Keith Skeoch, chief executive of Standard Life Investments, the UK fund manager, and chairman of the UK Institutional Shareholders Committee (ISC) has countered claims – made notably by Paul Myners, UK Financial Services Secretary – that institutional investors contributed to the financial crisis by acting as ‘absent landlords’ rather than engaged shareholders. Speaking to Responsible Investor, Skeoch, said: “I think it is inappropriate to suggest that the Association of British Insurers, the Association of Investment Companies, the Investment Management Association and the National Association of Pension Funds, are absent landlords. They are industry bodies, and working for the views of their members.” The ISC, which is run jointly by the UK’s four big institutional investor bodies was created in the wake of the 2001 Myners Review on institutional investment, although Myners himself recently dubbed it a “rather low profile entity” and has accused institutional investors of adopting a ‘leaseholder’ mentality to the companies they invest in.
Skeoch added: “Given the heat of the last 6-9 months, it is inevitable that people have been casting around for stones to be thrown in various directions.” He said investors could, however, have played a more active role in protecting the financial system from systemic risk, but placed most of the blame for the crisis on regulation: “Investors believe they should be able to rely on someregulatory premium with regulators assuring that the system in place ensures corporate solvency. We as investors are not privy to regulatory information, but we should be able to rely on the data, regulatory judgement and framework. It’s fair to say that there is plenty of evidence that in the last 18-20 months some of that regulatory framework has failed, notably in the case of the banks. Could investors also have been more forceful in cases such as Royal Bank of Scotland (RBS) and others? Yes, there are things that institutional shareholders could have done to minimise the chances of systemic failure. But these were things that were pretty difficult to do given the various cracks and fault-lines that were embedded in the tripartite system (the UK’s three-pronged financial regulation: Financial Services Authority, Treasury, Bank of England).” Skeoch is spearheading the building of 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 initiative was trailed in this month’s ISC report on governance, which will feed into the forthcoming UK review of corporate governance in banks by Sir David Walker, former chairman of Morgan Stanley, and the UK Financial Reporting Council’s review of the Combined Code on corporate governance.
Walker will file an interim report for further discussion on July 16th. Skeoch declined to name the international investors he is talking with, but said it was part of an existing dialogue: “Over time, UK institutions have become a reduced part of the UK marketplace. Insurance companies now hold about 20% of UK plc. With increased international ownership it makes sense to talk to large overseas investors on corporate engagement and governance. To be clear, we want to create a mechanism for shareholder issues that kicks in only when it is clear that engaging is failing and we are facing a serious investor/corporate row or a no vote. It would be utilised in rare circumstances and there are examples where a failure of engagement can lead to sharp falls in a company’s share price.”
The Standard Life Investments chief says discussions are at early stages and that his aim is to talk to people and listen in order to build on what he calls the “consensus” embedded in the ISC report. This, he says reflects the ISC’s status as a broad church ranging from members with an active engagement stance to others that disagree with investor engagement strategies: “The governance report was a step forward generating some common ground. We’ve recognised that the benefits of engagement are cumulative and institutional investors are in a much better place than we were 5-6 years ago in terms of better engagement. It’s a long-term game though and we need to continue to seek out the benefits of the many governance reviews such as Cadbury and Higgs that we have had in the UK.” Sceptics argue that institutional investors, and by association the ISC, have not gone far enough. The annual fund manager voting survey released this week by the UK Trades Union Congress (TUC) said the vast majority of institutional investors had not challenged the remuneration reports of leading banks in the run-up to the financial crisis in 2008. Excessive pay and bonuses have subsequently been identified as one of the catalysts for banks to take excessive capital risk. In addition, the TUC survey noted that only one UK investor – the Co-operative InsuranceSociety – had voted against the disastrous takeover of ABN Amro by Royal Bank of Scotland. The TUC said the number of fund managers completing its survey had also fallen to just 40% compared to 68% five years ago. One of the ISC’s main proposals in its governance report, the creation of an ‘ISC Code’ based on its in-house Statement of Principles on the Responsibilities of Institutional Shareholders and their Agents, to which investors could sign up and report progress, also came under fire. Colin Melvin, chief executive of Hermes Equity Ownership Services, told the Financial Times that the monitoring role for the new code should be transferred to an independent body. Skeoch says some of the criticism lacks awareness of the ambit of the ISC: “I think sometimes there is a misconception of what the ISC is about. It’s a committee of industry bodies. I chair the members of the secretariat when they sit round the table and personally I think we do a pretty good job of looking at some of the high level issues and have done some excellent work on voting and transparency.”
On the question of independent oversight of the planned ISC code and its potential to become a phase of the UK’s Combined Code on corporate governance, Skeoch says there is not yet a consensus within the ISC. Speaking in his capacity as CEO of Standard Life, he says those arguing for independent monitoring, such as through the Financial Reporting Council, are creating an asymmetry because the FRC does not perform the same task for corporates: “The FRC doesn’t actually monitor whether there is comply or explain. I am more than happy that the ISC code should be updated from time to time to reflect changes in the regulatory architecture. I also don’t have a problem with the ISC principles becoming a code and becoming another phase of the Combined Code.”
Nonetheless, he sympathises with some of the critique: “I have to say in some circumstances I agree with what some people are saying on a lack of investor governance. At Standard Life Investments we are big believers and actors in effective corporate engagement. However, it is not investors that sit directly on the ISC, but it is
investors who are involved in this kind of governance activism. One of the things I’m trying to do is find the means by which the engagement agenda of institutions finds its way on to the agenda of the ISC.” Skeoch may already be seeing fruits of this. A report this week by the NAPF found that almost half of all UK pension funds intended to spend more time scrutinising the actions of fund managers on engagement issues in the future. It’s the kind of forward thinking Skeoch says he wants to hear: “I believe with a passion that we shouldn’t be crying over spilt milk and trying to solve yesterday’s problems. But everybody involved with financial services has a vested interest and indeed a duty of financial care to ensure that what is put forward in terms of a new regulatory architecture is fit for purpose and that we do not suffer the same chaos and risk in the financial system that we did in 2008. Institutional investors have a role in that by being responsible investors, and my view on this is good engagement and governance should lead to dampened volatility and premiums in share prices for those companies that do things appropriately.” Regarding the forthcoming Walker report, he says he hopes to see something that adds to the debate and provides stimulus for further discussion: “I think Paul Myners has done a pretty good job in creating polemic. The interim Walker report will add to that discussion over the summer and when it is finally published, I hope, be astep forward on the road to significant cumulative improvement. The one thing that I worry about in the report is that I would hope it doesn’t have proposals that are proscriptive and bureaucratic. The fund management industry remains a diverse and fragmented industry on some issues, partly because people run money in very different ways with different philosophies and processes and we don’t want to see anything that’s heavy-handed.” Asked whether that legislative fear includes mandatory share voting, which has been proposed by Myners, Skeoch says: “It would be unhelpful because what it will tend to do is divide the asset management community rather than make common cause. In the wake of all the issues we have faced over the last 18 months, we think the beneficial effects of governance, engagement and corporate activism will suffice and the more people we can bring to the party with codes the better.”
As for whether Myners will seek to tighten corporate governance regulation in the UK – in a speech this week to the British Bankers Association Myners said shareholders should take “front-line” responsibility for the companies in whose equity they have invested their client funds – Skeoch concludes: “I think Paul Myners is pushing the industry quite hard. He has long had strong views and is a known quantum and we’ll have to wait and see. There’s an interesting summer of these debates ahead!”