Myners accuses investors of ‘leaseholder’ mentality, pre-empts UK governance report

Institutional investors have adopted a ‘leaseholder’ mentality in their ownership of companies, according to Paul Myners, the UK Financial Services Secretary and author of the influential 2001 Myners report on institutional investment. In a speech to the UK Investment Management Association (IMA) last week, Myners said this had led to what he called “the ownerless corporation”, reflected in fragmented share registers and inconsistent investor engagement. “The true owners, for instance pension fund trustees, have been intermediated out of the story,” he told the investor audience. He added: “To put it simply: most institutions are not set up to act as owners; they don’t have the mindset of owners and are not incentivised by their clients to act as owners.” Myners stoked debate around the forthcoming publication of a major evaluation report early next month by the Institutional Shareholders Committee (ISC), created by the UK Treasury to act as an investor governance vehicle following Myners’ 2001 report, but which the Minister said had developed as a “rather low profile entity”. The ISC is run jointly by the Association of British Insurers, the Association of Investment Companies, the Investment Management Association and the National Association of Pension Funds. Myners said: “It enjoys the support of a number of tradeassociations but has no permanent secretariat or budget. The Combined Code of Corporate Governance states that institutional shareholders should apply ISC principles and goes on to say that these principles ‘should be reflected in fund manager contracts’. Reality has fallen somewhat short of ambition. The ISC has made little progress in reviewing compliance and achievement or revisiting its core principles in the light of experience, and pension fund trustees have been slow in pressing for progress, including inserting formal and binding obligations in all their agreements with their fund managers (or, at a minimum, codifying what can and cannot be expected from their fund managers in respect of governance).” Myners favours bringing the UK into line with the United States’ Employment Retirement Income Security Act (ERISA) of 1974 which codifies fiduciary responsibilities and obliges investors to explicitly vote on all AGM matters at companies they own. He has said he wants to see shareholder governance activity “hard-wired” into fund management mandates. Some UK investors say ERISA has become a time consuming, box-ticking exercise for US investors across a huge range of corporate issues. The ISC, for its part, has said it is testing an enhanced technology-based platform to promote more vigorous investor governance

coalitions. Myners said he hoped the ISC’s report would include an assessment of its own performance and future role. He suggested that it might propose to transform itself into an investor equivalent of the UK’s Financial Reporting Council, the independent body for oversight of corporate reporting. He said such a body could provide an “unfettered focus on investor interests and responsibilities.” Myners said issues he would like to see such a body examine, included revitalizing the former Case Committees body that the NAPF used to sponsor, which brought together investors with concerns around a particular company. He also called for stronger evidence to be established over the link between good and bad corporate governance and for investigation on concerns about what he termed the “insidious influence” of executive benefit consultants. Corporate remuneration, he suggested, should also take into account “perceived fairness” within the company itself. Myners said the ISC should also look at “fixing the plumbing” of shareholder voting systems and researchthe appropriate use of dividends as a measure of corporate health and progress. He also called for talks on whether the UK’s Takeover Code could better protect the interests of shareholders: “Why, for instance, should owners not benefit from an independent report to shareholders in the offeror company, setting out the key assumptions and risks and opportunities inherent in a proposed takeover or combination – a report to the shareholders rather than the directors and from a qualified party with no conflict or financial interest in the outcome of the proposed deal? This would certainly be an improvement on the current statement by the financial advisers to the board of the acquiring or protagonist company which provides limited value or protection to shareholders.” He said the UK government had also extended a review due later this year by Sir David Walker, former chairman of Morgan Stanley International, on banks’ governance following the financial crisis to include hedge funds, asset managers, insurers and the role of institutional investors and the effectiveness of engagement.
Link to speech