Investors invited to join forces to rein in wayward governance

December 2, 2013 10:04 pm

Investors invited to join forces to rein in wayward governance

By David Oakley, Investment Correspondent

Britain’s largest shareholders are joining forces with the world’s biggest international investors in a groundbreaking initiative to curb boardroom excesses and improve company performance. An Investor Forum, a central recommendation of economics professor John Kay’s 40,000-word report on UK equity markets last year, will be created to tighten checks on all London-listed companies over pay, auditing and strategy and to promote long-term decision-making.The forum, established by some of Britain’s biggest shareholders, intends to unite investors around the world to help them rein in excessive pay and mismanagement.

The forum will enable all shareholders in a company, including the big sovereign wealth funds in the Middle East and Asia and US pension funds and insurance groups, to join forces against perceived poor corporate policy.

It will achieve this by setting up an engagement action group, led by one or more investors in each company, with the assistance of a secretariat. Concerns about a company would be passed on to all shareholders, providing them with an opportunity to have their say on the issue and become involved in the engagement process.

It will also help to promote one consistent line of complaint to the company involved. Companies often complain that they receive mixed messages from investors, making it difficult for them to meet demands or modify strategy.

The call for an Investor Forum was one of 17 recommendations made by Prof Kay in his report on equity markets in July 2012. Prof Kay’s proposal followed a turbulent spring of investor protests over executive pay, triggering the resignations of several high-profile chief executives.

However, critics warn that the shareholder community is far too fragmented to create a unified force. They say that big shareholders have their own agendas and views and are often reluctant to club together and collectively engage.

James Anderson, a partner of Baillie Gifford and chair of the working group that has set up the forum, rejected the criticisms, saying: “We insist that improvements in the collective engagement process are not a chimera. The Investor Forum will drive cultural change and act as a mechanism for investors to work together more effectively.”

The forum has the backing of the main shareholder bodies in the UK, the Investment Management Association, the Association of British Insurers and the National Association of Pension Funds.

It will start operating in June and is expected to meet once a month with a rolling membership of 15 shareholders, which will represent all investors.

Critically, it wants to encourage companies to develop long-term strategies that have an eye to performance over 30 years rather than a 12-month or even quarterly view.

The report by the working group says: “There can often be too much focus on short-term performance. We consider it important that asset owners take more of a long-term holistic view.”

The establishment of the forum also comes as shareholders in the UK gain a binding say on pay for the first time, making them more influential on remuneration policy and forcing chief executives to listen more closely to investor concerns.