Why the IIC matters

Not many people will have heard of the Institutional Investor Committee (IIC), and even those that have, or have followed my burblings on here over the past few years, may wonder what the big deal is.

To recap, the IIC pulls together the three big investor trade bodies - ABI, IMA and NAPF - and, under its new terms of reference, has a focus on lobbying over policy issues. One of the issues over which the IIC name has been used to lobby is audit reform, both in the UK and Europe. The IIC has issued two papers on this subject in March 2012 and December 2012.

The important difference to note between these two papers is the position adopted on mandatory rotation of audit firm. In the March 2012 version it says:

However, the mandatory rotation proposed could be costly and disruptive [chuckle]. Mandatory rotation requirements could also mean that companies are forced to change auditor at a time when the existing auditor’s familiarity with the business would benefit the audit such as when there is a major acquisition or merger. It could also conceal the fact that an auditor has stood down for a particular reason and prevent auditors being reappointed when they are the preferred choice of both management and investors.

There is no sense that some investors might support mandatory rotation.

However the December 2012 version says that "most investors" don't like mandatory rotation, but that "a minority of investors, primarily pension funds, consider that the application of mandatory rotation at 15 years would be desirable". This reflects the fact that the position of one of the IIC's members (NAPF) is to support mandatory rotation (see their submission to the Competition Commission here) as do some other major investors like L&G.

I share the view, therefore, that the IIC shouldn't say anything on mandatory rotation since there is no consensus amongst its members.

What is particularly problematic is that the IIC paper is being used rather disingenuously to suggest that there is a consensus amongst investors against mandatory rotation when there isn't. 

For example, Deloitte, a firm which has some interest in the Competition Commission's work on audit, cites the December IIC paper in its submission to the CC's possible remedies as follows

the UK’s Institutional Investor Committee – made up of representatives of from the Association of British Insurers, the Investment Management Association and the National Association of Pension Funds, which together manage or own £4 trillion of assets – set out in a paper in December 2012 clear opposition to mandatory rotation. [my emphasis] The paper commented that:

“A mandatory rotation requirement could mean that companies are forced to switch auditor at a time when the existing auditor’s familiarity with the business would benefit the audit such as when there is a major acquisition or merger. It could also conceal the fact that the auditor has stood down for a particular reason and prevent an auditor being reappointed when they are the preferred choice of management and investors. They consider that it should be for a company, possibly through its audit committee of non-executives, to decide the best time to change auditor, in conjunction with its shareholders/investors. A mandatory rotation requirement disenfranchises both.” 

Deloitte cuts out the first sentence of this para, which starts "Most investors...." and I can't believe they didn't read the first sentence of the next para (the "A minority of investors.." one), which makes clear that some investors do support mandatory rotation. Remember too that this is Version 2 of the paper that has to acknowledge the fact that the members don't agree on this point, so Deloitte's selective quoting is particularly underhand.

The IIC paper is also cited by BHP Billiton in its response to the CC:

It is also worth noting that in their response to the European Union proposals on audit, the Institutional Investor Committee concluded that it should be for ‘a company, possibly through its audit committee of non-executive directors, to decide the best time to change auditors in conjunction with its shareholders/investors,’ and that ‘a mandatory rotation requirement disenfranchises both.’

Again, no hedging, the IIC is cited as if it represents a unified position.

So, ultimately, the IIC paper is being used to lobby against a reform that is supported by one of is own members, and I am sure these are not the only examples of the paper being used in this way.

The IIC's new terms of reference (updated in May this year) state that it will seek to provide "a single voice on issues of common interest". Clearly on the specific issue of mandatory rotation it cannot do so, because its members do not agree. Unfortunately, the fudged position that has been advocated in the December 2012 paper is, in any case, being used to claim that there is investor consensus on a very controversial issue.

Given that the paper is being used to lobby against the position held by one of the IIC members, and is being used to suggest investor consensus where there is none, wouldn't it be better all round if the paper was at least rewritten to remove any commentary on mandatory rotation, or even withdrawn completely?