James Moore: Let's hope this brake on heavyweights works
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Wednesday 03 October 2012
Outlook The invasion of Britain's stock market indices by foreign natural resources companies with dominant shareholders and questionable governance has been a running sore among pension funds and their advisers.
Most hold at least some of their money in stock market index tracking funds because they make sense in terms of cost (they're cheap) and performance (they tend to do better over the long term than all but the best stock-pickers).
Trouble is if you track an index, you don't get any choice in the companies in which you invest. This means that pension funds – and many small savers – have recently ended up having to back the activities of some rather unsavoury businesses.
The problem was brought to a head by ENRC, the primarily Kazakh mining company that was memorably described as "more Soviet than City" by a former independent director who was sacked when the controlling billionaires threw a hissy fit. Yesterday, the Financial Services Authority sought to address the problem. It is proposing that in future where a company has a dominant shareholder, they will be identified as such by watchdogs, triggering the imposition of new rules to protect minority shareholders.
A company will have to have a majority of directors considered as independent by the Combined Code on Corporate Governance. If the controlling shareholder tries to kick out directors they don't like, the minorities will be handed the power to stop them.
There are also changes to the minimum amount of shares a company has to have in tradable "free float" if it wants to list in London, although the FTSE 100 already has tougher rules in place if a firm wants to be included in one of its indices.
It's all broadly to be welcomed, and not before time. The only problem is that it relies on "independent" directors behaving in a robust and independent manner while they sit on boards. As recent events have demonstrated, notably with the mining company Xstrata's attempts to pay its executives enormous bonuses, the theory doesn't always match up to the practice.
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