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Feeling the force
Corporate Governance hasn’t arrived: it’s only just started. Our stock
market commentator investigates
You can hardly pick up the FT these days without reading about institutional investors forcing change on companies. No one is too high and mighty
to be shown the exit ask Sir lain Valiance. Nor is anybody too insignificant. ITE Group, a £65m market capitalisation trade exhibitions outfit,
recently had it laid on the line by its financial advisers, Investec Henderson Crosthwaite. In a letter leaked to the FT, Investec told its client:
"It is very clear that (ITE shareholders) CSFB, HSB C, Schroders and JP Morgan Fleming are extremely unhappy with the situation, some to the extent
that they said they would be proactive in seeking changes if the board did not appear to be addressing their concerns, as a matter of urgency."
Middle-ground fund managers like these would not have faced up to ITE 10 years ago. They would simply have sold the shares. Even the trackers are at it. David Rough, investment director of mega-tracker Legal & General recently sounded off: "There is a greater readiness to
go higher profile. BT had been operating in a vacuum for nine months... we'd had discussions with them but they weren't communicating... we felt we
had to go public and said that if there was a rights issue, there had better be a strategy attached." Volia'. But if you think institutional busybodying has arrived, think again. It ain't even begun. To do the institutions justice, they have never been totally oblivious of the responsibility to bring change to boardrooms in need of it. In 1956,
after the Bluxingham Small Arms Company treated the chairman's wife to a £100,000 wardrobe (in modern money) to pose with the company's new car at the
Paris Motor Show, it was the Pru that galvanised the board into sacking him. And it was not the new age of corporate governance that did for Sir lain, because at no point in history did big shareholders - called upon to
subscribe a heavy rights issue to put a company back on an even keel - part with the money without satisfying themselves that any obvious corrections
in the leadership of the company had been effected. But institutional interest in corporate governance has moved on, from the obvious and egregious, to the ordinary and everyday. It is about the balance
of executive and non-executive directors, about whether the company's profits rest in some way on child labour. And it's no longer just the Prus and
the Legals & Generals who are up to it. In a recent speech, Sir Adrian Cadbury, who kick- started UK corporate governance a decade ago, attributed a lot of it to privatisation: "Before
privatisation the state as a shareholder was seen as able and willing to be a guardian of social and community interests. The expectation that society
had of state enterprises has, to an extent, been transferred to their private sector successors… Citizens look, to an extent, to today's major
investors to take account of the interests of society in the way the state sector was thought to do in the past." To the extent, indeed, that
corporate governance is now a regular agenda item for G8 summits and the OECD seems to have a whole secretariat devoted to the subject. And although
it is the huge privatised companies and global corporations that the G8 and the OECD has in its sights, the mechanisms that must be set up to turn
aspiration into actuality end up impinging all the way down the corporate ladder to outfits like ITE: best practice becomes normal practice. Moreover, institutions have figured out that there's money in it. The obverse of the "bad boss discount" is the "get rid of the bad boss profit". At
the front of the queue is Post Office and BT pension fund manager, Hermes. Its UK Focus Fund, set up in 1998 to specialise in companies needing a kick
up the behind, participated in two notable corporate governance investor coups at Mirror Group and Tomkins. Focus is selective about going public, but
it seems the anonymous underperformers it has been targeting have not let it down either: Focus put in better than average performance in 1999, and
significantly better than average last year. Focus now has approaching £800m under management and is about to launch a European fund. And alongside the pressure of society's expectations and the pace-setting of heavyweight investors such as Hermes and Calpers (the big Californian
state pension fund which publishes a regular "List of Laggards" whose managers find it expedient to get off that list pretty damn quickly), there is
emerging the whole paraphernalia of a corporate governance industry. For instance, Manifest, an electronic voting service for institutions, has
automated the voting process. In the same way as they were always able instantly to analyse their portfolios for yield and earnings multiples, they
can now, and as easily, analyse them for Cadbury Code and environmental reporting compliance. And then exercise their votes across dozens of different
accounts with a single click. The click is getting louder. Investors Chronicle
29 June, 2001 Return to News
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