Hewitt urges sense from institutions over Higgs

The Government yesterday issued a strong warning to major investors not to use Derek Higgs' review of British boardrooms as a way to blacklist all companies which chose not to comply with its proposals on corporate governance.

The move is a partial back-tracking by the Government, which has until now been steadfastly in favour of the Higgs review, which the Department of Trade and Industry commissioned last year in an attempt to prevent a repeat of the Enron and WorldCom scandals happening in the UK.

Patrician Hewitt, the Secretary of State for Trade and Industry, said she "welcomed Derek's proposals in full". But she added in a speech to members of the Association of British Insurers that they ought not to take its key concept of "comply or explain" actually to mean "comply or else".

Mr Higgs said companies ought to be free not to adopt his findings on how the role of non-executive directors could be beefed up, as long as they issued a satisfactory explanation for their decision.

Ms Hewitt said: "Some businesses have told me that some investors have made it absolutely clear to them that if they don't comply with the code they'll be voted against – automatically." Such behaviour would give corporate governance "a bad name", she added.

Mr Higgs' work has provoked outspoken comments in the City. Prominent businessmen such as Sir Nigel Rudd, the chairman of Pilkington, have said aspects of the review are "nonsense".

There have also been mixed feelings among institutional investors. While fund managers such as Hermes have praised the proposals, others have warned companies could suffer, for example by getting rid of good directors because they do not comply with Mr Higgs' guidelines on length of tenure.

At the same time, Ms Hewitt cautioned the Government also has little sympathy with companies which have awarded their executives outlandish pay packages while the health of their companies has suffered.

She urged members of the ABI to clamp down on huge pay-offs to failed directors who "filled their pockets" at the expense of shareholders.

Separately, Don Cruickshank, chairman of the London Stock Exchange, added his voice to the chorus in the City pressing for Mr Higgs' proposed new regulations to be watered down before being included in the Combined Code. Mr Cruickshank said much of the Higgs' work was "very balanced and nuanced", but criticised the list of proposed new guidelines.