Institutional investors should become more activist shareholders in the corporate governance of banks and other financial companies, while boardrooms should make rigorous challenge a key element in directors' decision-making on risk, according to recommendations in a review commissioned by Alistair Darling, U.K. chancellor of the exchequer.
The proposals in the Review of Corporate Governance in U.K. Banks and Other Financial Industry Entities “are designed to improve the professionalism and diligence of bank boards, increasing the importance of challenge in the board environment,” Sir David Walker, senior adviser to Morgan Stanley and author of the report, said in a statement about the review. “If this means that boards operate in a somewhat less collegial way than in the past, that will be a small price to pay for better governance.”
The 142-page report, released in London on July 16, produced 39 recommendations, including developing institutional shareholder principles of stewardship, sponsored by the Financial Reporting Council, an independent U.K. authority. The move would be the first time the FRC developed a corporate governance code for shareholders.
The recommendations call for fund managers and other major shareholders to “engage more productively” with companies in which they invest “with the aim of supporting long-term improvement in performance. Boards, in turn, should be more receptive to such initiatives” by shareholders, the review states. Fund managers “should be expected to conform” to the principles of stewardship or explain why they are not.
The Investment Managers Association, London, disagreed with a recommendation that managers registered by the Financial Services Authority, the U.K. regulator of the industry, should specify on their websites their commitment to the principles of stewardship.
With such disclosure, managers would confirm that their mandates from pension fund and other major clients include supporting corporate engagement activity, the review states. “Where a fund manager or institutional investor is not ready to commit and to report in this sense, it should provide, similarly on the website, a clear explanation of the reasons for the position it is taking,” the review states.
But the IMA said in a statement, “This is not an appropriate part of the process of FSA authorization. An investment manager's duties are to the client. Managers take a wide range of different approaches to managing money, some involving active engagement with the companies in which they invest, some not. We do not believe the regulator should get involved in what is the best way to manage money. That should be between the manager and the client, and the authorities should not become involved.”