Share and share alike?
Dr Matthew Gaved and Richard Regan argue for and against the
establishment of a formal body to regulate corporate governance
Corporate governance has become a major factor in determining board
responsibilities and accountability to shareholders to improve corporate
performance. Although listed companies are required to make substantial
corporate governance disclosures, the same is not true of institutions, which
dominate the stock market and effectively own the companies in which they
invest.
The government and industry organisations are concerned that voting
levels remain stuck at around 40%. This implies that half the votes controlled
by UK institutional investors are unused. This data is difficult to reconcile
with public and private statements by many institutions, that they 'always vote
their shares'. The serious discrepancy between what institutions say they do
and what actually happens, reduces confidence in the role played by
institutional investors as responsible owners.
Disclosures about the corporate governance standards and practices of
institutional investors need to be made on a consistent basis and subject to
independent verification. As the industry regulator; the Financial Services
Authority (FSA) clearly has a key role to play in establishing an appropriate
reporting framework for institutions to account to investors and beneficiaries
for their actions.
It is surely better that the gulf between theory and practice should be
addressed through disclosure and not the external imposition of potentially
arbitrary rules or the establishment of yet more committees. There is no
substitute for the direct accountability of companies to the underlying
investors and owners. Corporate governance in not the poor relation of fund
management but a key component in the leverage that all owners have over boards
and companies to improve their performance.
If votes are indeed "an important part of the asset represented by a
share" as the Hampel committee claimed, it is difficult to understand why so
many institutional investors fail to regard voting as part of their fiduciary
duty to their clients. If the FSA ducks this issue, it will be to the detriment
of investors and the long-term interests of listed companies and the stock
market.
Dr Mathew Gaved is editor of Governance and consultant editor
of Mandate at the Manifest Voting Agency.
Attention has focused in recent years on the communication process
whereby management accounts for its stewardship to shareholders and
demonstrates a proper regard for all the components in the business process.
Shareholders recognise that ownership carries responsibilities, that good
management can reasonably expect support and poor performance should be dealt
with accordingly. The vote attached to share ownership matters and should be
exercised responsibly.
But can good management be achieved by regulation or legislation? The
answer has to be no. Legislation or regulation can provide a framework for
accountability supplemented by listing requirements, accounting standards and
codes of best practice.
Most recently, it has been suggested that an organisation or commission
should be established to determine whether companies are complying with
corporate governance code requirements. The integrity of most management surely
is not in question. However; many could fail a bureaucracy test by an authority
pronouncing on what are essentially decisions based on individual judgement and
knowledge of a company.
Responsible investors will invest in a company because of its record in
management and its strategy. The structure of its management and quality of
communication between that company and its investors will build confidence in
the future or identify weaknesses.
What value could a regulator or independent arbiter of good corporate
governance practice add to the process of understanding and accountability that
is developing? Indeed it could simply create another layer of time-consuming
and possible misleading bureaucracy between management and shareholders.
The emphasis should remain on shareholders exercising their judgement,
voting responsibly by supporting good management and applying sanctions where
poor management fails to respond. This will encourage truly competitive
industry and successful fund management in the long term - intervention by
irrelevant bureaucracy can only hinder this process
Richard Regan is head of investment affairs at the Association of
British Insurers.
Pensions Management
June, 1998
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