Governance Code states that, ordinarily, the chief executive should not go on to be the chairman, but that if it does decide to appoint the chief executive as chairman, then the Board should consult shareholders.
'We have consulted the major shareholders of the Company to explain clearly the reasons behind this decision ... The Board does not regard this appointment as setting a precedent at Schroders and the separation of the roles of Chairman and Chief Executive remains in place.'
Given that the board has consulted 'major shareholders in advance and ... set out its reasons to shareholders ... in the next annual report' it is hard to see how the corporate governance code has been flouted.
The decision is certainly unusual, and it is good to see that Schroders is clear that it does not regard it as setting a precedent, but the company has complied with its code responsibility to explain if not comply.
Why, then, such angst? Well, there are a few reasons why
this is not as clear cut as it might seem:
- The Schroder family owns 45% of the company. Other investors have, no doubt, been consulted, but their opinion is perhaps less significant for Schroders than it might be for other companies.
- Mr Dobson will be receiving a considerably higher fee than his predecessor − £625,000 against £325,000. This is a significant reduction from his £8.9 million in 2015, and is justified by reference to his greater role in client relationships, but could be seen as a steep increase for the chairman nonetheless.
- There is a whiff of hypocrisy given that Schroders, as an investor, was one of the most vociferous critics of Sir Stuart Rose's elevation from CEO to Chairman of Marks and Spencer in 2008, which the Financial Times reported Schroders describing as 'an appalling example ... [and an] ... undue concentration of power'. However, this was a combined chairman/CEO role and Schroders has reportedly supported six out of 10 elevations of CEO to chairman since then.
- There is some concern that Schroders might feel constrained in voting against future breaches of the UK Corporate Governance Code by its investee companies.
Probably the most important point is the first. In the event, Mr Dobson was re-elected as a director by 85.09% of votes. This is another case where a company with a significant majority shareholder is able to disregard corporate governance norms should that shareholder so choose.
There may therefore be a case for companies without a high percentage of free-float being permitted to list but excluded from indices. This is because many funds have a mandate which requires them to track the index, and so are unable to sell out of a FTSE 100 security, but at the same time have no effective control over management because of the significant shareholding.
However, in this case, the voting figures for other independent directors suggest that Mr Dobson was supported by a majority of the independent shareholders, albeit only 65%, with more than a third voting against.
This highlights the point about free-float, however. In most companies, a vote of 10−15% against a director, let alone the proposed chairman, would be sufficient to make him something of a lame duck. Even with shareholder support, Stuart Rose stepped down from the combined role at Marks and Spencer after two years when it returned to the normal split arrangement.
Schroders does seem to have made an effort to engage with shareholders and to explain its rationale. However, that a significant proportion of independent investors voted against Mr Dobson's reappointment is perhaps less significant than the proportion that did. That is, given the somewhat iconoclastic nature of the proposal; the fact that some investors will take the view that no explanation can ever be good enough to justify the elevation of a CEO to chairmanship; and that others will tend to follow the recommendations of their proxy adviser.
This begs the question: how far beyond the controlling shareholder did the company go in its engagement process? And to what degree was it presented as a 'done deal' to others? It is always wise to talk to the wider shareholder base before doing something that is likely to be controversial. The minority still needs to be courted.
That said, it would be interesting to know whether there were investors with whom Schroders sought to engage but who declined to do so and then voted against.
Lord Howard, interestingly, received the votes of 88.20% of independent shareholders, 94.91% overall. Not for the first time this season, investors seem reluctant to vote against individual directors, even when they disagree with what those directors have done.
My view is that there has been a failure of investor engagement on one or both sides. Schroders has clearly done enough for it to be wrong to say that it has flouted the UK Corporate Governance Code, but not quite enough to convince independent investors that the board is correct that this was the right decision. The real issue seems to be whether companies with dominant shareholders should be included in investment indices.
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