Wednesday, 8 July 2009

Institutional investors should 'do something', just not sure what

This piece by Jeremy Warner on the M&S vote and investor engagement is interesting, if only for the complete confusion about what exactly shareholders should be doing as owners. First up he seems to argue that institutional investors have been asleep at the wheel (he does after all use the words 'sleep' and 'slumber'):

There's to be a new set of proposals next week from the former City regulator, Sir David Walker, on how to improve governance in the banking sector, Sir Christopher Hogg, chairman of the Financial Reporting Council, is beavering away at improvements to the Combined Code, and as if finally awakened from a long sleep, institutional shareholders are flexing their muscles. All a bit late, I'm afraid.

What's more, these calls to action rarely last longer than the downturn itself. The codes soon become irrelevant, or ignored, and institutional shareholders rapidly slip back into slumber.

But then he says that shareholders expressing concerns about governance is 'grand-standing':

Wednesday's vote at Marks & Spencer instructing Sir Stuart Rose to split the roles of chairman and chief executive amounted to no more than completely pointless corporate governance grand standing.

In fact he says that the Combined Code is pretty much a waste of time:

As for the narrow point of corporate governance concern around Sir Stuart's combined position as chairman and chief executive, this is basically just a lot of officiously driven nonsense prescribed by the City Code....

Now we've had another, very much more serious series of corporate failures, this time chiefly in the banking sector, and the Code duly proved powerless to prevent them. As far as the Code was concerned, both Royal Bank of Scotland and Halifax Bank of Scotland were paragons of virtue, with all the prescribed checks and balances and a star studded board of non executives.

But the problem with these banks is that shareholders didn't... err... engage enough:

Yet shareholders did nothing. Worse, they allowed Sir Fred to push ahead with his disastrous top of the market acquisition of the worst parts of ABN Amro even as the banking system was imploding around him. It is a problem that Lord Myners, the City minister, has characterised as that of "the ownerless corporation". When fund managers sense trouble, rather than try and fix the problem, as a private equity owner normally would, they instead just vote with their feet and sell the shares. Remuneration structures in fund management tend to be set in a way that deliberately or otherwise encourages such behaviour.

And the answer is... err... to beef up the Combined Code:

There are twenty pages of rules and regulations governing the conduct of boards in the Combined Code and not a blind bit of difference did it make as RBS and HBOS. Yet there is only one on the duties of shareholders. In the interests of the health of our economy, as well as the safety of our money, it is about time this deficiency was rectified.


I'm really not sure what the point of this piece is. Shareholders are castigated for not engaging, for engaging, and then for not engaging again. The Code is portrayed as pretty worthless, but also as the solution to the lack of engagement.

Obviously I have sympathy with the argument that shareholders don't act like owners. I also have sympathy with the argument that governance issues can be a bit abstract. But in thrashing around like this he attacks shareholders for both doing nothing and doing something, blasting the Code but also calling for it to be increased in length. I'm really not clear what he thinks shareholders should be doing. And he doesn't even attempt to get into the meat of the M&S argument - why are the combined roles necessary at all.

ho hum

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