Reports and Comment

Foundation's Engagement Publication No.1

Engagement between boards of FTSE-small cap
and FTSE-250 companies and institutional shareholders

However, the Executive Summary is reproduced below:

Executive Summary

This Publication deals with engagement between FTSE-small cap and FTSE-250 company boards and institutional shareholders, as distinct from disclosure in a company's annual report for analysis and evaluation by shareholders and/or their agents. Whilst both are communication, engagement requires contact and dialogue between the two parties. High quality disclosure (reporting) on the part of companies and effective engagement between companies and their institutional shareholders are essential to the sustainability of the ‘comply or explain' basis for the Combined Code.

Engagement, however, can also have a wider purpose, namely the enhancement of shareholder value. This is referred to as active engagement.

The Publication is divided into two Sections. Section 1 focuses on the Key Issues and Practical Recommendations on engagement. These are based on research conducted through meetings with senior and experienced practitioners in the business, institutional shareholder and corporate adviser/broking communities, supplemented by other work. This is presented in Section 2.

The key issues are identified under a series of questions, namely:

• Where does responsibility for initiating engagement lie?
• Should engagement be with the fund manager or governance specialist?
• Where does responsibility for identifying governance issues requiring engagement lie?
• Under what circumstances does active engagement apply?
• Are the incentives for fund managers to actively engage sufficient?
• Are there gains for the fund manager from less active forms of engagement?
• How do small cap portfolio fund managers cope with the large number of investee companies?
• How important is the involvement of chairmen?
• Do company advisers and brokers have a role in engagement?
• What is there to learn from the private equity and hedge fund models?

Thirteen practical Recommendations on engagement are proposed for serious consideration. To that end, further work to progress some of the Recommendations, as well as relevant and associated projects to be initiated, are outlined and included as a final Recommendation.

The Foundation's purpose is to encourage better engagement between the boards of FTSE-small cap and FTSE-250 companies and institutional shareholders by leading the debate on the Recommendations and their implementation - supported by continuing research, publications and forums for discussion.

An article on the Foundation's Engagement Publication No.1 has recently appeared in both -

The December issue of “ Governance ”–

“Engaging the Board : Dr John Mellor looks at engagement between boards of FTSE small cap and FTSE-250 companies and institutional shareholders”

and the February issue of the ICAS Journal “ CA Magazine ” –

“Strictly Boardroom :
It takes two to tango. John Mellor looks at some of the governance issues that arise between institutional shareholders and company boards, and asks which partner should take the lead role as problems crop up.”

This article highlights six key issues which lead to eight Practical Recommendations on engagement deserving of serious consideration.

Click here to download the PDF file.

PRESS RELEASE

The Foundation enters into a partnership with The Institute of Chartered Accountants of Scotland (ICAS) to work together on corporate governance research on small and medium sized quoted companies in the European Union .

The following Press Statement was released by ICAS in September 2007.

A Partnership for Progress in Corporate Governance
(www.icas.org.uk/pressoffice)

ICAS has entered into a partnership with the Foundation for Governance Research and Education to work together on Corporate Governance Research on small and medium sized quoted companies in the European Union. The Foundation, formerly known as the Foundation for Independent Directors, was founded by Professor John Mellor in 2002. It is also supported by the Department for Business Enterprise and Regulatory Reform, the Quoted Companies Alliance (QCA), the Financial Reporting Council (FRC), Standard Life Investments and the Co-operative Insurance Society.

The Foundation's research will have a strong focus on EU countries' governance regimes. Further information on the Foundation and its publications may be obtained from the Foundation's website at www.foundationgre.com .

David Spence, Convener of the ICAS Research Committee, welcomes the new initiative, “Promoting high quality and effective governance is a key aim of the work that ICAS carries out. As a body with members who work across Europe at the highest levels of business, we are delighted to have the opportunity to share expertise to develop governance in small and medium sized listed companies in the EU. Our commitment to support the Foundation recognises the strength and focus of its work in the area of corporate governance.”

