Lord Myners, the UK Treasury’s Minister for the City has again called for a radical new approach to financial reform – this time it’s investors under the spotlight. In recent months Myners has been no stranger to controversial proposals and during a speech to a conference hosted by UBS, he outlined his concerns about the way corporate governance and stewardship is implemented by investors.
Here are the key take-aways:
Underinvestment in the Governance Role
I doubt if the governance budget in most mainstream active fund managers in the competitive sector exceeds 5% of the resource committed to stock selection – the latter adding little performance value for most investors employing traditional long-only approaches. This is at least true in terms of how performance is normally measured – another example of the paradox of how the professional money management industry has inverted resource allocation, devoting the greatest resource and professionalism to those decisions that are least important and vice versa; compare highly paid active long-only equity managers with lay trustees.
More Transparent & Accountable Shareholder Representation
I question the absence of an organisation in the UK that speaks solely on behalf of institutional investors without a commercial interest, as opposed to a tangential activity of trade associations. The most appropriate arena for this to take place would surely be an industry-wide institute operating with close ties to the academic institutions also engaging in the debate. I have in mind something similar to the Council of Institutional Investors. But no such organisation exists in the UK.
Such a body would focus exclusively on promoting understanding and best practices in stewardship and good governance, unfettered by any other loyalties or priorities. To date the only significant effort to address this challenge was the creation of the Institutional Shareholders Committee Forum. This is composed of various constituent member bodies including the ABI, AIC, IMA and NAPF.
The terms of reference for the ISC are to provide a conduit through which members can share views and, where appropriate, co-ordinate activities on any matter likely to affect the interests of investing institutions in their role as investors.
However, in practical terms the ISC has struggled to deliver tangible results.
Conflicts of Interest
The ISC is a loose collection of trade associations rather than member firms, and as such is two degrees removed from the operational nexus of the industry. The committee has rarely met and has not evolved. It is controlled by industry trade bodies; it has no budget or permanent secretariat.
Trade bodies clearly and correctly operate primarily in the interests of their own fee-paying members. This may or may not accord with the interests of end investors but it is a fact of life that parties selling services to others for gain are not necessarily always going to have entirely shared interests with their clients.
The recent financial crisis is evidence enough that bad governance, compounded by ineffective oversight, can and will de-stabilise the financial system and destroy value. This should provide enough of an incentive for all parties concerned to address the problem.
There is a real opportunity for gain if we can secure a cultural shift in the priority and resource attributed to governance and stewardship.
A number of Walker Review submissions have echoed similar sentiments, including Manifest’s. What remains to be seen is whether the proposal for the FRC to take up the mantel of co-ordinating investor best practice will get off the ground.