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Newsroom & speeches
09 June 2009
Check against delivery
Let me begin by thanking the IMA for organising this event, and for Sally Muggeridge for that introduction. The title of this event is ‘institutional investors- the weakest link’. I would not agree with this. Institutional investors are not the weakest link. A weak link, yes, but there are many. Good governance and engagement are areas where the institutional investor model raises a number of questions.
Bob Jenkins, the IMA’s Chairman, and I both spoke on this at the recent IMA annual dinner. I thought Bob delivered an excellent speech and I agree with many of the points he made. Importantly, I also agree that we cannot and should not legislate to ensure engagement.
I will now turn to some of the themes I covered in my remarks at the IMA dinner.
I welcome the Institutional Shareholders’ Committee paper “Improving Institutional Investors Role in Governance” (June 2009)- “as far as it goes”. But I am disappointed at the absence of any engagement in intellectual debate comparable with, for instance, the OECD’s paper of Corporate Governance. The paper is not challenging enough, and I note the tentative language used in the document and the absence of any attempt to assess the ISC’s achievements and effectiveness.
I urge institutional investors to make more use of the powers already available to them under company law. These include the ability to put resolutions to shareholders for vote and for institutional investors to attend and speak at Annual General Meetings. I note that the current Combined Code on Corporate Governance suggests [Principle E.3] that “major shareholders should attend AGMs where appropriate and practicable” - but in reality they rarely attend and almost never speak (there is no respect here for comply or explain).
I would suggest that if the AGM did not already exist as a requirement in company law someone would invent the idea in a “Eureka moment”, proselytising the benefits of an annual opportunity for a coming together of management, board members and owners, with opportunity for open debate and questions. But I despair that such little use is made of this venue, save by private shareholders.
There are a number of areas where institutional investors could be more proactive in specifying areas where they expect to see improvements in areas of corporate stewardship and governance. I refer specifically to the opportunity that exists for institutional shareholders to insist on higher standards of disclosure on remuneration, including requiring details about the relationship between compensation costs at the top of the company and prevailing practice for compensating at other levels of management and employment in the same company.
I have also urged that more attention be paid to the dividend as a possible qualitative indicator of corporate health and progress. It is not easy to explain why the remuneration of CEOs has grown at a multiple of the increase in dividends- surely they should broadly move in step?
I would also like to express strong support for greater clarity in investment mandates (between investment managers and their clients) which should state, beyond doubt or ambiguity, the extent to which the manager will, if necessary, use positive engagement to protect and enhance the value of investments, the resources they have available to support this work and the methodology used to assess effectiveness. The absence of detail on this matter in many investment mandates could be interpreted by some as the portfolio manager saying to clients “Management accepts no responsibility for items left unattended”. Clients accountable to others, for instance pension fund trustees and investment company boards, could then explain their choice of managers in the context of their manager mandates. There could be an oversight role for others here – including possibly the Financial Services Authority or the Pensions Regulator.
On takeovers, I would like to first raise a question about the utility of current Risk Factors included in Listing Particulars. For example, the Risk Factors in the RBS offer letter for ABN Amro ran to 15 pages, including a statement that due diligence had been ‘limited’ (and the Listing Particulars issued at the same time were 453 pages long). Do investors find these disclosures and documents helpful? Did they inform the 94% of RBS’ voting shareholders who approved the bid?
I would also like to return to another issue I have raised previously- the question as to whether shareholders in an offeror company might benefit from the availability of independent advice from a qualified and independent person (not having a financial interest in the outcome of the transaction) on the merits and risks of a proposed takeover. I have previously pointed to the Australian practice in this respect, but it is worth noting that there has been criticism from some investment bankers about the quality and value of the advice provided. Advisers have also expressed concern to me about the liability that might attach to the providers of such advice, and the behavioural consequences. So this is clearly not a straightforward issue – but I do believe the matter might benefit from greater debate.
The background to my thinking here is the strong evidence that hasty, ill-conceived or over-priced takeovers can be very damaging to an offeror company and its shareholders whilst noting that the option available to shareholders in the offeror of rejecting a Board proposal can often appear “nuclear”.
I appreciate that issues of price-sensitivity limit the extent to which an offeror Board can pre-consult with major shareholders before announcing an offer but would question whether there is more that could be done by leading players, including fund managers and the Takeover Panel, to create secure methods for greater consultation (such pre-consultation tends to be more frequent in the case of capital raising and placements).
I would also point out that the Takeover Code currently adopts the position that a success fee to a financial adviser who advises that a bid is too low and should be defended is wrong but a success fee to a financial adviser who advises that a bid should be accepted is acceptable. I would question whether this might introduce a bias in favour of successful bids? This is another example of where fund managers could be doing more to challenge established practices in order to ensure that they are “investor friendly”.
Another issue I have spoken on before and one which industry frequently cite as a key barrier, whether real or perceived, restraining engagement and good stewardship, is the concert party rules in connection with the City Code on Takeovers and Mergers. I can confirm that I have today written to the Takeover Panel, with a copy to the Financial Services Authority, asking them to give early attention to resolving any uncertainty about whether the Code limits or inhibits regulated investment managers from working together with their counterparts to address concerns relating to corporate governance and business performance.
A final thought, and a call for action. The institutional shareholder community is essentially split in to two camps. There are those who do not particularly prioritise questions of engagement and stewardship. If that is so, they must make this clear, not least because they owe this transparency to their clients/the ultimate beneficiaries. Those in the sector who do care and want to press for effective engagement and stewardship- I urge you to be more assertive, and use those tools already available to you. You have a role to play in enhancing the performance of corporate Britain, whilst at the same time enhancing the service you offer to your clients.
