New investor body could lack firepower, say bosses

LONDON Fri Nov 30, 2012 5:55am EST

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LONDON (Reuters) - UK proposals for an investor forum to improve relations with company boards face a challenge garnering support from hedge funds and sovereign wealth funds and avoiding charges of collusion, executives say.

Speakers at the Reuters Global Investment Outlook 2013 Summit this week said efforts to create a workable shareholder forum - as proposed in this summer's Kay Review - could be hampered by the difficulty in working with shorter-term or secretive investors, who are an increasingly powerful shareholder force.

Economist John Kay's government-backed review, published in July and aimed at preventing a Barclays-style board implosion, said fund investors could improve returns to savers if they engaged collectively with company boards rather than individually.

"It's a challenge," said Rod Paris, head of investments at Standard Life Investments (SL.L). "Not everyone values it (engagement) in the same way, it's a shifting pool of investors (on a company's shareholder list).

"Do hedge funds and sovereign wealth funds have the same degree of interest in promoting this?"

Last week the Investment Management Association (IMA), trade body for the UK's 4.2 trillion pound asset management sector, said it was assessing support among institutional investors for a forum.

The aim would be to enable investors to see if other shareholders support their calls for change at companies and to promote longer-term decision-making by company management, the IMA said.

However, Ewen Cameron Watt, chief strategist at the BlackRock Investment Institute (BLK.N), pointed out that traditional investors now account for a relatively small portion of UK equity ownership. The Association of British Insurers' members, for instance, own just 20 percent of the UK stock market.

"Ownership of the UK equity market is very fragmented," said Cameron Watt, who declined to comment on the Kay Review specifically.

"I was speaking at a conference last week which was a group of IR (investor relations) people from listed corporates and they were saying 'it's really difficult, because we've got passive funds on our register, we've got hedge funds on our register, we've got non-domestic funds on our register'."

He highlighted trader Glencore's (GLEN.L) $33 billion takeover of miner Xstrata XTA.L as an example of where sovereign wealth funds and arbitrageurs could be the deciding factor in a takeover.

"The Qataris at the end of the day and the hedge funds were the conditionality at the end," he said.

"COLLUSION"

The Kay Review of UK Equity Markets and Long-Term Decision Making was commissioned by Business Secretary Vince Cable in response to the takeover of confectioner Cadbury by U.S. rival Kraft Foods (KRFT.O), which critics said was driven by short-term investors seeking a quick reward.

The drive to improve relations between companies and shareholders comes after an investor backlash earlier this year, dubbed the "shareholder spring", which cost the jobs of executives such as Aviva (AV.L) boss Andrew Moss and Sly Bailey, head of newspaper group Trinity Mirror (TNI.L).

When publishing his review Kay also highlighted Barclays (BARC.L) as a "classic illustration" where collective engagement would have ensured a more orderly transition for the board after the bank lost its top three executives in the fallout from the Libor rate-rigging scandal.

However, Standard Life's Paris said that in trying to set up a forum to work with other shareholders, investors had to be careful to avoid acting as a concert party - a group acting in concert in a takeover bid.

"I think you've got to be realistic about how we can work. Remember collusion? We have to be careful of (that)," he said.

"We've got some industry bodies that attempt to overcome this fragmentation and give a forum for the articulation and the more concerted voice, but you cannot act as a concert party."

Paris also said there was a tension between investors sharing their ideas for corporate change whilst also avoiding publicity, which can damage delicate talks between companies and their shareholders.

"The conflict is the more public the discussions, sometimes ... the harder it is to make change," he said. "So the industry has to get that balance right."

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