No revolution in banks boards...

From Walker, page 31

"To dilute the primacy of the duty of the BOFI director to shareholders to accommodate a new accountability to other stakeholders would risk changing fundamentally the contractual and legal basis on which the UK market economy operates. It would introduce potentially substantial new uncertainty for shareholders as to the value of their holdings and would be likely to lead to shareholder exodus from the sector and a rise in the cost of capital for BOFIs. Broadening the range of board responsibilities and, to take one suggestion, statutory provision for addition to the board of a representative of a particular stakeholder interest (such as that of employees or of minority shareholders) would distract and dilute the ability of NEDs to concentrate in the boardroom on the most important strategic matters."

Stupid bankers

Dumb reaction to the Walker Review so far:

One senior British banker at an American investment bank equated proposals in the Walker Review, published on Thursday, to the provisions of Sarbanes-Oxley legislation in the US, which imposed strict new governance requirements on listed companies in the wake of the Enron scandal and the era of dotcom excess.

“There are real echoes of the Sarbox syndrome here,” he said.
“This is the dead hand of bureaucracy.”

I can only assume this senior British banker hasn't read the report properly - it's nothing like Sarbox.

Similarly -

“What purpose does this actually serve?” the CEO asked. “It is fundamentally wrong to whip up this hatred of bankers.”

Eh? What planet are you living on if you think this report is some kind of populist assault on bankers? Higgs was arguably more radical than this.

So, Walker...

My initial reaction, having had a decent read through, is that it isn't that great. To be honest, even though I thought his job on private equity wasn't that great either, I didn't write off the potential for this to be a significant report. But in reality I am somewhat disappointed.

There is nothing - and I mean nothing - radical in this report, and many of the recommendations are basically statements of existing or emerging best practice. In addition, given that it is largely pitched in terms of a flexible 'comply or explain' approach there is little for banks to worry about being compelled to do. (I'm not saying that making banks worry is the way to judge whether the report is effective or not btw).

Most of the newspaper coverage this morning went for the idea of disclosing pay info for highly-paid individuals below board level. But actually this isn't intended to identify individuals (though I'm sure you could work a few of them out if you know the banks concerned). And more broadly the idea that rem committees have responsibility for sub-board pay might sound radical, but already some institutions are taking this much more seriously (see last year's UBS special audit for example).

The recommendation on directors' pensions is particularly poor. It is clearly designed to avoid a repeat of the Fred Goodwin example but a) is any company really going to be dumb enough to try and do that again (early retirement pay-off for a disastrous chief exec) and b) by making that the sole focus it misses several other issues like rapid accrual rates and big payments in lieu of pensions. And these are issues for banks specifically - look at the payments in lieu at HSBC for a particularly extreme example.

And what about the idea that rem consultants draw up their own code of conduct? Why do they get to do this whereas the Combined Code and proposed new Stewardship Principles for investors get to be reviewed by the FRC? It doesn't make sense - especially given the low opinion many investors have of consultants.

There is decent stuff in there about beefing up boards - requiring non-execs and chairmen to devote more time to their positions, much more emphasis on relevant experience and so on. And there is much emphasis on a greater appreciation for risk. But to be honest, isn't that the sort of stuff you would expect the banks to be doing anyway in light of what has happened?

Notably about a quarter of the recommendations relate to shareholder engagement, which gives you some idea of who is expected to do the heavy lifting in terms of policing governance. But yet again we are looking at a lot of best practice being regurgitated. A lot of fund managers will, not unreasonably, think that they already make pretty clear statements about their policy on engagement. The idea of giving the FRC responsibility for a sort of Combined Code for investors is all well and good - but who is going to police it? For the Code itself it's obviously investors, who have well-defined, timetabled (AGMs etc) and regularly exercised enforcement rights - what are the equivalent mechanisms to hold investors to account?

I see nothing in the recommendations in respect of investors that I think would make a typical fund manager act any differently. So what's the point? If the Review doesn't believe that shareholder engagement would make any difference to governance standards maybe it should just say so. But if they do they need something much more serious than this. These proposals are considerably less likely to bring about change than some of the ideas Myners has floated for example.

