Corporate governance: trade union voting and engagement guidelines

Author: Adam Dowdney

The TUC, Unison and UNITE recently announced they had formed the Trade Union Share Owners group and published the Trade Union Voting and Engagement Guidelines.

The three organisations have pension funds in aggregate representing more than £1 billion of assets, and delegate decisions on voting and shareholder engagement to their fund managers.

Concerned that pension fund managers do not always vote in line with trade union policies, the guidelines were developed to encourage fund managers voting at AGMs of FTSE 350 companies to take a common position on a variety of corporate governance issues.

Where companies do not act in accordance with trade union policies or aims highlighted in the guidelines, funds are encouraged to take specific action, including voting against certain policies, resolutions or re-elections proposed by the company.
Company boards

In relation to boards, the guidelines recommend:

  • boards should include sufficient experience of managing stakeholder relationships and environmental impacts and should be as diverse as possible
  • annual re-election of the board is appropriate for all companies
  • if the Senior Independent Director demonstrably fails to address shareholders' concerns, action should be taken
  • 25% of board positions in a FTSE 350 company should be held by women
  • all board positions should be advertised publicly
  • an executive director should have no more than one external directorship and non-executive directors should have no more than three
  • shareholders should hold the company to account for CSR failings

Directors' remuneration

The Trade Union Share Owners are concerned that the current gap between executive and average employee pay is much too high. They recommend that:

  • the ratio between a director's total remuneration and the median employee pay should not exceed 20:1 for more than half of the directors at a company
  • increases in directors' total pay should be in line with ordinary employees' pay increases
  • companies should adopt the living wage and remuneration reports should state whether the company is an accredited living wage employer
  • directors should not participate in more than one performance-related incentive scheme and the maximum award under it should not exceed 10% of salary
  • directors' notice periods should be no longer than those of the employees
  • executive directors should be members of the same pension schemes and on the same terms as staff.

CSR and reporting

In relation to CSR and reporting, the guidelines state that:

  • financial reports should be transparent and a company's business review should give information regarding its impact on employees, stakeholders and the environment
  • the audit process should be objective, rigorous and independent
  • where an auditor undertakes non-audit work, the nature of and fees for the work should be disclosed; and the value of non-audit work should not exceed that of the audit
  • the audit committee should also report on a variety of employment issues including training, pensions, health and safety, pay, work-life balance, diversity and employment tribunal claims

Share capital
In relation to share capital, the guidelines state that:

  • dividends are preferable to share buybacks
  • directors should not be rewarded for a rights issue - proposals for a rights issue will be judged on whether they support a viable long-term plan for the company

Conclusions

The financial crisis highlighted significant weaknesses in the way investors have exercised their oversight and governance role in relation to investee companies.

The FRC introduced the Stewardship Code for Institutional Investors to encourage asset owners to communicate their stewardship policies to their managers and to hold them to account. These guidelines provide a means for trade unions to fulfil their obligations under the Code while promoting trade union values.

Although the guidelines are currently only applicable to funds held by Unite, UNISON and TUC, other trade union funds are welcome to join the Trade Union Share Owners at any stage.