The Role of Institutional Shareholders

It’s great that Hector Sants has said that “delivery of supervision has to be done in partnership with responsible firms, shareholders and auditors.” (It’s a pity that Sants is inconsistent, but that’s another matter.)
The thing is, he’s not exactly saying anything new. I summarised the current position last year in my book on Corporate Governance (the square brackets are my current interpolations):

Institutional Shareholders

The Combined Code [UK Combined Code on Corporate Governance – in place for 10 years] also requires institutional shareholders to interact proactively and objectively with the companies in which they are invested. There are three main principles for institutional shareholders to observe: 

  1. Institutional shareholders should enter into a dialogue with companies based on the mutual understanding of objectives. (E.1)
  2. When evaluating companies’ governance arrangements, particularly those relating to board structure and composition, institutional shareholders should give due weight to all relevant factors drawn to their attention. (E.2)
  3. Institutional shareholders have a responsibility to make considered use of their votes. (E.3)


The Combined Code explicitly recommends that institutional investors should not accept a ‘box-ticking’ approach to corporate governance, and that their consideration of disclosures made by the company in relation to the Code should take into account the “size and complexity of the company and the nature of the risks and challenges it faces” (supporting principle to E.2)

The Combined Code recommends (supporting principle to E.1) that City [ie investing] institutions should follow “The Responsibilities of Institutional Shareholders and Agents – Statement of Principles”, which were drawn up by the Institutional Shareholders’ Committee (ISC)[1], whose associations represent virtually all UK institutional investors.

The principles were the first comprehensive statement of best practice governing the responsibilities of institutional shareholders and investment managers in relation to the companies in which they invest. 

“They aim to secure value for ultimate beneficiaries – pension scheme members and individual savers – through consistent monitoring of the performance of those companies. This is to be backed up by direct engagement where appropriate.  The principles make it clear that if companies persistently fail to respond to concerns, institutional shareholders and investment managers, ISC members will vote against the Board at general meetings.

The principles set out best practice for institutional shareholders and investment managers, under which they will:

· Maintain and publish statements of their policies in respect of active engagement with the companies in which they invest;
· Monitor the performance of and maintain an appropriate dialogue with those companies;
· Intervene where necessary;
· Evaluate the impact of their policies; and
· In the case of investment managers, report back to the clients on whose behalf they invest.

What’s the reality? 

The reality is that active shareholder engagement has – in both London and New York – been extremely limited; after all, the management fees they were earning from ignoring the real risks being run by the companies in which they were invested supported an exciting personal life style. The real victims are the ordinary folk who fell for the polished pitch of the fund managers, who sold so effectively the idea that managing cash is so difficult and complex that ordinary people can’t do it. (An ordinary person said, on a panel interview programme here a couple of weeks ago: ‘I can’t run a bank; can I get a £695k pa pension?’). It’s all very well asking the institutional investors to exercise their governance responsibilities responsibly, but they too have their fingers in the till.

So, isn’t it time we taught basic financial risk management to ordinary people? I know this might require breaking the centuries-old link between financiers and politicians, but perhaps that might start a move toward a society in which those who produce the cash don’t have it conned out of them…..sorry, that’s a bit hopeful…

[1] The ISC is a forum which allows the UK’s institutional shareholding community to exchange views and, on occasion, coordinate their activities in support of the interests of UK investors.  

Its constituent members are: The Association of British Insurers (ABI), the Association of Investment Companies (AIC), the Investment Management Association (IMA) and the National Association of Pension Funds (NAPF)

[2] ISC Press Release accompanying the launch of the Principles.