|Previous Section||Index||Home Page|
In those circumstances, we believe that the fear expressed by the hon. Member for Huntingdon
(Mr. Djanogly)simply having the reserve power will result in fewer institutions moving towards voluntary disclosureis misplaced. We believe that as long as the industry is reassured by the Government, preferably by the amendment being accepted, although the Minister could attempt it in other ways, further progress towards voluntary disclosure will continue.
The question laid down by the hon. Member for Huntingdon is, why have the reserve powers in the first place? The answer is that it is perfectly legitimate for the Government to take the view that there will be institutions and institutional investors that follow practices that are not as transparent as others, and that there might come a time when, to provide a level playing field for the whole industry, some regulation is necessary.
I hope that that time does not come and that the Government will use the powers that the Bill will grant them in a way that helps the industry to move further, although we recognise that there is a legitimate case for those powers as they stand.
Mr. Mike Weir (Angus) (SNP): I am interested in what the hon. Gentleman is saying. Does he envisage the majority of institutions following a voluntary procedure and it then becoming necessary to force a minority to come on board with disclosure, or does he think that perhaps two or three large institutions will continue to refuse to disclose when the rest are disclosing? Would that be acceptable to him?
David Howarth: To make things clear, I should say that I envisage there perhaps being some recalcitrant institutions, which it would then be necessary to coerce. I was about to say that the exact shape of the regulations needs to take into account industry practice, so even if it is proposed, at some stage, to coerce the final few, it will be much better if the Government draw on the experience of the industry as it has developed in the intervening period.
I hope that the Government do not evince an intention to use the regulations early. They need to consider the practice of the industry and to use that practice as a way to shape any regulations that they are thinking of introducing.
Margaret Hodge: I must say first to the hon. Member for Huntingdon (Mr. Djanogly) that this is not a last-minute idea. These provisions were in the Bill when they were introduced, but were overturned in the House of Lords. We reinstated them in Committee. They have been part of the Bill from the start.
I have to say further, to all hon. Members, that a theme running through the Bill is our attempt to ensure better shareholder engagement. We think that this is part of it. The hon. Gentleman, in a very lengthy contribution, quoted every business organisation he couldthe CBI, the ABI et aland I found it extremely difficult to work out whether he was working in the spirit of what his leader said. Whether the hon. Gentleman was standing up for business or was willing to stand up to it in the interest of shareholders; I could not get it at all.
On the other hand, the contribution made by the hon. Member for Cambridge (David Howarth) was perfectly valid, and I hope to give him the undertaking
that he wants. We want a practical scheme and we want to ensure that we do not have a one-size-fits-all approach. We also want a proper cost-benefit analysis and consultation, although not in the terms of the amendment. This is a good movea reserve power that will not allow again, in the words of the hon. Member for Huntingdon, an institution that wants to maintain secrecy to do so. We do not think that is appropriate. We would rather back shareholders in this instance.
shareholders whose shares are held through nominees or are managed on their behalf are entitled to know what is being done with the shares that they own.[ Official Report, House of Lords, 25 April 2006; Vol. 681, c. GC69.]
I could not agree more. They are entitled, which means that the entitlement goes to the shareholders, not the companies. Nor is that an isolated view. The hon. Member for Huntingdon talked about a number of business interests, but John Bogle, the founder of the $500 billion Vanguard funds group, has said:
Vanguards founding principles stand for the simple proposition that it is the duty of an agent to faithfully serve his principal...Viewed in this light, it would seem self evident that each Vanguard Fund shareholder has the right to know how the shares of the corporations in his or her portfolio are voted.
Mr. Djanogly: The two examples given by the Minister relate to the relationship between the institution and the people investing in it, but the concerns relate more to the third parties who want to see the institutions policies.
Margaret Hodge: I do not follow that argument. Those third parties who act on behalf of shareholders in relation to institutions have such a right. Is the hon. Gentleman willing to rephrase his point?
