Hats off to Legal & General's Sacha Sadan, their director of corporate governance.
Fund managers must be held to account in the same way companies are
While he reiterates a clear commitment to better governance the article raises more questions than answers.
1 He states that "every pension or ISA investor can also get involved to make UK plc better". This certainly is a welcome but HOW can these investors be involved?
2 A major problem with improving governance is the sheer number of issues, companies and investors that need to be engaged. Loading gender diversity (how many investors have ever asked for this? and have they ever been surveyed at all?), climate change, cyber-security and executive pay into the discussion guarantees that little progress is made on ANY of these issues.
3 To think that the problem of excessive executive compensation can be solved by just asking companies (nicely?) to "explain how much they pay their chief executive" is a road to nowhere as developments over the past years have amply demonstrated. The same pertains to desire to make companies more "accountable" and bring about "cultural change". All very well, but accountable to who, and what cultural change?
4 Fund managers have role to play - this is the understatement of the year. Who but they are responsible for all the problems that are raises with respect to corporate governance? The top 20-40 institutions (Asset Managers, Private Banks) can control all listed companies the moment they would congregate and agree on principles that have to be adhered to.
5 Mr. Sadan states that his firm collaborates with other fund managers and engages with companies on a regular basis. But this is so "discreet" (secretive?) as to be of little effect - even if it would have an effect, how would end-investors be able to verify this? And you may "engage" with your wife, friends etc but the investment fiduciaries act on behalf of the OWNERS, and as an owner you tell your employees - even if it is a haughty CEO - what to do on your behalf.
6 Free riders are a burden on those investment firms that try to make a serious effort with respect to corporate governance. The best solution would be a rating system. Firms will have to clearly state their governance policies and be rated accordingly. End investors could choose responsible firms. There might even be legislation to make funds that do not comply loose any tax or regulatory umbrella.
My suggestions are:
Corporate Governance needs a set of clear, simple and unambiguous rules. Independent Chair or not? Maximum Pay for CEO? Mandatory vote on Pay? to name but a few.
End Investors should be able to vote for a Proxy Advisor of their choice, similar to a party. This could mean that L&G for ex has to allocate x% of their votes to each Proxy Advisor's recommendation. Given the progress in information technology that should not be a major problem.
(19-Mar-2017)
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