Ian Sayers explains why the puzzling case of Chair tenure demonstrates why the FRC should be put on a statutory footing
The AIC spends most of its time arguing against inappropriate regulation being imposed on its members. We less often argue for regulation of other sectors, though we do not shy away from it when necessary. The regulation of proxy voting agencies is a case in point, which will be delivered via the Shareholder Rights Directive.
It is even rarer for us to propose that regulators be subject to additional regulation, but this is what the AIC has done in calling for the FRC to be put on a statutory footing. Though not in response to the issue of Chair tenure, it does provide a timely example of why we think it is necessary.
If possible, I am going to ask you to put your personal views on Chair tenure to one side. Though the AIC is against tenure limits, it recognises that there are a range of views on this topic amongst member directors about the need for regular refreshment versus the value of experience and ‘corporate memory’.
The FRC’s consultation presented a very cogent case against a tenure limit for directors which the AIC supported. You can imagine our surprise when we learned, very shortly before publication of its final Code, the FRC was proposing a tenure limit of 9 years for the Chair alone.
The AIC immediately objected to the FRC’s decision on the grounds that it had consulted on the basis that tenure limits were not required and so would not have had the full range of views or evidence from those opposed to such a limit. However, in the very little time available, we were unable to secure a change of approach.
At this point, we wondered whether respondents to the consultation had overwhelmingly supported such a change, as this seemed the only possible explanation for such a ‘volte face’ without another round of consultation. Things became even more curious, and worrying, when we discovered that, based on the published responses, almost no-one had, in fact, supported such a change.
We analysed some 230 public responses to the consultation. This was not always easy, as the FRC’s consultation did not separate the question of Chair tenure from director tenure. But we discovered:
78 respondents did not respond at all on tenure limits
104 respondents opposed having any tenure limit for directors
Only 9 respondents were in favour of a tenure limit for directors
Only 86 respondents commented on the tenure of the Chair specifically. However, of these:
63 were opposed to any tenure limit
8 respondents argued for a longer tenure limit for the Chair
Only 4 respondents supported the 9 year tenure limit for the Chair
So, not only did the FRC not consult properly on this issue, there was virtually no support from respondents for the final decision taken.
A cornerstone of sound regulation is to gather evidence of the impact of any change. The FRC did not have this to hand, as the AIC could not provide it in the time available. Now we know that, by H2 2020 (when the first reports under the new FRC Code will be produced) there could be as many as 170 investment company boards affected.
At this point, someone in favour of tenure limits might be tempted to chip in that this demonstrates that there is an issue that needs tackling in the investment company sector, but that ignores my earlier plea to separate the decision from the process. And, in any case, if the case for a tenure limit is so compelling and obvious, why did so few respondents support one?
We tend to take proper consultation processes for granted in the UK. Indeed, one of the frustrations of the European policy making process is that principles of sound regulation are not as ‘hardwired’ into the system as they are in the UK. But the case of Chair tenure demonstrates what can happen when those processes are ignored. Namely, a decision taken without consideration of its impact and almost entirely against the published views of those consulted.
The AIC continues to make the case for the AIC Code to diverge from the FRC Code on this issue, and you can read our latest submission here. We will keep members informed of any progress we make. Though this may delay the release of the AIC’s Code into the New Year, feedback from our recent director roundtables suggests that boards support us taking this extra time.
Putting the FRC on a statutory footing, of course, won’t prevent poor decisions. But the accountability that a statutory footing provides should, at least, ensure that decisions are taken with the full evidence of their impact to hand and justified by reference to the responses received.
Ian Sayers Chief Executive T: 020 7282 5612 E: Ian.Sayers@theaic.co.uk