ICAS' own extensive research programme has a strong focus on governance. Two important projects are due to be completed within the next few months. One, led by Professor Mike Page from the University of Portsmouth sets out to examine the relationship between corporate governance and corporate performance. The other is an enquiry into corporate governance in AIM companies led by researchers from the University of Birmingham .

Professor John Mellor, Chairman of the Foundation and a Visiting Professor in Corporate Governance at Bristol Business School , welcomes ICAS' involvement with the Foundation, “The Foundation's purpose is research and education in corporate governance, focusing on practical relevance to business, investors, policy makers and regulators. The particular research on European smaller quoted companies is an important initiative with implications for economic development amongst EU member states. The Foundation welcomes the involvement and support of ICAS and looks forward to capitalising on the strengths of both our organisations.”

NOTES

1. David Spence, a Past-President of ICAS, and convener of the ICAS research committee, will join the Steering Group of the Foundation, which sets the scope of the research programme, and monitors its progress in order to maintain its relevance to business. The work builds on work previously undertaken by John Mellor, sponsored by the QCA, which led to the publication of an initial report in January 2006. It is expected that the Foundation's next report will be published in November 2007. The work leading to that report is being made available to the FRC's current consultation on the Combined Code.

2. The Institute of Chartered Accountants of Scotland (ICAS) is the world's first professional body of accountants, receiving its Royal Charter in 1854. ICAS has 16,000 members worldwide and in the UK the CA designation is reserved exclusively for their use

3. ICAS is the fastest growing accountancy body in the UK in terms of worldwide student numbers with latest figures (Source: Professional Oversight Board (POB) - Key Facts and Trends in the Accountancy Profession –November 2006) showing a student growth rate of nearly 60% from 2000 to 2005. It is the only UK professional accountancy body to both educate and examine all of its students. The CA qualification is known around the world for consistency and high standards and ICAS enjoys a widely recognised reputation for providing the 'gold standard' in accountancy education

4. ICAS is a member of The Global Accounting Alliance (GAA) – an alliance of the world's leading professional accountancy bodies, which was formed in 2005. The GAA is intended to promote quality services, share information and collaborate on important international issues. It works with national regulators, governments and stakeholders, through member-body collaboration, articulation of consensus views, and working in collaboration, where possible with other international bodies, especially IFAC.

LAUNCH OF RESEARCH REPORT

Lord Strathclyde launches report on “Corporate Governance Research on small and mid cap quoted companies”, sponsored by the Quoted Companies Alliance .

Wednesday 15 th February 2006 saw the launch of the Report which took place at the prestigious London Wall offices of Osborne Clarke, solicitors to the Foundation. The launch was attended by representatives from the investment community, DTI, FRC, LSE, companies, and Middlenext representing mid caps in France .

Opening speech by Lord Strathclyde, President of the Quoted Companies Alliance -

"I am delighted to be here for the launch of Corporate Governance Research on Small and Mid Cap Companies in the Quoted Sector.

I'd like to start by congratulating Professor John Mellor for his timely report. No one pretends that corporate governance is something many boards find easy to deal with in practice, but I believe that we have gone well beyond the box-ticking mentality of the past.

There is no one-size-fits all approach where small and mid caps are concerned, the sector needs to be liberated from regulation that often has no benefit or purpose. As Professor Mellor has put it 'Codes and regulations must cease to be seen as an end in themselves, but a means to an end' where that end is a flourishing market.

It is a fundamental need of the UK, and indeed EU economy in this time of globalisation to increase cross border flows through integration of the capital markets. We should not fear the new global economy; it is bringing unprecedented opportunity and prosperity; it is liberating and exciting; but we must face up to the new challenges it brings.

There is the challenge of competitiveness: how we attract new investment as travel and technology make it easier for companies to locate anywhere in the world. We must learn from each other; regulation must take into account the differing company structures and characters across EU member states. Corporate Governance must not blindly dictate, it must promote effective dialogue between shareholders, boards, other stakeholders and the small and mid cap sector as a whole.

The burden of legislation in the economic sector is abundant. The Company Law Reform Bill currently working its way through the House of Lords contains 885 clauses; and while it may not set many parliamentary pulses racing, it has a huge influence for good or ill on British industry and commerce.

