Investors told to take a share of responsibility

Fund managers accused of contributing to the financial crisis by acting like 'absentee landlords' are being encouraged to hold companies to account
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The Independent Online

They can earn huge salaries, work from plush offices and sometimes get bonuses despite the fact that most of their clients have lost a fortune over the last couple of years. Yet fund managers have largely escaped the public mauling meted out to the banking industry.

But the spotlight is slowly swinging on to them, accompanied by demands for reform.

Money managers are coming under mounting pressure to do more to engage with the companies in which they invest. Critics hold them at least partly responsible for the financial crisis that has devastated Britain's economy and left millions out of work. The managers who hold shares on behalf of clients are accused of failing to use their power to question the strategies being pursued by the banks.

Politicians are demanding change and regulators have acted to oil the wheels. The Takeover Panel is preparing a position paper which will spell out to shareholders that they will not fall foul of its rules if they act together to force change at companies in which they invest as long as they act with the aim of securing change for the good of all rather than just themselves. Its statement could be issued in the next two weeks.

A similar move has already been taken by the Financial Services Authority, which wrote to shareholders to tell them that "ad hoc" discussions between groups of investors with the aim of seeking common positions to force improvements in the way that companies were run would not fall foul of its rules against investors acting in concert – trading on the basis of knowing another investor's intentions or working jointly to avoid disclosure of shareholdings, particularly when seeking to force changes in control at companies.

Fund managers complained last month that the rules were vague, and fear of this meant that they were reluctant to engage in discussions between themselves about forcing change at companies or taking common positions – on issues such as excessive boardroom pay. The panel's move would clear the way for them to act. And they may need to show they are taking action in order to stave off an attack from politicians and regulators.

There is already mounting nervousness among them about the reform proposals put forward by the City grandee Sir David Walker in his interim report into the banking crisis. They include a demand that fund managers sign up to a set of "principles of best practice in stewardship" to be overseen by the Financial Reporting Council, and a proposal that the Financial Services Authority be given powers to ask "major selling shareholders" about their "motivation" when they pull money out of companies. This, they fear, could open a can of worms and hamper their ability to act in the interests of clients.

Peter Montagnon, director of investment affairs at the Association of British Insurers, argues that his members have for some time acted as "long term, responsible" stewards of companies in which they invest. He does not recognise Sir David's criticism that institutional shareholders have behaved like "absentee landlords", although he accepts that more could have been done to raise questions before the banking crisis.

"Within the insurance industry managers do see themselves as long-term owners and have done so for a considerable time. Quite a lot of the [corporate governance] actions come from people from an insurance background. Legal & General has been quite vocal on occasions. So has Standard Life, and quite a few others."

He argues that the job of these shareholders has become more difficult because of a change in the make-up of the stock market: "We are down to 15 per cent, and pension funds, 13 per cent." That means these groups, traditionally among the most active when it comes to "engagement", no longer have the clout they once had. One way of changing this would be to bring in more of the foreign owners alongside them who have become progressively more influential – particularly the sovereign wealth funds, which can take a similar view about "long-term ownership" to the insurance companies.

"There are organisations out there who have been reluctant to act because they are more nervous of the regulations or what the intention of them is. The reason we asked the FSA to clarify its rules is to reassure those who might be worried that they might be breaking the rules and about where the dividing line is between engagement and acting in concert."

Mr Montagnon adds: "We are no longer in a position to be able to snap our fingers and make companies do what we want. What we need to do is build critical mass. We need to encourage people who take a similar view to ours to work with us."

But Mr Montagnon is not entirely happy with the proposals for change, and says one thing in particular has to be made clear: "The right to sell must always be there."

That is something which the Investment Management Association (IMA) is keen to stress. While the two bodies have several members in common, the IMA's constituency is more diverse.

The IMA's director of corporate governance, Liz Murrall, says: "Shareholders tend to have one of two approaches when they are investing money. A number will simply buy and sell. Others will seek to engage with companies to try to make management better. This is a matter of choice for clients. There have been issues that have come out from the banking crisis in relation to engagement in that managers may need to be more robust in the future.

"But ultimately, whether managers engage is a matter for the manager and the client," says Ms Murrall. "At present we have 32 managers which hold 68 per cent of UK equities. They all have a policy statement on engagement which people can find on their websites and which clients can see. If these managers have a certain holding, they will tend to engage if there is a problem."

Is this enough, though?

Vince Cable, the Liberal Democrat Treasury spokesman, has called for Sir David to look beyond the banks and extend his review to cover the way fund managers interact with all companies. He spoke in the wake of the takeover of Friends Provident by Resolution – a deal which handed a small but recovering life insurer with a new executive team to an offshore company whose management stands to reap private-equity style rewards if it succeeds in an attempt to use Friends to build a super–insurer.

There were considerable cross shareholdings between the two and the deal appears to have been pushed by institutions, which brushed aside resistance from the Friends Provident board.

It is incidents like this, combined with the banking crisis, that are behind a growing chorus of criticism being aimed at institutional shareholders. If they fail to heed the warning signs and reform themselves, they may be heading for a crash.

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