Maybe I'll find more to like about it on another read through tomorrow, but currently my view us that this does not look like the sort of document that reform-minded investors would have been hoping for.

Walker snippets

Recommendation 22
Voting powers should be exercised, fund managers and other institutional investors should disclose their voting record, and their policies in respect of voting should be described in statements on their websites or in other publicly accessible form.

TUC response:

Responding to the publication today (Thursday) of Sir David Walker's interim review of corporate governance in banks and financial institutions, TUC General Secretary Brendan Barber said:

'There is much to welcome in this review, in particular the call for more voting disclosure by fund managers and investors which will help pension trustees and unions to find out how workers' pensions are being invested.

'We support moves to curb the short-termism and excessive risk taking behaviour that bankers' remuneration has encouraged. But by focusing solely on risk, the review has not considered the wider problems with bankers' pay. The growing gap between executive and employee pay has a damaging impact on staff engagement and has created a new class of super-rich that float free from society.

'It is clear from some of the decisions approved by non-executive directors in the run up to the financial crash that a greater understanding of banking is needed. But many experienced bankers also showed terrible judgement. People from outside the world of finance must be brought on to company boards to ensure that the consumer voice is heard and avoid repeating the groupthink that contributed to the financial crash.

'The proposal for new Principles of Stewardship, ratified by the Financial Report Council, will help set a higher benchmark for standards of shareholder engagement.'

Walker Review

The consultation doc is out. Will post up some thoughts later, but from a first scan are (unsurprisingly) some good bits, and some places where he seems to have bottled it.

Best blog on Andy Couldson EVAR

Here.

Voting, engagement and disclosure

One of the most recurring arguments that I’ve had to deal with in the years I’ve spent looking at how institutional investors vote at company meetings is the idea that votes don’t actually mean that much. Lots of fund managers have told me over the years that just looking at their voting doesn’t tell you much, because actually they engaged with the board behind the scenes and got some results.

I’ve always been a bit unsure about this argument, but, principally because I hadn’t been involved in much interaction with company boards directly myself, I took it largely at face value. However the more I’ve been involved in talking directly with companies, including trying to influence them over specific issues, and the more research I’ve done into voting trends the more I think it’s fundamentally wrong.

For one, I have absolutely no doubt that many boards are very interested in how shareholders plan to vote when there is a large pool of dissent. And the threat of voting against them does carry some weight. But in order for companies to be influenced there has to be a credible threat that you may vote against. Those managers that routinely support management are simply not credible in such a negotiating environment.

Having researched manager voting in one way or another for about 6 or 7 years now, I have a pretty good idea of how various fund managers are likely to vote on given issues (I wasn’t surprised by some of the votes against the shareholder resolution at M&S for example). I can’t believe that a smart investor relations department doesn’t know this too.

Secondly, I think it’s only human nature that some managers are more likely to vote for whatever management puts in front of them than others. Confirmation bias is bound to be at play. So managers that are generally supportive of management will no doubt search for information that allows them to justify a vote in favour (and the reverse is no doubt true for more confrontational managers). Although voting guidelines clearly play a role in determining voting outcomes, it can’t explain everything since most institutional investors claim to uphold the Combined Code, yet they reach very different decisions when looking at the same companies. So my view is that actually individual positions and viewpoints are a greater explanation of votes than engagement activity taken alongside.

This leads me, unsurprisingly, back to the conclusion that public disclosure of voting records is a necessary reform. There are without question variances in manager voting that would not be suggested by comparing their voting guidelines, or stated policies on governance issues. But fund manager clients don’t have a hope in hell of seeing this at present because there is so little comparative data available. And to be clear here there are some managers with undeserved reputations for activism if you look at how they actually use their voting rights.

A mandatory disclosure regime would get all the data out in the open and enable proper analysis that would show where managers sit in the voting spectrum. If some clients aren’t interested they don’t have to use it, but those that are would have a useful guide to how managers act in practice, rather than just what they put in their policy documents.

Let’s hope Walker has a look at this tomorrow.