It is vital that we secure the ongoing research funding to develop a regulatory framework that recognises the particular features that small and mid cap markets need to prosper, and spread across the whole of the European Union. There has long been a gap in corporate governance research focussed on this sector, and I am pleased to announce that this project will go a significant way to closing that gap.

This Research sets out the opportunities and the codes that smaller quoted companies need to thrive. We all recognise that we cannot stand still if the UK marketplace is to be the vibrant place we all want it to be.

I must thank Professor John Mellor for the enormous amount of hard work he has put into this report, and his call for 'a vision of a thriving and competitive small and mid cap sector of the economy' is more timely now than ever before.

The QCA share that vision and they must be praised for their continuous support of such research and the unwavering practical encouragement and advice they give to smaller quoted companies.

Stability, fiscal responsibility and competitiveness must all come together if we are to increase prosperity in the British Economy, and I welcome this research as a vital step along that path."

Speech by John Pierce, Chief Executive of the Quoted Companies Alliance and Chairman of the Union of Issuers Quoted in Europe -

"It is 14 years since the Cadbury report was published, and established itself as the cornerstone of corporate governance thinking and practice, not just in the UK but worldwide.

In terms of the history of the joint stock company in the UK, which can be traced back some 300 years or so, it is a very short time span.

I do find it interesting that it has taken so long to get to where we are in developing a workable, balanced and effective link between the owners of capital and the managers of that capital. And the process is still evolving - especially in refining a governance regime that is suited to those smaller, growing quoted companies as they develop from owner managed businesses to fully fledged public companies with diverse shareholdings.

In describing them as developing companies, I immediately introduce one of the challenges of governance - how to accommodate and reflect that growth within the governance code. We talk in a general sense of the need to ensure that governance per se is kept under review, so that it is dynamic and reflects the changing requirements of investors and market practices over time.

But it also has to be dynamic in another sense, at the micro level, and that is what this research has borne out. To date there has been anecdotal evidence, but now we have real evidence that different ownership structures bring different governance challenges calling for perhaps different or flexible or tailored solutions than may not be explicit in the combined code. By no means am I suggesting that the combined code has got it wrong, it is sometimes a consequence of the principles being dissected and perhaps misunderstood or applied too rigidly.

By the researchers for this project talking to both investors and company managements we believe the findings in this report fairly reflect the problem and uncertainties being met by both parties at the present time.

The QCA exists, amongst other things, to find for smaller quoted companies proportionate, workable solutions to market issues. Part of the next step in this research programme is to find out more about how to improve the dialogue between investors and company boards, so that both parties benefit.

The evidence of dissatisfaction on both sides, easily leads to the governance processes being seen as 'imposed chores' rather than part of value enhancement.

In the future study we will explore further the relationship between the cost of capital and corporate governance. Market studies of large companies here and in the US, indicate that investors will indeed pay a premium for shares in a company with demonstrable good governance practices compared with similar businesses which lack such frameworks.

In theory, given the generalised risk profile of smaller companies, a good governance profile may encourage a comparatively higher premium.

If a link is established between the cost of capital and the governance regime in place, then we should see an acceleration toward compliance and best practice amongst small caps. A win win situation for companies, their owners, and the economy at large.

In order to find solutions for a Pan European market we need to share experience with the quoted companies and their representatives in other EU member states, and I am especially pleased that Evelyne Deloirie of Middlenext the French organisation for small and mid caps is able to be here with us this evening.

As you will see from the report, research was carried out with companies in France and Germany, and in the next phase, we intend to extend the work to other major EU countries. The purpose is to make a meaningful contribution to the development and harmonisation of corporate governance principles across Europe. In my current capacity as chairman of UNIQUE - the Union of Issuers Quoted in Europe - a coalition of representative bodies covering 3500 out of the 8000 companies in the EU - I am giving this initiative my full support.

I hope you too will support this important programme of work.

Thank you."

A company limited by guarantee No. 4396150 and Registered Charity No. 1124053 ( England and Wales )