November 6, 2011 5:09 am

Activism – a good idea – if it works

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If Bob Diamond, boss of Barclays Bank, turned up at the Occupy London Stock Exchange camp outside St Paul’s cathedral, he would be assured of a polite reception. He may even be offered the opportunity to put his point of view at the general assembly, the group discussions that determine policy at the camp.

But he should be aware the campers are being well educated on City issues and unlikely to agree with his version of what banks do and why we need them, put forward at the inaugural Radio 4 Today programme lecture last week.

On one of my visits to the camp I listened to a discussion of where money comes from by the New Economics Foundation. And if I didn’t have to write this column, today I could go to a session on corporate social responsibility by academics from Cass Business School and the University of London.

Mr Diamond would not be the only City celebrity to visit if he did show his face. Former City minister Lord Myners has put in an appearance, and at a discussion last week on the value of shareholder activism, he also noted the occupiers’ familiarity with City practices. Objective number five on their list, he said, was to close down algorithmic and high frequency trading. He took their presence, and that of the other occupiers around the world, as evidence of a need to strengthen the market economy, in terms of legitimising it in the eyes of people disillusioned with the outcomes such an economy has produced. “We need to show evidence of active engagement to legitimise the way the market economy is organised,” he said.

There is a lot of work to do. And one of the major questions is whether shareholders can be the force that effects some of the changes needed. Lord Myners, now chairman of Cevian Capital, an activist hedge fund manager, has opined often on the problem of “ownerless corporations” since the global financial crisis, and chided institutional investors for their failure to hold management to account.

Speaking in favour of activist investors Lord Myners said he did not defend everything done under the activism label, but believed on the whole they were a blessing not a curse. They might be a nuisance to some, but company managers taking that view were not working in the best interests of shareholders.

Engagement as practised by fund managers was good as far as it went, he added, but governance specialists only “hold the line”, and suffer from being inadequately resourced. They were not doing enough on executive remuneration in particular, he said.

However, he does not think all investors need to take up their activist cudgels. One of the problems with the UK’s stewardship code, he said, was that too many firms had signed up. There is a long list of signatories, it is true, but hardly too many. The most important signatories are the asset owners, mainly pension funds, whose general lack of involvement in corporate governance (with a few notable exceptions) is a big part of the problem.

It is too early to tell whether the code will make any appreciable difference to the “ownerless corporation” problem. Lots of investors have similarly signed up to the United Nations Principles for Responsible Investment, but it is hard to tell what the impact has been.

Reports on the subject note that companies feel much more pressure to take account of environmental, social and governance issues from customers than from investors. The conflicts of interest facing investors on this front are well known: it is difficult for one part of an organisation to be critical of companies whose business another part of the organisation may be seeking to win or keep. And the barriers facing shareholders in some parts of the world from acting as effective stewards are similarly well documented. The US poses particular problems, as Bob Monks, the well known governance activist expounded in a recent speech to the International Corporate Governance Network.

The remuneration issue is a particularly thorny one for the fund management industry. In Europe, many management groups are owned by banks. Even independent managers face the problem that their top brass may well be as highly rewarded as the company executives they should be challenging on pay.

Tax is also a difficult area. Companies may justify their tax arrangements on the grounds of maximising shareholder value. But to the extent that shareholders are individual taxpayers who benefit from government spending, they may not take this view of value.

Institutional investors have let large corporations run wild and failed in their fiduciary duty to the ultimate owners of the companies in which they invest. That may include some of the occupiers down at St Paul’s. Perhaps it is time to mobilise the real owners of companies.

pauline.skypala@ft.com

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