UK Firms Getting Nervous Over New Corporate Code

Several top UK companies are worried that the revised corporate governance code, to be published next month, could lead to disgruntled employees removing all their directors.

The new code plans to introduce the annual re-election of directors.

Alan Buchanan of BA has written to the Financial Reporting Council (FRC), which is producing the new code, saying: "Annual re-election opens up the possibility of a major company being unexpectedly without a board. It would create something of a constitutional crisis if this were to happen on top of what must already be a troubled situation. The ingenuity of activist shareholders should not be underestimated."

Re-electing chairmen annually was recommended by Sir David Walker in his report last year on reforming Britain's banks. The FRC has incorporated his conclusions into its new code, which will apply to all quoted companies from June. The council is set on annual re-elections but has yet to decide if it should apply to all directors or only to chairmen.

Many FTSE 100 companies said they want neither proposal, preferring the present system of directors standing for election every three years on a staggered basis.

Simon Bicknell, the company secretary at drugs giant GlaxoSmithKline, said: "We do not support either of the proposed changes." He claimed they could destabilise the board and hit companies vulnerable to takeover threats. BT, Smith & Nephew and drinks groups Diageo and SABMiller also oppose annual elections. Whitbread called them an "annual vote of confidence".

The Invensys chairman, Sir Nigel Rudd, said: "Annual re-election could undermine the ability and responsibility of the chairman to lead the board and take decisions in the company's long-term interests."

A small number of UK companies do allow annual votes on all directors and BAE Systems and Anglo American backed the new code. Land Securities, despite adopting it, said companies should be free to choose.

Other businesses reluctantly prepared to back the code are split on who should be elected by annual votes. BT and property group Shaftsbury would prefer it to be only the chairman, while National Grid opposed both but would opt for re-electing the whole board.

However, HSBC, one of the banks at which Walker aimed his proposals, was firmly against any annual voting. Its secretary, Ralph Barber, said: "Annual re-election of all directors gives rise to the potential, however remote, of an entire board being removed at one time. Such a situation cannot possibly be in the best interests of a company or its shareholders."

Opponents said picking off individual directors destroyed the concept of collective responsibility and will make recruitment harder. But they are particularly concerned at activist shareholders disrupting a company.

The company secretary of Tesco, Jonathan Lloyd, said: "There is a real risk of abuse of the process, with activist shareholders using the opportunity to vote against re-election purely as a means of registering their dissatisfaction with specific issues."

David Tyler, who is chairman of Logica as well as Sainsbury's, warned that annual elections will give activists disproportionate influence because directors would fear losing their jobs.

"Activist shareholders already exert a good deal of influence," he said. "An annual election process will be grist to their mill."

You couldn't make it up could you?