Meanwhile, a crazy contract of complicity lies at the centre of the crucial relationship between professional investment managers and boards of directors of listed companies. Consciously or subconsciously, both these sets of people are driven to protect their own self-interest rather than to serve those that own the capital they use, and sometimes abuse. Though the potential for wider benefits is palpable, greater participation by individual investors makes life significantly more difficult for boards of directors and institutional investment managers.Is this why so little is done by those that have acquired the power to act to improve the position of the individuals and citizens they are meant to serve? Probably.I concur.Back to my post, a fund manager kindly commented on it: although he rejected my particular reasons ('He would say that, wouldn't he?'), he gave some of his own which I hadn't thought of. He argued, and I am sure he is right, that fund managers like to have access to boards, and that they therefore don't act against the board except in rare instances; he also argued that, again cogently, that boards engage in malpractice by, for example, bundling controversial or unattractive propositions together with routine ones to be voted on (for example, appending the board's pay alterations to the motion to accept the company's annual report).I think I would summarise his examples as telling us that the relationship between the fund managers and the directors has been inverted: the shareholders have been made supplicants at the board's feet, when it should work the other way round. In all, corporate governance is in a pretty shoddy state. The fund manager's proposals were to make shareholder voting compulsory and anonymous: I don't how compulsion would work, and while I can see the sense behind anonymous voting from a governance perspective, it does make it harder for fund clients to hold their fund to account for its own decisions.And me? I still don't have many ideas. Increasing private shareholder ownership is good, but if that is behind nominee walls then no improvement in governance will be forthcoming under the present arrangements. Apparently a recent Companies Act gave nominees the right to demand shareholder rights for their clients, but individual clients still do not have direct access to their legal rights: that is an obvious candidate for alteration. However, with such a large amount of the UK's companies in the ownership of collective investment vehicles, there still needs to be some change in the way fund managers, boards and clients interact.I'm a firm believer in economic freedom as the best engine for prosperity, and a cautious fan of the capitalist system as evolved in the Anglo-Saxon west. (I make the distinction, because I advocate improvements to the latter, but see the former as absolute.) However, both economic freedom and our ever-evolving capitalist system rely on private property rights. When the law separates, as it does, beneficial ownership from effective ownership, we end up with the City effectively owning and running itself. Clearly, we ignore such a state of affairs to our cost.
Tuesday, January 12, 2010
More corporate governance
Once again, I have led the news agenda. Will the papers ever catch up with me? On Friday I posted a ramble on corporate governance (link), noting that the pension fund industry has become a part of the problem rather than a part of the solution. In Saturday's Times, two articles appeared on corporate governance (1, 2), both making very similar points to my own. In the first, the Times' personal investment editor Robert Cole writes: