Finance

Duncan Mavin is a former Bloomberg Gadfly columnist.

Pity Schroders' fund managers. They could have a tough time pressing for better governance at companies they've invested in after the asset manager announced its own plans to flaunt the provisions of the U.K. Corporate Governance Code Thursday.

Specifically, Schroders said Chief Executive Officer Michael Dobson, in charge for the past 14 years, will become chairman of the board from April -- a role for which he will be paid an annual fee of 625,000 pounds ($879,500). That's in contrast to the code, which states that "A chief executive should not go on to be chairman of the same company."

This part of the code is meant to ensure the new CEO is independent of undue influence from his or her predecessor, free to make decisions and challenge previous ones without having to look over his or her shoulder. Schroders' decision now puts the spotlight on the relationship between new CEO Peter Harrison -- who has been at the firm in various roles for the past two years -- and his former boss.

Sure, the code makes room for nuances, allowing that, "If exceptionally a board decides that a chief executive should become chairman, the board should consult major shareholders in advance." 

Dobson says Schroders has complied. "Everyone has understood the reasoning," he said on a conference call with reporters on Thursday, although he doesn't know if all the big shareholders agree with it.

So what is the rationale? Dobson and other board members stress the importance of "continuity" and knowledge of the asset management industry, including regulations.

The board also point to Dobson's track record as CEO, noting, for instance that assets under management have tripled during his tenure. Certainly, results for 2015 were strong. Assets under management increased to 313.5 billion pounds at the end of 2015 from 300 billion pounds a year earlier. Pre-tax profit of 589 million pounds was up sharply from 517.1 million pounds in 2014. The shares trade at 15.3 times forecast earnings for the next twelve months, compared with 14.5 times for the industry as a whole, according to Bloomberg data.

Long March
Schroders shares have done better than the U.K. stock market under Michael Dobson's stewardship
Source: Bloomberg

But surely that can't be enough? The code doesn't say a CEO can stay on as chairman if he has done well in the past. And if Dobson has done such a great job of building Schroders up, how come he still needs to hang around after stepping down as CEO?

That's not the only point of irony. Schroders' response seems to be that it needs to flout one set of regulations in order to comply with another set. As outgoing Chairman Andrew Beeson wrote in his letter to shareholders:

"Peter's knowledge of the sector is deep and broad and, at this time of significant regulatory and industry change, there is a need for a Chief Executive who understands the Company, as well as the complexities of the sector."

The reasoning for bending the rules isn't compelling -- continuity is inherent in any move from CEO to chairman and anyone with years in the CEO role must have a deep knowledge of the industry. All these explanations hardly seem "exceptional" or even specific to Schroders.

The code applies to all big companies listed in the U.K. -- companies must report on how they have applied it, and explain any exceptions. Dobson says Schroders' fund managers have taken a "horses for courses approach," looking past decisions by any company to flout the rule, depending on the circumstances. 

"It may not always be right for all companies," he said. The question is whether it is the right approach for an influential asset manager with more than 300 billion pounds to invest. The decision to allow Dobson to stay on past his due date is a poor example to set. As good as he's been as a CEO, it's wrong for him to stay on.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Duncan Mavin in London at dmavin@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net