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City Comment
When Captain Scott's ill-fated expedition was making its way back from the South Pole 100 years ago, Captain Oates, fearing that he was slowing his colleagues down, left the tent during a storm with the words that he “may be some time”. He was, of course, never seen again.
These words have had a certain resonance ever since.
Thus when the new director general of the Financial Reporting Council, Stephen Haddrill, told yesterday's Institute of Chartered Secretaries and Administrators' conference on corporate governance that publication of the new stewardship code for shareholders “may be some time” it prompted thoughts that it may never reappear at all. The FRC inherited the code from the Institutional Shareholders Committee only a few months ago. Why the delay?
Well there are many reasons but before going in to them it is worth pointing out that this code is the equivalent on the shareholders side of the Cadbury Code of 1992 which first set out guidance for boardroom behaviour, so it is a major step.
Not only that, it is breaking new ground and will be the first such code anywhere in the world to be owned by a public interest body. There are questions about both the quantity and the quality of shareholder engagement in the UK which the ISC code — itself drafted only last year — was thought by some critics to have ducked.
So the delay is at least partly because the FRC wants to produce something fit for purpose but which recognises the complexities of the issue — not least of which the fact that British institutional shareholders now account for only about 25% of the UK equity market, a significant portion of which is in passive funds. That in turn prompts the question that even if they are active, are they big enough to get any company board to listen?
Thus the FRC is anxious to produce something which is an advance on where we are now but not so ambitious that it has no chance of being followed. It has not yet worked out why this might be. Interestingly at the same conference Peter Butler the chief executive of Governance for Owners, a body dedicated to shareholder engagement said in effect that no amount of tinkering with the current system would get us anywhere.
He pointed out that there was 91% compliance with the corporate governance code across the FTSE 350 but that has not prevented the failures of governance which led to the financial meltdown. “The combined code may be fit,” he said, “but it is not achieving its purpose.”
His conclusion is that the governance code based on “comply or explain” is being asked to do too much. It cannot and should not be expected to fix what he says is a dysfunctional system where conflicts of interest and inappropriate business models stop institutional shareholders behaving as owners. Fixing that requires government intervention.
Butler wants a debate about the issues. He says that it is hopeless expecting all shareholders to be engaged because they are so diverse — like vegetables — so dispersed geographically, and because those which are passive funds have to be, well, passive. There is a fundamental difference between shareholders who want to be stewards and those who want to be traders and this has to be recognised.
It will only ever be a minority who want to engage he says. The trick is to recognise this and then find some way this minority can be rewarded for making the effort. He has several ideas.
He suggested, for example, that a tiny levy on share transactions, or from savings funds which benefit from tax relief, could be used to create a pool of money which the FRC could then allocate to shareholders to finance their engagement activity.
If they failed to use it well and in line with the responsibilities to be set out in the shareholder code then the finance would be withdrawn.
There are precedents: the Takeover Panel is funded by a levy on share transactions to police the Mergers & acquisitions scene, so why not raise a levy to fund better governance which might make some of that M&A unnecessary?
Another way might be to reward loyalty by creating two classes of equity with greater rewards accruing to shareholders who held for a long time, who followed comprehensive engagement policies and who did not lend out their stock to enable others to go short. The reward could take the form of a special dividend or a differential rate of stamp duty or capital gains tax.
Again there is a precedent: Standard Life when it listed on the stock exchange gave bonus shares to investors who did not sell for a year.
Butler has been around too long to think these ideas will find either immediate or wide acceptance. But he is equally right in saying that nothing on the table so far seems likely to change the way shareholders behave so that they do take on the responsibilities of ownership which are so vital to the health of our form of capitalism.
At the very least his ideas need to be debated.
