This snapshot, taken on 07/04/2010, shows web content selected for preservation by The National Archives. External links, forms and search boxes may not work in archived websites.
Newsroom & speeches
09 November 2009
Thank you for the invitation to speak today - I welcomed the opportunity earlier in the year and do so again.
In January I talked about some of the failings of governance and where the Government thought there could be improvement.
And since I spoke to you last more failings have been exposed. There is still plenty of room for improvement, as Sir Christopher Hogg has observed, the banking crisis is a story of monumental failures in corporate governance (although I would add that the crisis was also due to shortcomings in regulation and supervision).
Today, I have been asked to address a specific issue - the impact of EU proposals on financial regulation and their consequences for corporate governance.
We have to make sure that we do not let the focus on new supervision and regulation crowd out lessons needing to be learnt on corporate governance and that good governance and good regulation proceed hand in hand.
There will be more regulation. And there will be tighter supervision. And both will need to be linked to stronger organisational governance and effectiveness.
We can use regulation to make governance better, but it is incumbent on investors and their agents to be the drivers of change.
We have a real opportunity to make sure that the new regulatory powers encourage and enhance reform of corporate governance – making clear that evidence of good governance is an important regulatory test (institutions with inadequate governance are a major source of systemic risk and should not be tolerated)
The new EU supervisory bodies will play their part in working to ensure that a financial crisis of the sort we have experienced is unlikely to ever happen again.
We strongly support the purpose of the Commission’s package of proposals – improving the quality and consistency of supervision, ensuring more effective rulemaking and enforcement, and better identifying risks in the financial system.
In particular, we support a strong rulemaking role for the new supervisory Authorities, together with a role to enforce EU rules.
These measures will help answer the UK finance industry’s calls for a single rulebook and better and more consistent supervision in the EU.
In a moment Claire Bury will give us the EU Commission’s perspective on governance – I urge her to give serious consideration to looking at ways to enhance to efficacy of shareholder stewardship.
The Commission will, however, have to take account of the widely differing practices of corporate ownership and governance that exist across the Member States and avoid the risk of conflating everything into a single model.
The Alternative Investment Fund Manager Directive is an example of a Directive that suffers badly from such conflation but also a good example of where engaged stakeholders can make a real difference through their lobbying.
The directive as first proposed by the European Commission was flawed. It showed a poor understanding of the complexity and taxonomy of the investment industry.
It was the product of politics, and not evidence.
Now that the industry has woken up to this and has started lobbying effectively, there has been real progress.
I have taken a close personal interest in the Directive and have discussed it with many of the key stakeholders across Europe. We are making good progress.
Turning to banks, in the UK, we have implemented the G20 reforms right across the sector, and not just for those banks in receipt of government support.
Our reforms go wider and further than any introduced to date by any other country.
And I believe they will be to the advantage of our banks, their shareholders and wider society.
At a national level, Sir David Walker is due to report later this month on the governance landscape in the banking and financial sectors.
He will make recommendations for far-reaching changes to strengthen board challenge and shareholder oversight, and improve the quality and independence of risk management.
And last week, the Chancellor announced the intention to legislate for the Walker recommendations on governance for banks.
In parallel, the Financial Reporting Council is reviewing the Combined Code and considering which of Walker’s preliminary recommendations have application beyond the banking sector.
I suspect many of them will be judged to be non-sector specific in their utility.
The FSA is implementing new remuneration principles, to ensure that banking remuneration practices do not incentivise excessive risk taking and run parallel with effective risk management.
We can tie capital requirements to risk and the FSA has already made it clear that capital requirements are being reviewed across riskier activities, with the prospect of substantial adjustment.
But as I have said on so many occasions, regulation and supervision is not enough.
Shareholders and owners have to take responsibility and take action.
When I spoke to you last I highlighted that there is a role for institutional investors in preserving and adding value to the investments made for their clients.
As the Government is now part of that class - thanks to our investment in the banking sector - we have and will use our position to be an active and engaged investor.
We have shown that new rules and regulations are not necessary to achieve this.
We showed leadership last week by requiring a tough line on remuneration as part of the Asset Protection Scheme negotiations.
This ensures bank pay is better aligned with the long-term performance of the bank, and with taxpayers’ interests.
I encourage institutional investors to see the Lloyds and RBS announcements as models to propose to other banks.
To date, institutional investors have said little about the lessons they have learnt over the last two years. Put simply, they have not produced satisfactory answers to the question ‘what were the owners of these banks doing?’ Remember that shareholders approved value-destroying transactions, and remuneration practices that now appear to have been poorly aligned with corporate health and shareholder wealth. I expect institutional investors, on behalf of their clients, to be much more challenging in the future than they have in the past, but I wonder whether their clients have similar increased expectation and have reflected this in their manager dispositions and incentives.
The unitary board and Combined Code assume that shareholders will act as informed and value-pursuing investors. A failure by fund managers to act in this way, or to be required to do so by their clients, raises questions about the underlying foundations of the unitary board and Combined Code. Sir David Walker will need to give this careful consideration.
When delivering a lecture in 1897 on lessons learned during the previous century and the unresolved issues for the next, Alfred Marshall considered in depth the issue of corporate governance.
He discussed what we now term corporate governance and posed the question of how we ensure that the manager of the firm acts in the interests of the owners.
Today, the principal/agent relations are far more complex than in 19th century economics.
De facto owners have become more distanced from corporate ownership than Marshall could ever have envisaged – giving rise to what I have described as the ‘ownerless corporation’, stocks held in widely diversified portfolios in which few, if any, shareholders have a large enough shareholding to be engaged shareholders, beyond ‘box ticking’.
Most fund managers regard themselves as owners of shares rather than owners of companies, which begs big questions and gives rise to serious risks that can only be addressed if the de jure owners, pension fund trustees and others, press for very fundamental changes.
There is a real opportunity for gain if we can secure a cultural shift in the priority and resource attributed to governance and stewardship.
I am not suggesting that all fund managers should necessarily ‘do governance’ but I am making the case that (i) some should, (ii) trustees and others must ensure that at least some of their managers devote sufficient skill and resource to the issue and can evidence the value added and (iii) regulators should take an active interest in enabling good governance.
The Government will ensure shareholders have the information necessary to fulfil their duties in challenging boards about risk appetites and remuneration and asking the right questions about strategy and performance.
But shareholders must respond to the challenge of making good use of these ‘further and better particulars’.
Government action will not be enough on its own.
It is time for owners and shareholders to take the responsibility assumed of them by economic theory.
They need to work together to bring about a new enlightenment in governance and stewardship, placing it at the heart of capital allocations and efficient, effective and accountable investment decisions.
And this All Party Parliamentary Group has its role to play.
Practitioners have to truly understand and support the role that good corporate governance can play.
And your connections with business can help achieve this.
We have to take bold and confident steps – we need to learn from the past and be more effective in the future.
