News

19/05/2009

Letter to the Editor of the Financial Times: Stock owners must wake up to their duties

From Mr Robin Hindle Fisher.

Sir, Lex is absolutely right to say that fund managers have failed to use their prerogative over the issue of executive pay properly (May 15) and that the impression this gives of “ownerless corporations” will encourage regulators who are now at risk of being hyperactive.

But the problem is wider than Lex implies. Fund managers generally not only fail to engage actively with boards over remuneration issues, but also fail to use the strong rights that shareholders enjoy in the UK to hold companies to account on a broad range of strategic and structural governance issues.

This in turn is because the majority of share-owning institutions, the fund managers' clients, do not take their ownership responsibilities seriously. The “free rider” effect of leaving a handful of funds worldwide to actively engage with companies is too compelling for most trustees.

For the ownership of public companies by dispersed institutional investors to work well, somebody in the ownership chain must behave as an owner.

Properly functioning markets rely on participants behaving rationally, and it is not rational to own an asset and not hold the agents appointed to manage it to account. At the moment investment managers who are entrusted with this role by asset-owning institutions have few incentives to act as long-term share owners rather than short-term share holders. This must change if different market practices rather than increased regulation are to be a significant part of the answer to our current problems.

Long-term investing institutions must be encouraged to ensure that their responsibilities as owners are discharged effectively. Various carrots and sticks involving institutions’ tax regimes could be applied. The financial impact of potential tax changes would bring ownership responsibilities to the top of trustees’ agendas.

Only then will fund managers have clear incentives to use their prerogatives properly.

Robin Hindle Fisher,
Managing Director,
Governance for Owners,
London EC2, UK