Mr. Djanogly: My point is that there is a difference between information that an institution gives to people who invest in it, and information that an institution puts on its website for third parties.
Mr. Djanogly: To elaborate further for the Ministers benefit, the problem that many institutions have is not with disclosing information to people who invest in it but with having to disclose information to third parties.
Margaret Hodge: I find that rather a tenuous point [Laughter.] The hon. Gentleman laughs, but if institutions have chosen to vote in a particular way on a particular issue, I can see nothing wrong with that being open. I will deal with some of the concerns that he expressed about how openness on voting intentions or voting record, which are among the practical issues that we need to address, might lead institutions to choosing not to vote or making secret deals, which appears to be his line of argument.
Is not another argument that many institutions, such as pension funds, are very big, and it would be much cheaper for them to put the
information on their website for those who are interested, rather than having to go back to all the investors in that institution?
Margaret Hodge: Indeed. In discussions that we had about information being given by companies to indirect shareholders, the companies made it clear that they preferred to use e-information channels. I suppose that the hon. Member for Huntingdon would make a distinction between reports and accounts and, for instance, information on voting on particular resolutions. I cannot, however, follow the qualitative difference between the two that would lead to secrecy on one and openness on the other. I therefore agree completely with the intervention of the hon. Member for Angus (Mr. Weir).
The important principle of openness must be underpinned by clear benefits. What are the benefits? First, it can only increase the confidence of savers in the governance being exercised on their behalf by institutional investors, that they are engaging with companies and that they are doing that well.
Secondly, greater transparency makes institutional investors more accountable for the governance decisions that they make on behalf of savers, providing stronger incentives to cast votes and to do so thoughtfully. It will put more pressure on institutional investors to explain their decisions. That cannot be a bad thing. The hon. Member for Huntingdon used the argumentI cannot remember whether it was from the ABIthat this would encourage uninformed voting decisions. How can that be right? An institution that chose to vote unthinkingly would be exposed to ridicule. Why would it choose to do that, when delegating decisions to a fund manager or using a voting advisory service are simple options to ensure considered voting?
Thirdly, greater transparency will help institutional investors manage potential conflicts of interest arising from voting decisions, thus deterring decisions that might benefit the institutional investor rather than savers. Such conflicts can influence behaviour. Research by the university of Michigan using data acquired under the American disclosure rules found that business ties between the institutional investor and a company made it more likely that the investor would vote with the companys management. That is natural, but not right, and transparency would reduce that risk.
Fourthly, greater transparency enhances shareholder engagement between institutions and investee companies, which is one of the key objectives of the Bill. Again, it has been argued that that will harm behind-the-scenes engagement. Of course, some discussions are more effective behind closed doors. But if a company knows beforehand why an institution is not supporting a resolution, how does disclosure after the fact of the vote cause damage? And if it did so, why are a dozen major UK institutional investors, including institutions such as the Pru and Standard Life, making voluntary disclosures of their voting records?
Of course, there are important issues to deal with in designing the disclosure regime. I accept that it must be cost-effective, and we are confident that it will be. The disclosure data in question are already available, as required by the industrys own best practice guidelines. Institutions that already publish voting records, such as Co-operative Insurance Services, confirm that the costs are not excessive, and John Bogle said that they were a drop in the bucket. That might be why there is a strong existing trend towards voluntary disclosure, which the hon. Member for Huntingdon accepted. In the UK, of 35 major fund managers, the number making voluntary disclosures has increased from two in 2003 to 10 in 2005, and two more have now joined them. Alternatively, the reason might be pressure from clients. A recent survey among pension fund trustees found nine out of 10 agreeing that fund managers should publicly disclose their votes.
I am also encouraged by the growing number of international precedents. The US in 2003, followed by Canada, have mandated voting disclosure. In the US, that covers 3,700 mutual funds with approximately $2 trillion of investments, and it has been implemented without the dire consequences that the hon. Member for Huntingdon predicts for the UK. Action is also being contemplated in South Africa and France.
