LGIM: Role of Corporate Governance has Wider Remit than Ever

The nature of corporate governance is changing and the trends create grounds for optimism over its future, according to Legal & General Investment Management (LGIM).  

In the group’s latest
Fundamentals
briefing, director of corporate governance, Sacha Sadan, writes: “We think that corporate governance should act as a voice of sanity in an increasingly complex business environment.

“We work with, not against, companies and aim to help businesses to succeed. Ultimately, our clients achieve long-term growth when the companies we invest in improve. So, you could say we have vested interest in their success.”

“Companies have the best chance of growth by focusing on a number of key factors” adds Sadan. For example, a company is only ever as effective as its governing board. While LGIM has seen significant improvements in board diversity and engagement, there is still further to go. The group is increasingly focused on effective board reviews; improving the disclosure on reviews and greater transparency around how boards plan to tackle the action points highlighted by reviews.

“With an effective board in place, companies can ensure that they keep ahead of the potential risks to their business,” says Sadan. “Cyber attacks and the protection of intellectual property is a risk that barely existed a decade ago, but one that can pose a significant financial and operational problem. A company board must address this problem strategically and understand the infrastructure needed to protect its intellectual property.

“Another focus for LGIM is linking director pay with performance. Investors played a crucial part in the development of new regulations that cover executive pay and we have been encouraged by the changes in company behaviour. The regulations help remuneration committees to set clear performance measures and transparent links to pay.”

The briefing paper notes that transparency is a common thread in corporate governance and there are further areas where shareholders would benefit from greater disclosure. The annual audit is a process designed to make sure that shareholders have accurate information about the state of their company. LGIM would like to see more auditor rotation and information from the auditors – for instance how they managed the audit process and what was a material item in their work. Sadan adds: “It’s these sorts of changes that enable shareholders to make more informed decisions on their investments, or flag questions to ask management.

“The role we play in corporate governance has changed enormously. Investors want us to do more to improve company performance and, in general, companies want to engage and have more supportive shareholders. While we are not claiming that everything in the corporate world is perfect, there have been a number of real improvements across a range of areas, and we know that we can continue to work to improve the corporate landscape.”

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