| Thank you for your kind introduction.
I'm delighted to be speaking at this year's stewardship and
performance seminar.
It's good to see here so many of the world's largest pension funds,
including ABP and TIAA-Cref, as well as major businesses and
institutional investors
And I'm honoured to be sharing a platform with Sir Adrian Cadbury,
Alastair Ross-Goobey and Robert Monks, who together have done so much to
shape the policy agenda in this area.
Today I want to talk about "good businesses" and "good
owners" - and what we can do to get more of both.
Our government is often accused of being too close to big business.
I don't happen to believe that that is true - and I don't suppose you
do either.
But I do believe that any modern progressive government should
support enterprise and entrepreneurs.
As a progressive, pro-enterprise government, we want more businesses
that produce great products and services - and by doing so, make a good
profit and build long-term value.
Businesses that don't just talk about their greatest asset - their
people - but create a workplace based on partnership, where everyone can
contribute to success.
Businesses that are passionate about the quality of what they
produce; honest and fair in their dealings with customers, employees and
suppliers; and careful with their reputation.
In short, good businesses.
Britain is fortunate in having many such businesses - although you
wouldn't think so when you look at the public reputation of business
today … right down there with estate agents and politicians.
That's why we've strengthened corporate governance and improved
auditing and accountancy standards.
And I want to thank all those who responded so positively to the work
of Derek Higgs and the FRC on these issues.
We have also acted on executive pay.
It's not surprising that people are outraged when directors
responsible for massive corporate failures walked away with huge
pay-offs when employees were losing their jobs and investors their
pensions.
Boardroom pay isn't the government's responsibility … it's a matter
for the shareholders, or it ought to be.
So we have put information and power into the hands of the
shareholders, by requiring companies to publish full details and hold
annual shareholder votes on executive pay.
By empowering shareholders - the owners of companies - we are helping
to create and reinforce a change in public and corporate attitudes
towards payment for failure. And we will report back soon on any further
changes proposed following the recent consultation.
Good governance is not - and must not become - an exercise in
box-ticking, or a distraction from the real business of business. Good
governance is about the creation of a productive and profitable market
economy.
But having made these changes to corporate governance - measured and
considered changes- I have some sympathy with those in the Boardroom who
now ask when will transparency and accountability - rightly demanded of
public companies - be reciprocated by those in the investment community.
Good businesses need good owners.
But who are the owners?
When it comes to big business, most of us.
In Britain, publicly quoted companies are just one in a thousand of
all businesses - but they generate a quarter of turnover. And they're
owned predominantly by the insurance funds, the pension schemes, the
collective investment trusts and individual shareholdings of millions of
people here and abroad - millions of people who for the most part view
big business with, at best, indifference and, at worst, outright
hostility.
But is that surprising when, all too often, share ownership - our
share ownership - is short-term where it needs to be long-term; passive
where it needs to be active; and detached when it needs to be engaged.
At this year's company AGMs - despite the controversy about boardroom
pay, despite the new information and new voting rights -
shareholder-voting levels only just passed 50%.
It's not good enough for a general election, and it's not good enough
for business either.
Millions of votes are going AWOL. Beneficiaries are disenfranchised.
Pension fund managers are not fulfilling their duty - as trustees - to
take care of the assets that they own.
Mandatory voting is an option, but not one that I think would be
sensible. We must avoid a box ticking culture in voting practices every
bit as much as in other areas of governance.
But voting levels do need to be raised. We may not agree with the
entire US approach, but you can't help but envy voting levels of 80% -
in part the result of requiring companies to solicit proxy votes.
So I was pleased to hear that the Shareholder Voting Working Group
has appointed Paul Myners as its new chairman. We look forward to
hearing about their progress and will be looking to see if future
legislation is required to secure appropriate levels of shareholder
engagement.
But voting is only a small part of good ownership.
We need to examine honestly what good ownership really involves. How
can funds and fund managers develop the combination of trust and
challenge that will create profitable, competitive enterprises? Do we
have the structures today to enable that to happen? Do we have the right
expertise within the fund management industry? Are its incentives
properly set to create the kind of companies that pension fund owners
need? And if there is a gap, how do we use the enormous talent of our
investment community to create the new structures, new services, skills
and resources needed to fill that gap?
That is the topic of this conference - an issue that is at the heart
of my own concerns as the secretary of state responsible for creating
the conditions for a successful and creative market economy.
So I welcome the work of those, like Hermes, who are rethinking the
relationship between fund managers and companies.
Their starting-point is that 'the primary goal of a UK listed company
is to be run in the long-term interests of its shareholders - to
generate value for them.'
But long-term, sustainable value creation needs managers who can
understand and build real competitive advantage for their companies. And
it needs fund managers and analysts who can look beyond quarterly
returns and support long-term investment.
The 'Hermes Principles' set out the expectations that this one fund
has of the companies whom they back. They are not asking business to
accept limitless social obligations: the responsibility of business is
still to generate a surplus. Indeed, most of the Hermes Principles are
tough financial disciplines. After all, no profits, no pensions.
But Hermes believes - and there is growing evidence to support the
proposition - that companies that act fairly, and engage in an open
dialogue with investors and the wider public, are likely to do better
long-term than those that simply pursue short-term profit.
The Hermes Principles challenge corporate managers to do better. But
they equally challenge fund managers.
Too many fund managers, when faced with under-performance, continue
to support inadequate management. Others simply pull the plug and switch
investments. So a merger or take-over becomes the only route to
replacing failed management - despite the evidence that few mergers
create lasting value.
Instead, active owners can create value for their investors and
future pensioners - replacing bad management and helping to create a
good business rather than just walking away from a bad one.
So it's time to assert the principle that fund managers - as
trustees, for us, the savers - have a responsibility, as well as a
right, to be active owners.
I shan't offer any judgement on the rights of wrongs of the recent
shareholder action following the Granada / Carlton merger. But I will
staunchly defend the rights of shareholders to take this sort of action.
Active ownership can be troublesome for management. It certainly
takes time - and I speak with feeling as the sole shareholder, on behalf
of the British public, of the Royal Mail and BNFL.
Active owners take the time and the trouble to understand the
company's strategy and strengths, to make sure the right management is
in place, and to support the delivery of sustainable long-term value.
And that, surely, is what we all want.
But active ownership requires not only a different relationship
between fund managers and companies - but also a different relationship
between fund managers and the public.
It requires what Dr Steve Davis, who is addressing this conference
tomorrow, calls a new 'civil economy' based on a fundamental change in
the behaviour of institutional investors.
Beneficial investors need clear, concise and regular information on
how fund managers are acting and voting on their behalf. Whether through
voluntary codes or regulation, we need to create a chain of transparency
and accountability that stretches from the boardroom to the individual
shareholder and saver, via the pension fund manager, trustee and
institutional investor.
The Co-operative Insurance Society, for instance, uses the Internet
to display and explain their voting record for their policyholders - and
everyone else - to see. I hope that others will follow suit in a way
that combines transparency with the good relationships required to be a
good investor.
Like business, trade unions have a responsibility here too, as do
industry bodies like the NAPF and the ABI: supporting the election of
pension fund trustees, equipping those trustees with the skills they
need, and representing their members when management proposes changes to
schemes.
In conclusion, I believe we have some of the best businesses and
investors in the world. Innovative, profitable and socially and
environmentally responsible. But we need more of them.
By empowering the people who actually own so much of the British
economy, we can help to deliver better businesses, better jobs and a
better quality of life for all of us.
|
