Standard sets tough rules on governance

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The Independent Online
PETER RODGERS

Business Editor

Standard Life yesterday told Britain's top 100 quoted companies that it expected tougher performance conditions for the award of directors' share options and long-term incentive schemes than those in the Greenbury report.

The request was in a letter to the chairmen of FT-SE 100 companies from Dick Barfield, the chief investment manager, setting out Standard Life's new corporate governance guidelines.

The Edinburgh-based company manages pounds 42bn of funds and is Europe's largest mutual life insurer, owning more than 2 per cent of the UK equity market, so its guidelines are expected to have a significant influence on company behaviour.

Mr Barfield said the guidelines covered "pretty well all the points" in the Cadbury and Greenbury reports. But a lot of companies used total shareholder return - share price plus dividends - as the sole measure of performance, which Standard believed was wrong.

He added that the benefits should be awarded against some measure of underlying financial performance such as value added or growth in earnings per share that the managers could affect directly, unlike the share price.

The main features of the guidelines are advice to separate the roles of chairmen and chief executives, a fundamental plank of the Cadbury report, and the appointment of effective independent non-executive directors.

There must be comprehensive disclosure of remuneration, and incentive schemes must reward directors for high performance, not mediocrity.

Standard's letter also recommends that directors' service contracts should not exceed one year, rather than the two to three years widely practised now. Although Greenbury said there was a strong case for one-year contracts, its recommendation was hedged, and Standard appears to be making the point more robustly.

Mr Barfield said: "Corporate governance is not a box-ticking exercise. Adherence to the spirit of our policies is the key."

Standard Life already votes as a matter of course at all shareholders' meetings and meets all the top 100 companies at least once a year. It plans to vet compliance with the guidelines and will also ask smaller companies in which it holds shares to observe them - although the request will probably be made in meetings, not by sending a letter to the chairmen.

Mr Barfield said Standard already had a policy of identifying underperforming companies and telling them if they were seen to be following the wrong strategy.

If the share price did not reflect the problem and management did not listen, one outcome would be to sell the shares. If the problem was already in the share price, Standard would tell the company it should think about changing management, probably by talking to the non-executives, who under Standard's guidelines would include the chairman.

In hostile bids, Standard does not automatically support the incumbent management. Mr Barfield said the company had not yet made up its mind about the Granada bid for Forte.

Standard's letter came a day after Ian Irvine, chairman of Reed Elsevier and Reed International, said companies should be free to ignore parts of the Cadbury code on corporate governance.

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