ShareSoc (the UK Individual Shareholders Society) was asked to give evidence to the Business, Energy, Innovation and Skills (BEIS) Select Committee Inquiry on Corporate Governance. Cliff Weight represented ShareSoc at the inquiry on the 23rd November.
You can watch the session in which he appears by clicking on this link (Cliff appears in the second half of the session): http://parliamentlive.tv/Event/Index/053aad45-73c6-43e4-9d36-fd43c3850b60
Here is a summary of some of the points he and other witnesses made:
Cliff indicated that individual shareholders are under-represented: The views of individual shareholders tend to be under-represented in many policy discussions, which is surprising as often they have very sensible opinions based on quite detailed knowledge of how business and the markets work. Part of the problem is the way that individual shareholders are disenfranchised through the way nominee accounts operate. This needs to change.
Individual investors do not have effective power to curb directors’. Fund managers, who are merely intermediaries in the ownership chain, have usurped this power: but have patently failed to provide effective stewardship. They are responsible for creating many of the current problems, yet to date seem to have avoided blame. Why should we expect them to suddenly change their behaviour? It is time for a strong input from Government and regulators of the London Stock Exchange to change the framework in which we are currently operating. The goal should be to get more power back to the ultimate investors and hence make capitalism work for everyone.
The Committee wanted to question what is the extent of the problem about corporate governance and what is changed since the 2006 Companies Act and why?
Cliff responded: It is a big problem. The 2007/8 financial crisis highlighted many of the problems of corporate governance. It was caused by short termism, greed, irresponsibility and a complete failure by NEDS, fund managers and auditors to highlight the risks that were being created. It was not just the complex products like CDOs and CMO’s, but also PPI miss-selling and the LIBOR scandal.
The main issue is enforcement of the Companies Act. It needs to be enforced more vigorously. ShareSoc believe that the law is adequate, but it is not being properly enforced. SFA, DPP and BEIS are Under-resourced. There are very few prosecutions. Very few have gone to jail. Few directors struck off. Regulators like London Stock Exchange and FCA are failing to enforce their rules. You should ask the LSE here and ask them why they don’t enforce better behaviours.
There is a problem in relation to some AIM companies. The AIM market, which is run by the London Stock Exchange (LSE), has been frequently criticised for the quality of some companies listed on the market and for the way it operates. ShareSoc and its Members think that some reform is necessary.
Question: what are your views about shareholder engagement?
Cliff’s response was: It is not working. I don’t wish to criticise Aberdeen Asset Management who are a low turnover, buy and hold, fund manager who aims for consistency of returns and has over a dozen executives in its corporate governance department. However not all fund managers are like Aberdeen. Far too many are completely under resourced to cope with the volume of work that has to be done. Prof John Kay highlighted this in his excellent report and said that too many so-called active funds held far too many stocks and should hold much more concentrated portfolios.
Catherine Howarth the Chief Executive of ShareAction made several very good points, that fund managers are not doing their job very well. Beneficial owners of pension funds and investment products are disenfranchised too. We have what Paul Myners calls the ownerless corporation with fund managers failing to exercise control and companies and Boards not being held to account. She suggested AGMs for Pension Funds where pension trustees could be questioned by members.
Asset Managers were not doing a good job and overcharged. A common theme amongst those giving evidence was the poor job that asset/fund managers are doing. The FCA has just published a damning report of the asset management industry which overcharges its customers and has failed to produce returns even close to the benchmark in most cases. Many witnesses referenced this as well as the failure of these managers to solve corporate governance problems. Retail investors are being treated poorly and their interests are being ignored by asset managers and industry bodies.
Other witnesses appearing at the session were Professor Vanessa Knapp, independent consultant and lecturer in company law and corporate governance, Queen Mary University of London; Elizabeth Wall, City of London Law Society; Catherine Howarth, Chief Executive, ShareAction; Kerrie Waring, Executive Director, International Corporate Governance Network; Sarah Wilson, Chief Executive, Manifest and Paul Lee, Head of Corporate Governance, Aberdeen Asset Management.