Institutional investors vow to use voting power against companies

Pension funds and other powerful investors yesterday told companies that if they do not stamp out corporate governance abuses, they will vote against them at shareholder meetings.

The move comes under a tough new industry-wide code on corporate governance. It is the first attempt by City institutions to lay out ways large shareholders can act against companies which commit abuses such as excessive pay packages for executives or mergers that do not create value for investors.

The Institutional Shareholders Committee (ISC), the investor group that drew up the code, is keen to increase pressure on companies in response to Enron and other corporate scandals.

The new code is also an attempt to head off the Government's plan to introduce legislation on corporate governance which would force institutional shareholders to act under certain circumstances.

Lindsay Tomlinson, the ISC's chairman and chief executive of Barclays Global Investors in Europe, said: "If we introduce legislation it is likely we would move back towards a box-ticking mentality and the more positive engagement we have now might go out of the window."

Mr Tomlinson added that while the UK already has a stricter corporate governance regime than many countries, the new code should make a big difference because more pension funds and investment fund managers will be obliged to follow it.

"Institutions will now publish their own policy statements which they will be contractually committed to because they will be made public and will be in investment management agreements. Companies should see a significantly greater level of interest from their shareholders," he said.

ISC members include the National Association of Pension Funds, the Association of British Insurers, the Association of Investment Trust Companies and Investment Management Association. Their members will be encouraged to intervene "where necessary" and vote "where practicable". The Treasury welcomed the move but said it would review how effective it has been in two years' time.