UK: The Importance Of Independence

Last Updated: 15 February 2017
Article by Henry Ker

Independent board members are key to engendering public trust in UK business

In December 2016, 21st Century Fox tabled a takeover bid for Sky. 21st Century Fox is currently Sky's biggest shareholder, controlling 39%, and its offer for the remainder of the company stood at around £11.2 billion, or £10.75 a share.

However, the bid raised concerns with several of Sky's minority shareholders about the independence of some of the company's directors. Sky's Chairman James Murdoch (Rupert Murdoch's son) is also Chief Executive of 21st Century Fox.

There had been mounting speculation that a bid by 21st Century Fox was imminent and it is not the first time Rupert Murdoch has looked to acquire the remaining 61% of the UK's largest pay-TV broadcaster. He made a full bid for the company in 2010 which was later abandoned as Murdoch's News Corporation dealt with the fallout from the News of the World phone hacking story.

Appropriate appointments

Under the Companies Act 2006, the role of the company's directors is to act in the interest of all members of the company – whether large or minority shareholders. This is one of the reasons why independent directors are so important to the UK's system of governance – the legal obligation is not just to protect a company and its shareholders from any potential subjective views of the executive team, they also ensure the interests of minority shareholders are heard and protected.

Shareholder engagement is a vital part of good governance and although clearly the primary shareholder is on-board with the proposed deal, it is interesting that some of the minority shareholders feel that they must raise in public their concerns about the bid.

Commenting on the takeover bid, Alison Kennedy, Governance and Stewardship Director at Standard Life Investments, told Governance and Compliance: 'We don't believe it is appropriate that the CEO of a 40% shareholder be appointed as the chairman of the company, particularly when that shareholder is known to harbour ambitions to bid for the company. As things stand, the interests of 21st Century Fox are not aligned with those of the minority shareholders in Sky plc.

'On behalf of our clients, we voted against the appointment of James Murdoch as Chairman in 2011. We did the same at the AGM in October 2016. We also voted against the re-election of the members of the Corporate Governance and Nominations Committee as we were not convinced that the nominations process for the appointment of the Chairman was sufficiently robust.'

In total, 28.45% of shareholders voted against Murdoch's reappointment at the AGM.

The UK Corporate Governance Code, states 'the chairman should on appointment meet the independence criteria'. These criteria are clearly set out in provisions B.1.1.

The Code asks that 'the board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination'; these include if the director 'has close family ties with any of the company's advisers, directors or senior employees' or if they 'represent a significant shareholder', among other things. Although the principles of the Code of course operate on a 'comply or explain' basis and are not legally binding in any way.

However, James Murdoch does not consider his role as Chairman to be an independent one. Speaking to The Guardian after Sky's 2016 AGM, he dismissed concerns around his role saying 'I'm not qualified as independent because I'm not an independent director, being associated with the major shareholder' – the Sky board does have six designated independent directors, including Senior Independent Director, Andrew Sukawaty.

Shareholder foresight

It is interesting to note that shareholders raised issues with Murdoch's appointment back in January 2016 over this very situation. Ashley Hamilton Claxton, Corporate Governance Manager at Royal London Asset Management (RLAM – a minority independent shareholder which holds 6.2 million shares in Sky, worth around £62 million or 0.36% of the company), commented: 'His appointment is a major concern because the chairman should be independent. And particularly so in this case as Fox is such a significant shareholder that has shown an interest in taking over the company. It is surprising the board has chosen to elevate him to the level of chairman again [...]

'Should Fox make a bid for Sky, investors need a strong independent chairman to protect the interests of minority shareholders [...] If there was a situation where a vote was tied we question what extent the chairman will act in the best interests of all shareholders, he is conflicted.'

This principle of independence was the reason for Standard Life Investments' opposition at the AGM to Murdoch's appointment as Chairman. It is also the reason behind RLAM's opposition to his original appointment and the issue has again come up.

In any situation where the objectivity of a company board is reasonably called into question, the onus is on the company to be transparent and demonstrate independence.

Interests of shareholders

However, Sky has been clear that it has formed an independent committee to consider the takeover proposal, to rule out any potential conflicted directors from involvement. The independent committee comprises the members of the Sky board, including the Group CEO and COO/CFO, minus those with connections to 21st Century Fox (Murdoch and NEDs John Nallen and Chase Carey).

Sky stated in its announcement about the recommended cash offer, 'each of whom the Board of the Company considers to be free from conflicts of interest with regard to the Proposal. The members of the Independent Committee will act in accordance with their duties as directors and, in particular, in order to protect the interests of shareholders'.

The last comment is important, given there are shareholders questioning the offer. Regarding transparency around the takeover bid, Richard Marwood, Senior Fund Manager at RLAM, said: 'Following the £10.75 [per share] offer for Sky from 21st Century Fox, we would urge the independent committee of Sky directors, who recommended that shareholders accept the offer, to share more information on the independent financial advice that they based their agreement on. Such disclosure would help shareholders assess the fairness of the offer and give greater confidence in the independence of the committee in the
bid process.'

Independent directors

What the Sky/21st Century Fox takeover reminds us about is the importance of independent directors to the UK corporate system. Enshrined in the Corporate Governance Code, the notion of independent directors taking an objective view is vital to the success of public companies and works in tandem with the legal duties that directors have under the Companies Act 2006 for the company to be run in the interests of its members.

If we are to avoid corporate scandals and accusations of self-interest, being able to show that members of the board are independent and unprejudiced is a key component of engendering public trust in UK business.

It is no coincidence that developing corporate governance systems around the world are adopting elements of the UK system. For example, the Japanese Corporate Governance Code, introduced in 2015, added a requirement for two independent directors on public corporate boards.

If a company is involved in a potentially contentious business decision, whether a takeover of merger or something else, being able to fall back on its independent directors to ensure that no conflicted motive is involved is vital to avoiding accusations of self-interest or misconduct.

It is worth noting, should Sky be bought out by 21st Century Fox and become a wholly-owned subsidiary rather than a UK listed company, it would no longer be under any obligation to 'comply or explain' with the UK Corporate Governance Code. However, as there is so much attention on the governance of private companies and pressure for them to adopt similar standards of governance, with public trust in organisations at something of a nadir, they may still want to consider some of its principles, especially given Sky's profile and role as a leading UK company.

Sky declined to comment on this article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.