Shareholders shouldn’t manage companies
Why are investors expected to run the companies they invest in? A new stewardship code for shareholders is being prepared by the people who already thrust a corporate governance code onto companies. Do we really need it?
Lord Myners, a fund-manager-turned-Treasury-minister until the election, called investors “absentee landlords” for not involving themselves in the affairs of the companies they buy, but why should shareholders have to be active?
If they want to buy a share and sit back while the managers get on with their job, why not? If the investor doesn’t like what the directors do, sell the share. Index funds do not buy to change companies but because they are in an index.
However, Sir David Walker thinks shareholders have a responsibility to get involved. The ex-banker asked by the government to explain how the financial crisis happened decided that if investors had been more hands-on, the banks would not have collapsed. He recommended a stewardship code for bank investors but because the Financial Reporting Council correctly thinks banks should be treated just like other companies, other companies now face this new code.
The code will tell shareholders when and how to engage with managements, how to gang up with other investors, to attend annual meetings and not only to vote but also to reveal how they voted. Some want an explanation of why they voted a particular way too.
Now just as companies should be transparent to their investors, shareholders such as pension funds and unit trusts ought to be prepared to explain themselves to their ultimate beneficiaries. But the stewardship code will apply even to sovereign wealth funds and other investors that are not managing other people’s moneys. Hedge funds, charities, trusts and trade investors will all be caught in the same net.
There are too many organisations trying to tell companies how to behave and now telling shareholders how to handle companies. Should we not let each side get on with its own business, influencing the other if it wants, but going elsewhere if it does not.
Walker’s original complaint was that when Royal Bank of Scotland and its rivals went off the rails their shareholders did not pull the communication cord. Yet RBS investors were asked to vote on the disastrous ABN takeover and gave clear consent. Would having a stewardship code have made them reject the bid? Unlikely.
