Sunday, 22 April 2012

Unintended consequences in corporate governance

As I have droned on before, I get a bit sick of hearing about "unintended consequences" when even relatively modest reforms to corporate governance are put forward. This isn't because I don't think policy interventions have unintended consequences, I'm sure most do. But rather because our corner of the world seems only able to consider negative unintended consequences.

As I blogged recently, it's notable that the unintended consequence most governance people think of in relation to a 75% threshold for passing a remuneration vote is a negative one - Stelios dicking around at easyJet. They do not see they equally valid argument that it would empower minority shareholders in companies like BSkyB, Xstrata etc. I think that examples like this suggest a potential positive unintended consequence (unintended because I don't think the policy is designed to address such cases).

More broadly, when you think about it the existence of a corporate governance community (and the employment of people within it) is arguably an unintended consequence. It results from the extension of equity-backed pensions and investment products and the rise of the institutional shareholder as a major player. Before this, certainly in markets like the UK, shareholder engagement of any kind was rare and the idea that shareholders were 'owners' of companies in a meaningful sense was a dormant one.

However with the extension of funded pension schemes (driven in no small part by trade unions negotiating for them) form of investor emerged with potentially significant voting power. The separation of ownership and control which had grown up over many decades before, and was regarded as an inevitable feature of the PLC, could begin to be addressed. Finally there were shareholders with enough clout to make a difference. With the decline in unions the institutional shareholder became the main source countervailing power in the governance of many public companies.

The result is that now many institutional shareholders, mainly but not only asset managers, employ people solely to look at governance issues. It's an unintended consequence, I reckon, of the changing nature of share ownership. So is it a bad thing?

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