REASONS FOR SHAREHOLDER INEFFECTIVENESS
170. We requested evidence as to the reasons behind
weak and sometimes ineffective shareholder engagement as well
as ways to strengthen investor engagement in companies they invested
in, including whether shareholders required additional tools and
powers if they were to carry out their role more effectively.
171. Lord Myners rejected the suggestion that shareholder
ineffectiveness resulted from investors having insufficient tools
or resources. He stressed that "Investors in UK companies
have very substantial powers", which were "amongst the
most significant powers of investors anywhere in the world".
He cited as evidence of this their ability to convene meetings
and remove directors which he said were "not embodied in
company law in the United States of America in most states and
it is not common practice in Europe". He concluded by reiterating
that the question was not "that they do not have the powers
… it is that they have not exercised them".[271]
172. The ABI has, however, argued for additional
powers for shareholders, calling for a requirement to be introduced
that all directors should submit themselves annually for re-election
at the Annual General Meeting.[272]
At present, directors stand for re-election on a rotational basis
with re-election every three years being the norm. Mr Montagnon
argued that this would be a "big change" and would "be
a means of people being held to account" whilst giving shareholders
the safeguard of being able to vote out directors in whom they
had lost confidence.
173. PIRC argued that part of the problem lay in
the lack of priority accorded to corporate governance issues by
investors. It noted that beneficial owners such as pension funds
typically delegated responsibility for analysing corporate governance
issues and the exercise of shareholder voting to their existing
fund managers, but that many fund managers did not "have
the capacity, and perhaps the desire, to undertake this role effectively".
PIRC went on to say that it "was hard to see how fund management
houses with a handful of corporate governance staff can play this
role effectively", especially as they expected the "situation
to deteriorate further" given that a number of large financial
institutions were already cutting back the resources that they
dedicated to corporate governance analysis. PIRC's conclusion
was that "a step-change in behaviour" was required with
large investors such as pension funds either taking more responsibility
for corporate governance themselves, or keeping a much closer
watch on how their fund managers dealt with such issues.[273]
174. Both PIRC and InvestorVoice, a forum for individual
stakeholders in publicly quoted companies, argued that one way
to improve the focus of institutional investors on corporate governance
would be the introduction of mandatory disclosure by institutional
investors of their voting on shareholder resolutions for all UK
listed companies.[274]
Investor Voice told us that such legislation existed in other
countries, but that it was only voluntary in the UK and the majority
of fund managers did not currently publish such information.[275]
175. Witnesses representing institutional investors
were at pains to point out that shareholders as 'outsiders' faced
information barriers when attempting to monitor what was going
on in the banks and that both the regulator and non-executive
directors were in a far better position than shareholders to scrutinise
the activities of the banks. For example, Richard Saunders, Chief
Executive for the IMA, whilst acknowledging that shareholders
had played a contributory part in the banking crisis, went on
to contrast the position of shareholders with that of the non-executive
directors in the banks:
there is a hierarchy of information. As shareholders
my colleagues would have no greater access to information than
is available to the market as a whole. Obviously, the non-executive
directors will see much more; they will see board papers and so
on and will have greater access to the state of the company.[276]
Peter Chambers used a similar argument, but contrasted
the information available to regulators as opposed to investors,
stressing that:
of all outside people the regulators have the first
line of sight in seeing what goes on in the banks. They have information
that is not accessible by the rest of us as investors in the public
domain". The other group of people who have line of sight
are the banks themselves and their executive directors and above
that the non-executive directors. One would have to conclude that
the non-executive directors were not effective in controlling
the activities of the executive directors; otherwise, we would
not be where we are now.[277]
176. The ABI in its submission noted that ownership
of UK equities had become more fragmented in recent years with
the "insurance industry now owning only around 15 per cent
of the market and pension funds somewhat less". It believed
that often other owners were "less concerned about governance",
thus making it "easier for companies to override efforts
by concerned shareholders to achieve change".[278]
Lord Myners also noted that ownership was fragmented, but drew
a different conclusion. He said ownership was "now so widely
held across a number of institutions, none of whom own more than
2% or 3%, that nobody is much exercised to apply the care and
attention that is necessary to behave in a manner consistent with
ownership responsibility". He referred to this state of affairs,
which he said applied to all major firms and not just banks, as
a situation where "we have to some extent ownerless corporations".[279]
177. Peter Montagnon pinned part of the blame for
shareholder failure on the strong presence in the market in the
run-up to the boom of investors "whose interests were mainly
trading rather than ownership".[280]
David Pitt-Watson agreed with Mr Montagnon, stating that "primarily
a lot of us are trading shares rather than undertaking the task
of being good owners of companies, but said another reason why
shareholders were not as effective as they could be was because
"we are all very disparate".[281]
178. The ABI acknowledged that more could be done
to "improve the techniques and approaches to dialogue"
and said that a particular focus should be on "improving
mutual understanding between independent directors and shareholders,
how they interact at times of corporate stress, and on ensuring
that dialogue appropriately addresses key issues such as risk
management".[282]
The need for greater engagement between investors and non-executive
directors was a theme which Lord Myners pursued when he appeared
before us:
One of the things I would like institutional shareholders
to do is to have much more engagement with non-executive directors,
to sit with the non-executive directors, to talk about the issues,
to form a view on their competence, to understand what is going
on in their minds—what are they worried about at the moment?
From my experience of contact with some of the non-executive directors
of some of the banks where we have intervened it is quite illuminating
to know what is on their minds and, perhaps more interesting,
what is not on their minds.[283]
179. Institutional
investors have failed in one of their core tasks, namely the effective
scrutiny and monitoring the decisions of boards and executive
management in the banking sector, and hold them accountable
for their performance. We note David Pitt-Watson's evidence to
us which questioned the extent of investor engagement with the
banks prior to the current crisis. We accept that there has been
increased engagement by investors once signs of the crisis began
to emerge, although some appear to have chosen to sell their stakes
in the banks rather than intervene or challenge bank boards. Those
that did not just sell up appear to have been asking the wrong
questions or, as Lord Myners told us, just gave up. This may reflect
the low priority some institutional investors have accorded to
governance issues. The lack of resources devoted to corporate
governance appears to reflect a range of factors including the
fragmented and dispersed ownership and the costs of detailed engagement
with firms—resulting in the phenomenon of 'ownerless corporations'
described by Lord Myners. The Walker Review on corporate governance
in the banking sector must address the issue of shareholder engagement
in financial services firms and come forward with proposals that
can help reduce the barriers to effective shareholder activism.
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