A group of the biggest mainstream UK institutional investor associations that was relaunched last year to promote the UK Stewardship Code and better corporate engagement has started its first major campaign.
It’s calling on investors and the companies they invest in to challenge banks on their underwriting fees.
The Institutional Investors Committee (IIC) – which changed its name this week from the Institutional Shareholders’ Committee (ISC) – has published best practice guidance for companies to follow when raising equity capital through rights issues. The guidance follows mounting shareholder concern that banks are overcharging: underwriting fees and rights issue discounts rose dramatically during the credit crisis. A Rights Issue Fees Inquiry (RIFI), published last year by the ISC, concluded that a significant portion of the fees paid by companies was a poor use of shareholders’ money. Industry observers say that on average 10 years ago rights issue sub-underwriters were paid 1.25% out of a total fee of 2%, with bank underwriters taking the rest.
The sub-underwriting fee is now closer to 1.75% out of a total fee of 3.5%. However, a subsequent report earlier this year by the UK Office of Fair Trading said the onus was on companies and institutional shareholders to make rights issues cost-effective. The OFT subsequently decided not to refer the matter to the UK Competition Commission. At the time, the Investment Management Association, the fund managers’ trade body, criticised “the weak conclusion” of the OFT report. Concerning the latest guidelines, Douglas Ferrans, a former chief executive at Insight Investment, and Chairman of the IIC, said: “Institutional shareholders take their stewardship responsibilities seriously and this guidance is intended to help us hold companies to account when they spend our money. Companies should not feel that they have no choice other than to accept disproportionately high fees from the banks.”
The IIC is made up of the Association of British Insurers, the Investment Management Association and the National Association of Pension Funds. The Association of Investment Companies, a former member of the ISC, has stood down because it said the IIC’s shareholder engagement approach could represent a conflict of interests because investment companies have their own shareholders. At its inception in May 2010, the IIC said its mission was to: “work closely with the Financial Reporting Council in promoting the new Stewardship Code for shareholders;to facilitate collective engagement by institutional investors with companies particularly in times of stress; and to provide industry-wide senior practitioner input to the authorities on issues relating to investments.”
Its re-launch came after criticism during the financial crisis that shareholders had been acting as absentee landlords in the companies they own. The IIC’s former chairman, Keith Skeoch, CEO of Standard Life Investments, initially set out to build an international network of investors and sovereign wealth funds with an interest in long-term value, in a bid to put some major weight behind their lobbying of companies on important issues and their subsequent voting at annual general meetings. The creation of that network has yet to be announced. However, the IIC’s new Terms of Reference and its website fail to mention the Stewardship Code and present a diluted form of its original shareholder engagement commitment. It said a new Advisory Council of practitioners would be formed shortly, made up of practitioners nominated by members of the IIC and appointed as individuals.
IIC’s new Terms of Reference
To provide a forum through which its member organisations may:
- consider relevant matters where it is felt a co-ordinated approach or representation may have a greater impact with UK Government and regulators; European institutions; and, any other relevant international legislative, regulatory or standard setting bodies;
- make joint representations/recommendations on occasion and by mutual agreement;
- present a single voice for the institutional investment industry on matters affecting its role as investors in companies;
- encourage compliance with appropriate codes from regulatory or other relevant bodies; and
- consider any matter affecting or likely to affect the interests of investors in companies to ensure that there is a better outcome for savers and investors.