Hermes gives hope to shareholders

Institutional shareholders are responding with, albeit varying, enthusiasm because they accept that the financial crisis was — at least in part —a failure of corporate governance.

But one of the problems UK institutions face is that they don't own many UK shares. Twenty years ago the insurance and pension funds accounted for 80 per cent of the UK market. Today that figure is nearer 30 per cent.

Regulatory changes have made them sell down their equity holdings and to buy outside the UK.

Overseas institutions hold as many shares as they do in the leading companies where issues are most likely to arise, so one challenge facing British institutional shareholders is to persuade these foreign holders — be they American pension funds or Asian sovereign wealth funds — that they should make common cause in trying to improve the running of British businesses.

One tends to think that this is more of an issue here than anywhere else because corporate governance is more developed here.

Indeed there is a hope among those at the heart of the system that Britain will come up with the template for other jurisdictions and make for another of those exports which can only enhance the credibility of the City as a financial centre. It seems a not unreasonable hope.

Counter-intuitively, however, the big governance story of the past few days has taken place not in this country but in Germany, a land where shareholders have a history of being passive. The target was Infineon, a company spun out of Siemens 11 years ago, and therefore very much part of the German industrial establishment.

But what was interesting was that the shareholder dissatisfaction was co-ordinated and led by Hermes, the British-based manger of the BT pension fund, acting in concert with several smaller investors. It was therefore a very rare example of cross-border activism by an investor other than a hedge fund.

Going hand in hand with the endemic shareholder passivity in Germany is a suspicion of foreign-based activists — not least because of the attack five years ago on the strategy of Deutsche Börse which led to the ousting of its chief executive Werner Seifert.

No doubt it would be the same if the boot were on the other foot. One can only imagine the outrage which would erupt in the City — and certain sections of the media — if a German hedge fund sought to oust the chief executive of the London Stock Exchange.

So Hermes moved slowly and carefully, making it clear that it is a long-only pension investor not a hedge fund. Although the spat only really achieved a high profile in the past few weeks, Hermes has in fact been talking privately to the company about its concerns for not far off two years.

Indeed it was only when Hermes felt the Infineon board was dragging its feet that it went public with a challenge to field an alternative candidate to the board's choice of chairman for election at the company's annual meeting.

This is not how they are used to things in Germany — a challenge from a non-German investor directed at the heart of the German industrial establishment.

But what was more remarkable in many ways is that Hermes found another credible member of that establishment to run as its choice for chairman and because there was this credible alternative, the Infineon board was galvanised to put forward its own programme of voluntary change and, on that basis, won the vote.

So the point of the story is that although Hermes lost the vote it managed to shake things up and deliver the clearest indication that attitudes in Germany towards corporate governance really are beginning to shift.