Afternoon:
10°c
The report by Sir David Walker in which he put forward a range of ideas to improve the governance of banks and the involvement of shareholders has had one unforeseen effect.
The exhortations to do more have produced a furious reaction from private shareholders who point out that, much as they would like to behave like good owners, the system is designed to stop them doing so. As pointed out in a letter to the Financial Times by Michael Walters — a retired financial journalist, one should perhaps say —thanks to the nominee system through which private investors are usually obliged to hold their shares, they have no direct contact with the companies they own.
They do not receive the accounts, and they are not entitled to vote, attend annual meetings or ask questions. If individuals do manage to produce a share certificate so they can gain admission to the AGM, they then hit another brick wall. Company boards rarely see these as an exercise in democracy and accountability. Persistent questioners get shut up by the chairman, in the interests of getting through the meeting in time for lunch.
Follow-up questions are denied, so evasive answers get through unchallenged. Penetrating questions are sidestepped on usually spurious grounds that to answer would disseminate information not available to all shareholders. And if all that fails, there is a tame lawyer on hand to back up the Trappist-monk tendencies of any board member with some spurious legal opinion that nothing should be said. As a result, shareholders seldom get reasonable answers to reasonable questions.
The current AGM, which is supposed to be the centrepiece of accountability and therefore good governance, is in fact a sham, and this is why a proposal from Tom Bonham Carter, another of that famous family, deserves to gain more traction. Instead of having pointless votes on the auditor's reappointment and the directors' report, he suggests instead that the AGM should be a platform where the board is required to present its strategy and plans. The board should be required to explain why its proposal is the best option for the business. It must spell out how this plan would create value for the business in the longer term, and why it is better than anything else.
Bonham Carter believes the scrutiny which would be brought to bear on the board when going through this process would inevitably highlight whether it has the skills and experience to make it happen, and therefore make it easier for shareholders to assess whether they had a properly functioning board —which is, of course, the ultimate aim of most corporate governance. In addition, it would enable shareholders to assess the amount of risk undertaken, and the amount of financial resource required, and to know what rewards the executive team would expect if they deliver on the plan.
The final stage would be for shareholders to vote on whether to accept or reject the plan. Thus shareholders would know what they were entitled to expect from the board, and the board would have a mandate from its shareholders — unless, of course, the strategy was voted down. That seems unlikely to happen but if it did, what better example could there be of shareholder democracy in action?
Bonham Carter's ideas are radical, but his business is a consultancy that specialises in trying to measure the effectiveness of boards. Few people have as much insight into what happens behind those closed doors, what works and what doesn't, and what is needed to make things better. If people are really sincere about improving governance — which I personally do not think they are — this is the kind of radical action that is needed.
Just what is driving up iron ore?
In April, in the teeth of the global recession and with steel producers round the world slashing production and idling plant, iron-ore prices slumped to a low of $58 a tonne.
In May, the Financial Times reported that investment banks Morgan Stanley, Barclays Capital and Goldman Sachs planned to begin for the first time trading iron ore through the medium of cash-settled iron-ore swaps.
This week, iron-ore prices hit $93 a tonne and heading towards $100. What is interesting is that, although China continues to grow, the big users of steel in the western economies such as car manufacturers and the construction industry have shown few signs of recovery.
So where is the demand coming from? Is it trade or financial speculation from these banks that is driving the price up, just as it has done with oil?
