Can the new proposed codes for corporate governance succeed where others have failed in empowering shareholders and encouraging companies to regularly refresh their boards? asks FIONA REDDAN

AS THE US steps up its game when it comes to increasing shareholder rights, facilitating the easier removal of directors from corporate boards, Ireland appears to be on the same path, with two major revisions to the corporate governance regime currently at consultation stage. However, will these actually lead to any material change in what many see as a cosy cartel of directors?

Last month, the US financial regulator, the Securities and Exchange Commission (SEC), introduced new rules to make it easier for shareholders to oust corporate directors. From next year, shareholders, with at least 3 per cent of a company’s voting stock, held for at least three years, will be able to nominate up to 25 per cent of a board’s directors on company ballots, which will then be mailed to shareholders before director elections. So, rather than engaging in a time-consuming and costly proxy fight to remove particular directors, shareholders will be able to canvass other shareholders much more easily.

The aim, of course, is to put boards under more pressure and hold them to account for the company’s performance by making the possibility of removal a lot more realistic.

“As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own,” says SEC chairman Mary L Schapiro.

Investor groups see it as a welcome boost to shareholders who wish to hold underperforming boards to account – and are already lining up their first targets. But as it is institutional investors who are most likely to benefit from the change, having the requisite share ownership, it may prove to be largely ineffectual. After all, in the US the big fund managers and pension funds have traditionally been slow to move on under-performing boards.

In Ireland, it is much the same – despite the introduction of the Shareholders’ Rights Directive in 2009, which made it possible for shareholders with at least 3 per cent of the company’s stock to table any resolution they so wish.

But when directors are put forward for re-election, they are rarely voted against. Time and again, shareholders attending annual general meetings vote from the floor against the proposed re-election of a director.

When the proxy votes come in, however – mainly from the large institutional investors who hold significant portions of the company’s stock – the directors comfortably keep their positions. Under company law, while boards are controlled by shareholders, in excess of 50 per cent of the vote is needed in order to either appoint or remove a director.

As such, the removal of a director from an Irish corporate rarely takes place. Back in July, for example, Gerry Killen led an unsuccessful group of dissident One51 shareholders who sought a change in strategy at the investment group by nominating their own shareholders to the board.

There was the case of the removal of former chief executive John Nagle and chief financial officer John Williamson from the Payzone plc board back in 2008, but this did involve High Court action and injunctions during the move.

But such events are few and far between, with institututional investors showing a general reluctance to call for the replacement of directors.

According to Frank O’Dwyer, chief executive of the Irish Association of Investment Managers (IAIM), when large investors want to signify discontent with an appointment, they bring their issues to the chairman or ask his association to do it on their behalf.

Internationally, Ireland is perceived as a place where there isn’t a lot of board renewal. Indeed, following the financial crisis, while the Government moved to remove existing chief executives from the domestic banks, and appointed some of its own directors, many of the pre-crisis directors are still in situ.

Nonetheless, current corporate governance guidelines recommend regular board renewal.

“It’s good practice to look at your board, monitor their effectiveness, and allow people to have input into its effectiveness,” says Jillian O’Sullivan, a partner with Grant Thornton.

However, corporate governance requirements for Irish plcs are often on a “comply or explain” basis, which enables companies to select what they want to comply with, and give reasons as to why they did not comply with other provisions.

Many choose the latter. In this year's Grant Thornton's Corporate Governance Review, for example, the number of companies listed on the ISE claiming full compliance with the code dropped to just 13.

So, when it comes to following recommendations – such as non-executive directors (NED) maintaining their independence by not being allowed to sit on a board for more than nine years – they frequently aren’t followed. At Grafton Group, for example, Gillian Bowler has been a NED since 1995, accompanied by Richard Jewson, who was first appointed in the same year.

Traditionally, Irish plcs abided by the UK Corporate Governance Code. In conjunction with this, the Financial Regulator is working on its new regime for directors in credit institutions.

According to O’Dwyer, the new proposed Irish code has “gone beyond what is in the UK code”, and will require corporates to substantially improve the quality of explanations they give when they are not in compliance with one of the recommendations.

But rather than having “meaningful explanations”, should such codes not have mandatory requirements with which companies must comply in full, such as imposing rather than recommending a nine-year limit on the life of a director?

O’Sullivan doesn’t think so. “They [the directors] could still be adding value, you have to consider their effectiveness on the board,” she says.

For O’Dwyer, it’s not so much the requirements themselves, it’s the spirit in which they’re applied. “If boards don’t have the requisite integrity . . . it doesn’t matter how prescriptive the rules are,” he says.

Whether or not the new proposed codes will succeed where others have failed in encouraging companies to regularly refresh their boards remains to be seen, with one major difficulty still an issue: in a small country like Ireland, it may be the case that there simply aren’t enough adequately qualified people to go around.

And finding such people who are willing to sit on the boards of the beleaguered banks – and possibly have eggs thrown at them – is another challenge.