In the wake of the crisis, Governments and the public at large expect [the] responsible, benign and moderating influence [of shareholders] to be maintained and intensified. Market pressures may point in the other direction; fund managers may argue that they have no mandate for engagement; pension funds may argue their members’ money should only be spent on stock picking skills; traders may see only the vital need to enhance the technology to push ownership periods below ten seconds. All are points with some validity. But if shareholders do not lift their eyes and see thatas a result of such views stewardship is weakening and needs to be strengthened, then Governments will conclude that governance must become based on law – and that is not good news for shareholders investing in companies that need flexibility to win in global markets – and the public will conclude that shareholders do not deserve their rights. That the deal is off.As I posted previously, I think this is absolutely right and I don't think that UK institutions have really taken the point onboard as yet.
This is odd, as the warning signs are already there. I mentioned Paul Myners latest speech yesterday. Here's something he said early on that is worth flagging:
The European Commission’s Green Paper last month on corporate governance of financial institutions, an important document which raises a series of challenging questions and presages a report and proposals which are likely to shape governance thinking and practice across Europe, points to doubts about corporate governance processes based on the presumption of effective control by shareholders of listed companies. The EU Commission intends, inter alia, to review methods for strengthening shareholder co-operation, monitoring adherence to stewardship codes, addressing conflicts of interest and disclosure by end investors of the remuneration of the intermediaries. Over the last 12 months many in the UK have been wrestling with the EU Commission’s proposed Directive on hedge funds and private equity, a Directive which starts from a basic scepticism about market efficiency and agent accountability. The EU Commission’s Green Paper on Governance uses words more subtle than the original hedge fund Directive but the underlying message is very similar. The Commission is not convinced that the existing model is working and is inclined towards the need for more regulation, extended duties of care and wider stakeholder accountabilities for directors and corporate officers and a role for supervisors “to check the correct functioning and effectiveness of the board”. We have been placed on notice!Again, very true. The EC paper (PDF) is not an explicit attack on the shareholder-focused model of governance, but there are plenty of digs, like this:
The financial crisis has shown that confidence in the model of the shareholder-owner who contributes to the company's long-term viability has been severely shaken, to say the least.This:
The Commission is aware that this problem does not affect only financial institutions. More generally, it raises questions about the effectiveness of corporate governance rules based on the presumption of effective control by shareholders.And this:
The Commission is also considering whether, in addition to shareholders' interests, which are essential in the traditional view of corporate governance, financial institutions also need to take better account of other stakeholders' interests.That seems to suggest a policy shift away from a shareholder-focused model, doesn't it? And let's be honest, in political terms the UK probably isn't in the strongest position to argue in Europe that its model of public company governance is superior. As such there may will be quite a receptive audience for the Green Paper's message.
And just to finish joining the dots of this particular picture, let's have a look at what our own financial regulator in chief has to say about in whose interests the directors of companies should work. Shareholders? Err... not exactly...
I would strongly advocate intervention in the UK through changing the Companies Act framework for directors, for example. The current requirement for directors is to promote the success of the company. This is often interpreted in terms of shareholder value. Whilst this does include the need, for example, to ‘have regard to’ the impact on the community, I do not believe that is sufficient. There must be a stronger and more explicit obligation to wider society. There must be clear recognition of the need for institutions to contribute to the common good.Once again, it's a signal of a turn away from the shareholder-as-owner model isn't it? And if directors have a wider duty to consider other stakeholders (the 'common good' would need to be narrowed down a bit) surely some people are going to start asking why only shareholders are granted legal rights to hold boards accountable in respect of those duties.
What this emerging picture means will depend on your viewpoint on company ownership generally. As a pro-market lefty I'm inclined to want to try and make progress with the initiatives we have underway like the Stewardship Code etc. I still think there are opportunities for the Left to play a bigger role here. And if we were really going to turn away from our existing model, I'd be more interested in issues like employee representation in governance rather than simply shifting to more regulation. Nonetheless the potential turn away from a market approach could be very significant, and I'm surprised that the warning signs haven't attracted more attention as yet.
Finally the silence of the Tories (both blue and yellow varieties) on these issues is surprising. It's indicative of a general lack of attention paid to governance I guess, and maybe there's also a desire not to legitimise any of Labour's work in this field. But oddly it means that the effect could again be to make it more likely that regulators gain power relative to owners in the ConDem Nation.