During the passage of the Bill, it has been interesting to note that fewer people are saying that disclosure is wrong in principle. I do not think that the hon. Member for Huntingdon is saying that. Increasingly, people are saying, Its a good thing, but you dont need the power, its going to happen anyway. Even the industry may be moving that way, if the vigorous debate on a voluntary disclosure regime is anything to go by. But the argument goes the other way. If it is going to happen anyway, why is there all this angst about taking a power? The positions adopted by the Opposition and others are inconsistent.
In the Governments view, taking the power is still necessary. While we are keen to see how market practice evolves before considering a mandatory regime, we need back-up if the voluntary movement does not deliver. Of course, there will be a full consultation and cost-benefit analysis, and parliamentary approval through the affirmative procedure, to ensure that any mandatory regime is proportionate. The case for disclosure of voting is clear. We want to work with all stakeholders to make sure that we achieve that sensibly and practically, at least cost. This power lets us do that, and I ask the hon. Member for Huntingdon to withdraw his amendment.
Amendment No. 435, to which the hon. Member for Cambridge referred, would require the Government to consult and undertake cost-benefit analysis on regulations. I have already made clear that we will do that. Do we need a provision in the Bill that tells us to do that? Our view is that we do not. Consultation on such proposals is in line with normal practice and Government guidance. We have made a formal commitmentI have done so today two or three timesto full public consultation. In the circumstances, we think it unnecessary to introduce such a requirement in the Bill. I note that an amendment in the other place that would have had a similar effect was withdrawn after the Government gave their assurance.
New clause 15 would require the institutions to which the disclosure applies to disclose on a website whether they had exercised voting rights attaching to shares. They would have to make the disclosure in respect of each opportunity to exercise such rights. The new clause suggests that we share common ground on the principle of introducing provisions governing institutional investor voting, and we welcome that acknowledgment. We also agree with the logic behind the requirement for website disclosure. As was suggested by the hon. Member for Angus, that may be the best way of ensuring that disclosure is cost-effective. However, the new clause interacts with clauses 1241 to 1244, and two problems may arise.
First, the new clause makes compulsory the disclosure of certain information on the exercise of voting rights. That means that the Government would not have flexibility to adjust the requirementas suggested by the hon. Member for Cambridgeeven if that was supported by the results of consultation and analysis. Secondly, in the absence of clause 1244, the new clause would limit disclosure to whether or not voting rights had been exercised. The Government would not be able to require the disclosure of information about how the votes had been cast. That would prematurely restrict the scope of the Governments flexible enabling power before we had consulted on the best way in which to achieve a proportionate disclosure regime.
I believe that the knowledge of how votes were intended to be cast is important to understanding how the institutional investor is exercising ownership responsibilities. However, I do not want to prejudge the outcome of the consultation to which I have committed us.
I do not consider the new clause, as drafted, to be appropriate. I hope that the hon. Member for Huntingdon will not press it or his amendments to a Division, and that he will support the more flexible and principled route that the Government have taken.
Mr. Djanogly: The Ministers final comments suggested that she accepts the principle behind new clause 15 as long as there can be consultation beforehand. Perhaps she will come up with some suggestions to be dealt with in the other place.
Of course we in the Conservative party wish to encourage transparency. I said that quite clearly, and I think the Minister acknowledged it. I also think we have both acknowledged that the industry is moving in the right direction without the need for a Bill. Although I disagree with none of the Ministers reasons for saying that institutions should be open, we do not feel that they should be forced to accept the provisions of clause 1241. The Minister mentioned shareholder engagement, and I tried to explain earlier why we think the clause could damage that. Institutions that must say how they voted and do not wish to do so will simply not vote. The impact of the clause could be purely counter-productive.
We note that the Liberal Democrats have become a little less forthright in their opposition to the clause than they were in the other place or in Committee. Having said that, I note their support for amendment No. 435, which I wish to press to a Division.
|Next Section||Index||Home Page|