Jeremy Warner: Myners wants to force investors to be more engaged
Thursday 21 May 2009
Outlook Lord Myners, the minister for the City, made an appropriate stand-in guest speaker for the Investment Management Association's annual dinner the other night, because the man who was meant to give the speech was none other than John McFall, chairman of the very same Treasury select committee of MPs which has just issued a scathing report on Lord Myners' handling of Sir Fred Goodwin's pension. In it, Lord Myners is accused of naivety and failure to grasp the issue.
Inevitably, Lord Myners was determined to take a tit-for-tat dig at now tainted reputation of members of the House of Commons. Mr McFall's speaking fee had obviously risen beyond the means of the IMA, he joked. Yet even he felt inclined to agree with one of the committee's core observations: that the banking crisis amounted to a massive failure in corporate governance in which institutional investors were directly culpable. These failings were very much the subject of Lord Myners' speech. The peer is a former fund manager himself and has been banging on about such shortcomings ever since 2001, when he penned a review of institutional investment for the Government in the wake of the last big systemic failure in corporate governance practice.
As he points out, market pressures and the structure of corporate share ownership present major challenges for shareholder engagement. Many fund managers do not believe in engaging with companies as a matter of principle. Instead, if they don't like the look of a company or its management, they simply vote with their feet and sell. Quite a few of them did just that in the run-up to the bank crisis, when to the bemusement of bankers, the sector substantially underperformed the rest of the stock market. Some investors obviously recognised the illusory nature of the boom in banking profits.
In any case, the chain linking the ultimate beneficial owners of the shares with the company itself can be a long and diffuse one which moves the focus of behaviour from that of an "owner" to that of an "investor". Institutional investors are expected to exhibit the values of an owner but are in fact incentivised to act as investors, with performance scrutinised on a quarterly or even more regular basis. Most institutional shareholders, Lord Myners points out, are not set up to act like owners. The result is what he has characterised as "the ownerless corporation" which is reflected in fragmented share registers and inconsistent investor engagement.
So much for the diagnosis, but what to do about it? Lord Myners says the fund management industry ducked the necessary reforms last time around and instead opted for an inadequately policed "Combined Code". His suggestion of a legally binding set of fiduciary duties and responsibilities was ignored. Space constraints prevent me from listing all of Lord Myners' suggestions (you can find his speech on the Treasury website), but I particularly like the idea of using dividends as a measure of corporate health and progress, and making them an important determinant of performance pay for directors.
It is not possible to know yet whether Sir Stuart Rose, the Marks & Spencer chairman, qualifies for a bonus this year, but I'm willing to bet that if he does, the decision to slash the dividend will have no bearing on it. The vote against directors' bonuses at Shell demonstrates that, even when shareholders do engage, it is frequently unsuccessful. The board was warned not to, but still it proceeded.
Yet Lord Myners saved his real ire for the failure of institutional shareholders adequately to challenge and check the empire-building takeovers of their boards. Most research on takeovers is unambiguous – they end up value destructive for the offeror company. The banking crisis has proved it all over again, first with Royal Bank of Scotland's acquisition of ABN Amro and then with the equally hubristic takeover of HBOS by Lloyds TSB. When will shareholders learn and put a stop to all this nonsense?
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