This month’s guest article has been written by Catherine Howarth, CEO of FairPensions.
Corporate governance reform isn’t perhaps the most glamorous area of public policy for your ordinary man or woman on the street. Indeed it’s easy to forget how vital it is to the long-term well-being of millions of citizens, particularly those of us with a money purchase (DC) pension plan. Glancing through the list of submissions to the Walker Review of the Corporate Governance of Banks and Other Financial Institutions it is no surprise that investment industry and business interest contributions dominate. UNITE, the UK’s largest trade union, is the only submission from an organisation directly representing working people as the ultimate owners, through their pension plans, of vast chunks of the FTSE All-share.
FairPensions, the campaigning charity which promotes responsible investment of UK pension savings, brings together many of the UK’s largest unions and household-name NGOs to give a stronger voice to the interests and values of millions in Britain who own shares indirectly through institutional investors. Our submission was an attempt to thrust the interests of ordinary savers into the spotlight.
Many of those who responded to Walker, and earlier to the FRC’s review of the Combined Code, warned against the dangers of “box-ticking conformity with specific prescription”. Indeed Walker makes explicit that good governance depends on the abilities and experience of individuals rather than the dreaded ticking of boxes. This is surely right and yet it must equally be right to distinguish between prescriptive rules governing process, which may well be unhelpfully bureaucratic, and rules that regulate relationships between market participants, which are essential to set limits within which parties freely operate. As banks and other financial institutions are typically charged with the management of other people’s money, it must be appropriate to require strict observation of the fiduciary rule on conflicts of interest, namely that “a person in a fiduciary position…is not allowed to put himself in a position where his interest and duty conflict”(Bray v Ford, 1896). FairPensions proposed that this age-old standard should apply not only to banks and financial institutions but to those providing services to them. The powerful and somewhat shadowy clutch of investment consulting firms who advice on risk management for the UK’s major pension funds are a prime example of institutions to whom fiduciary obligations should begin to apply.
Walker’s Review refers to the balance to be established between necessary regulatory constraints and the ability of a bank’s board members to take decisions they consider to be “in the best interests of shareholders”. The “massive dislocation and costs borne by society” as a result of the financial crisis, and the regulation needed to minimise the risk that any such crisis could recur, is set against “ undue hampering of the ability of bank boards to be innovative and to take risks.”
Preventing a second financial crisis should, we believe, weigh rather more heavily in the balance than encouraging innovation and risk-taking in a sector whose misplaced ingenuity and recklessness brought about the first crisis. This is especially so since the UK economy is now in no condition to mount another taxpayer bail-out of the kind that narrowly prevented the complete collapse of the banking system. A second such crisis would likely entail even more disastrous economic and social costs.
We agree that the banks have a crucial role to play in economic recovery but feel should lie in sustainable finance and prudent support for responsible borrowers, including sound small and medium-sized enterprises, amongst whom you might expect to find innovation and risk-taking of a more productive and less toxic kind.
The banks’ systemic role in the economy makes it particularly important that, when making decisions in the best interests of shareholders, bank boards take fully into account their “stakeholder” duties under the Companies Act, including the requirement to have regard to the likely consequences of any decision in the long term and the impact of the bank’s operations on the community. Clearly the banking sector should be capable of generating reasonable returns for its shareholders (be they private or public), but only if banks properly discharge their social functions, including support for business. After all, pension funds and other institutions with holdings across the investment spectrum have an interest in preventing irresponsible behaviour by banks from destroying value not just in their bank shares but throughout their portfolios.
FairPensions is a UK-based educational foundation which was launched in 2005 to focus on Responsible Investment in the pensions industry. Their work is based on evidence that investors who consider human rights, business ethics and the environment in their policies are not only doing what’s morally right, but what’s financially prudent.
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