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Ever since half the banking system collapsed last year, people have been asking why the big shareholders did not see what was happening as chief executives ran amok, and take steps to prevent it.
City minister Lord Myners suggested they might have been asleep at the wheel. They in turn replied that they tried to intervene but were brushed aside by boards who were not prepared to listen to criticism.
It is an issue that is not going away. Early next month, the Institutional Shareholders Committee is to publish its thoughts on the financial crisis, its views on whether shareholders performed as effectively as they could, and what should be done to make sure things work better in future.
And just in case they were thinking of avoiding some of the thornier issues, or cloaking their comments in bland committee-speak, Lord Myners, in a speech to the Investment Management Association, this week laid on the line what he — and therefore presumably the Government — expects to appear.
It was astonishingly strong stuff, and if he gets even half of what he demands, the fund management industry will wonder what has hit it — as indeed will the companies on the receiving end of a completely new approach to corporate governance. Just to focus the committee's mind, he said as his starting point that the report should give a “frank assessment” of the ISC's own role in preventing the crisis. He said he wondered “whether a body funded by and controlled by industry trade bodies and without a budget or a permanent secretariat is necessarily the best model”. He might as well have given it a loaded revolver and told it to go outside and do the honourable thing.
What he would like to see instead — and presumably what will be imposed by law if the institutions do not agree to it voluntarily — is for a new radically upgraded ISC that would provide “an unfettered focus on investor interests and responsibilities”. He obviously sees this as a full-time organisation, which would be similar to and as professionally run, he suggests, as the Financial Reporting Council. He also hinted that if the institutions are not interested in doing this themselves, the FRC could set up such a body.
The first thing this body could do, he said, is gather proper evidence on the link between corporate governance and corporate outcomes, so that once fathered no one will be in any doubt that it matters and makes a difference.
Then he moves down his shopping list of issues this body might tackle, each individually capable of causing a storm and collectively fundamentally reshaping investor-company relationships. He says, for example, that the new ISC should “give expression to concerns about the insidious influence of executive benefit consultants” — a favourite topic of this column — and separately that it should place “dividends as a measure of corporate health and progress”, and possibly make them an important factor in executive performance schemes. He suggests that they finally get the voting system fixed so that AGM votes will actually reflect the wishes of shareholders.
Then, interestingly he says that the Takeover Code should also be added so that it protects the shareholders in the company doing the bidding as much as shareholders who are in the target. The bidding shareholders could receive an independent assessment of the deal, rather than having to rely on just what their board told them.
Given that most takeovers destroy value, he surely has a point when he says it is the biggest shareholders who are the most vulnerable and need such protection. That was certainly true of ABN Amro when bid for by RBS.
Just for good measure, he also thinks that the cherished “comply or explain” process could do with an overhaul. His view is that the “explain” part too often these days is just bland boilerplate.
There is much more, all of which is fundamentally going to change the way investing institutions approach their task. What we don't know is whether Myners has seen a draft of the ISC report, and was just trying to make sure there is no backsliding, or alternatively that he finds it a disappointing document and is trying to inject some steel into it. Either way, the next few days are likely to be a landmark in UK corporate governance and the mechanisms of institutional shareholder involvement.
If Myners gets even half what he demands, the fund management industry will wonder what has hit it.
Shanks takes up annual challenge
This column on Monday outlined moves to make listed-company chairmen stand for re-election every year as a test of their corporate governance credentials, and the stir this was causing in the nation's boardrooms.
One company at least thinks it is a good idea. Shanks, the waste disposal group, yesterday announced, along with a rights issue, that it will henceforth propose the re-election every year of all its non-executive directors because it believes in these difficult times that it is essential shareholders feel they can call the board to account for its decisions. It understands that there is no point in the board continuing to serve if the shareholders don't have confidence in it. This could well be the first British company to make such a move. It should not be the last.
