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Hermes Proposes Corporate Governance Reform for Private Infrastructure

Approximately half of Great Britain’s national infrastructure pipeline is expected to be financed by private investors between 2015 and 2021.

UK-based investment manager Hermes Investment Management has proposed an enhanced corporate governance code for private infrastructure assets.

Infrastructure services have traditionally been provided by publicly owned entities and national governments, but as Hermes points out, approximately half of Great Britain’s national infrastructure pipeline is expected to be financed by private investors between 2015 and 2021.

“Few asset classes are as necessary, or significant, to the daily lives of individuals as infrastructure,” said Peter Hofbauer, Hermes Investment Management’s head of infrastructure. “These businesses provide essential social services, including access to water, energy, health and social care, and vital transport services. In short, they are the basic physical and organizational structures and facilities needed for the operation of a society.”

 The proposal comes after the UK government issued a green paper in November seeking corporate governance reform for public and large private entities. 

“I want the Government to have an open discussion with businesses, investors, and the public about what needs to be done,” wrote UK Prime Minister Theresa May in her introduction to the green paper. “This is an important task, and one where both the government and big business must rise to the challenge of restoring faith in what they do.”

Hermes’ proposal includes:

  • Board Effectiveness Reviews – “A requirement for infrastructure businesses to periodically and genuinely consider the board’s skills and diversity, the quality of debate and decision making, the adequacy of conflict management processes, and its overall effectiveness in a structured and documented manner.”
  • Independent Chair – “An independent chairperson can provide valuable assistance in steering robust and effective board debate and stewarding interactions between shareholders, the board, sub-committees and management.”
  • A Minimum Number of Independent Directors – UK utilities regulators Ofwat and Ofgem each require the appointment of a specified number of independent non-executive directors to licensed operating company boards. “Such individuals are typically selected based on their sector or industry experience. The presence of independent, experienced industry professionals can provide comfort for investors, end users and other stakeholders.” 
  • Stakeholder Committee – An advisory committee made up of company management, shareholder directors/independent directors and other key stakeholders operating under agreed terms of reference. “While seemingly radical, this would not be a significant move away from existing practices of certain licensed regulated utilities, including certain water companies, which already maintain customer service committees. 
  • Remuneration – Aligning remuneration to matters other than financial returns (such as metrics related to environmental and social performance). “Making this an expectation for essential infrastructure businesses would mean such conversations at remuneration committees are the norm.”
  • Transparency and Disclosure - Clear and transparent disclosure from businesses both for the purposes of risk management and opportunity analysis. “Where infrastructure services have historically been provided by government, key stakeholders would have had the right to certain information.” 

“We believe the time is right for the authorities and the infrastructure industry to consider implementing some or all of the options set out in our paper,” said Hofbauer. “There is a distinct need for initiatives that will deliver an enhanced governance framework for the benefit of infrastructure company boards, shareholders, stakeholders, the public interest, and increase accountability.”

By Michael Katz

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