Top shareholders can and should do more to stop reckless bosses

But it is the case of Royal Bank of Scotland, now 68%-owned by the Government, that has come to symbolise the worst excesses of the banking system. Arguably, everything hinged on one fateful decision in August 2007. It was then that RBS chief Sir Fred Goodwin pressed ahead with the €72 billion (£64 billion) takeover of Dutch rival ABN Amro at the top of the market, with the credit crunch already under way.

Goodwin and his chairman Sir Tom McKillop admitted this week what everyone knows - and what many said at the time - that they made a terrible error. The question is why didn't anyone stop them? Plainly the non-executive directors on the board of RBS failed. Nor can much be said for RBS's advisers, Merrill Lynch, except to note that investment bank turned out to have colossal problems of its own.

But what about the RBS shareholders? Some of the biggest names in fund management such as Standard Life and Legal & General went along with the ABN deal. At the shareholder vote on 10 August 2007, almost 95% voted in favour. Fewer than 100 people turned up to the extraordinary general meeting in Edinburgh. Proceedings were over in half an hour.

One of the few institutional shareholders who did oppose the deal was Robert Talbut, chief executive of fund manager Royal London Asset Management. "We were surprised that others did not decide to vote against it," Talbut says now. "We took the view at the time it was overpriced and it was far too risky, and that view has been vindicated. In some respects, we wish other institutions had taken a similar view to us." RBS shares, which stood close to 500p then, are now around 24p.

Some other shareholders, who admit they voted in favour of the deal, point out privately that it is "easy to be wise after the event". And Talbut says in their defence: "I suppose what many people would say was that they were unaware how poorly ABN was when they signed up to the deal. Events now would suggest that ABN was a far less good quality asset than at the time the deal was struck."

Those involved in fund management point out that shareholders do rely on the company's management. "Non-executive directors [on the board] have a lot more information than shareholders do," says Talbut. And it can be difficult for a shareholder to vote against the management of a company. Sir Fred Goodwin went on a major roadshow to persuade investors in advance of the deal and there was talk of RBS being, shall we say, zealous in their efforts.

It is possible to register disapproval in other ways - say by selling off shares after the event. Data from Bloomberg suggest that some fund managers such as Aviva and Fidelity (see table above) did sell down their shareholdings in RBS significantly in the six months after the ABN takeover. It is also worth noting that some investments are through tracker funds, which hold shares simply because they are in the FTSE 100 index rather than as an active investment decision.

Many observers, notably in Parliament, are still unhappy. Let's not forget, we are all worse off both as taxpayers and through our investments such as pensions. Michael Fallon, Tory MP on the Treasury Select Committee, says: "Too many shareholders seem to have passively accepted the deals. The big institutions do have a case to answer and we are asking for more evidence of how they are challenging boards."

The Treasury Select Committee heard two weeks ago from some leading figures in fund management. Peter Chambers, chief executive of Legal & General Asset Management, which held about 5% of RBS shares at the time of the takeover, explained how his organisation lobbied heavily (and unsuccessfully) in late spring 2008 for the removal of Goodwin and McKillop from the bank's board. Chambers pointed out that L&G had repeated meetings with RBS - as much as once a fortnight: "The question is: did we engage enough? I would like to think we did. Why were we not listened to? I am not sure I can answer that question. Should we do more, and how can we do more effectively? I am not sure I know the answer to that but I shall be very happy to have a debate.

"The past 12 months have been a sobering period for us in seeing whether or not our engagement has been efficient and effective," he added. "You can form your own judgment on that."

This last comment raises the question again about whether shareholders such as L&G should have done more to scrutinise the planned ABN takeover in the first place. Those close to L&G insist they were vigilant all along. Not only did the bank itself let them down but there was arguably a failure by regulators, ratings agencies and so on.

However, many analysts and market-watchers did ring the alarm at the time. RBS's rival Barclays was also bidding for ABN. This was what New York-based investment group Atticus, a 1% shareholder in Barclays, wrote to chairman in Marcus in June 2007 before RBS's own shareholder vote: "Continuing to pursue this risky acquisition will harm management's credibility and anger shareholders, ultimately making Barclays vulnerable to a bid." That was more than a lot of RBS shareholders said.

Looking to the future, Royal London's Talbut says shareholder activism is key: "How can shareholders and members of the board improve the level of understanding and dialogue? Clearly that has not worked as well as it should. One of our roles [as shareholders] has to be to provide adequate oversight to management action."