Why corporate governance matters

The recent shareholder vote against the pay package awarded to Bob Dudley, CEO of BP, highlights the importance of good corporate governance.

By Matt Crossman, corporate governance manager

Corporate governance is a subject that should concern all investors, yet which can be difficult to understand. It is not just about executive pay, but covers all aspects of how companies are managed, including supply chain awareness, business ethics and compliance with environmental protection laws. Our active approach is about making sure that our clients’ interests as shareholders are represented and protected.

It is increasingly understood that governance standards are an important factor in financial and share price performance. In the extreme, poor governance can result in governmental or regulatory fines, or boycotts by consumers against ‘unacceptable’ business practices. Even without such consequences, it can lead to a weak culture and bad decision-making. It is not about moral judgements per se, but the impact of these factors on a company’s long-term performance.

In the case of BP, a CEO taking home significant figures on top of his salarly could be appropriate in some circumstances, but it doesn’t seem reasonable in a year in which the company made record losses, cut jobs and froze its employees’ pay. The package may have been calculated from pre-existing guidelines around long-term performance, but still shows a worrying lack of awareness from a major global company. At a basic level, the experiences of senior management an d shareholders have to be aligned.

BP said Mr Dudley should not be penalised for the steep fall in oil prices: he is, however, employed to run an oil company whose day-to-day business is driven by those prices. Managing such risks does not justify significant awards on top of basic salary. Furthermore, the tier of management below executive level had their packages adjusted downwards by 25% to reflect the difficult environment. For this and other reasons, we decided to vote against the remuneration report for the year.  The vote may have been advisory, meaning that it has no binding effect, but the message from all shareholders was robust: 59% voted against, one of the biggest AGM revolts. We can expect significant changes to come at BP’s board.

Voting is only one aspect of our approach to corporate governance. It is important to engage with companies before, during and after potentially controversial AGM votes to explain why we have concerns, reference best practice and identify an acceptable resolution. Such dialogue can be very effective and is better for all than confrontation.

To find out more about our approach to corporate governance, please read our Corporate Governance Report 2016 

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