Speak out and change the world

Neil Woodford may be regarded as a God-like genius by an army of investors, but rarely can the tectonic plates have shifted so sharply in response to the utterings of a mere mortal.

The inestimble Invesco Perpetual fund manager last week let it be known he was not entirely convinced by the logic of the proposed €36bn tie-up between BAE Systems and EADS, aimed at creating a pan-European military and aerospace behemoth.

Mr Woodford said he “did not understand the strategic logic for the proposed combination” which “would materially jeopardise BAE’s unique and privileged position in the US defence market”.

Within hours the mood music around the mooted merger had audibly soured. Within two days the project had collapsed in ignominy.

It would, of course, be completely erroneous to suggest Mr Woodford, whatever his powers, had achieved this feat single-handedly; the all-too predictable bickering between the governments of the UK, France and Germany was clearly instrumental in the collapse. Indeed BAE cited the diplomatic deadlock for the deal’s demise.

But then again it’s always more of a face-saver to blame those pesky politicians rather than admit many of your own shareholders were lined up against you. And it’s surely likely BAE and EADS would have pushed their respective government overlords harder, and secured an extension to the deal’s deadline, if they knew their private sector backers were cheering them on.

We will probably never know the relative importance of the forces lined up against the deal. But Mr Woodford’s willingness to put his head above the parapet emboldened others to have their say. We learn, for instance, that within 24 hours at least six of the biggest 20 shareholders in BAE had warned they supported Invesco’s stance, seen by one analyst as a “demolition job”.

Barry Norris, chief investment officer at Argonaut Capital Partners and an EADS shareholder, opined that the two companies’ management had “declared war on their shareholders,” before abruptly surrendering as soon as investors fired the first warning shots.

Your correspondent was recently engaged in debate with one of the UK’s most powerful corporate governance barons, whose team would appear to do a huge amount of chivvying and chiding of recalcitrant boards. But virtually all of this good work goes on behind the scenes. When pressed as to why he does not go public except in extremis, his reply was “what do we gain from that?”.

He surely knows his business better than I, but there has to be the possibility that going public, particularly if this becomes the industry norm, will embolden other, less powerful, investors to have their say.

By coincidence, Robert Jenkins, erstwhile chief executive of F&C Asset Management and chairman of the UK Investment Management Association, last week delivered a “call to arms” to institutional investors.

Mr Jenkins, now a member of the Bank of England’s financial policy committee, said the debate over the future of the rebuilt financial system had boiled down to a tussle between the banking lobby in one corner and the authorities in the opposite one, with academics largely failing in their attempts to referee the contest.

He labelled the investment industry the “missing piece” that was failing to use its “financial expertise, credibility and clout” to shape the debate, even though “the podium is vacant and the arena is waiting”. And just in case the industry thinks it can safely duck the debate with its reputation intact, Mr Jenkins offered the chilling warning to money managers that, in the eyes of the public, “we are all investment bankers now”.

As it happens, I disagree with the specifics of the argument Mr Jenkins went on to make. He suggested investors should help push for a better-capitalised, less leveraged, banking system. In the wake of the financial crisis a desire for sounder banks is entirely understandable. Yet it is becoming increasingly obvious that pushing banks to bolster their capital ratios, while simultaneously increasing their lending, does not work and is not a recipe for economic growth.

In this context, last week’s revelation that the UK’s Financial Services Authority has quietly relaxed its capital rules for banks is a welcome outbreak of common sense. Expect more of this, and not just in the UK either.

But Mr Jenkins’ broader argument stands. As a journalist, the unwillingness of large swathes of the industry to comment on contentious issues, even anonymously, is a source of perpetual frustration.

In a sense that is unimportant; newspapers are not part of the legislative process. But to the extent that it reflects the underlying nature of the investment industry, this most certainly is a cause for concern.


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