* UK investors to become more engaged across industries
* Corporate governance review to be published Tuesday
* FRC to ratify new investor stewardship principles
By Kirstin Ridley and Raji Menon
LONDON, Nov 26 Large shareholders in Britain are
bracing for rules urging more engagement with bank boards to be
rolled out across all industries as calls mount for investors to
shoulder more responsibility for how well companies are run.
Just days after city of London grandee David Walker outlined
39 steps to better pay and practices in a banking industry that
pitched the country into recession and debt, peer Christopher
Hogg will review corporate governance of all listed companies.
Hogg, who chairs the Financial Reporting Council -- the
guardian of good practice at listed British firms -- will on
Tuesday publish his review of the 'Combined Code' that governs
company behaviour and policy, and open a consultation process.
Along with the government, regulators and bank executives,
shareholders have borne part of the blame for not scrutinising
company strategy and policy and failing to rein in excessively
risky behaviour that helped sow the seeds of the credit crisis.
"The gauntlet has been thrown down to investors and it's at
their own peril that they do not rise to the challenge," said
Anita Skipper, corporate governance director at Aviva Investors,
a large fund manager in London.
"There may be one or two things that are very specific to
financial companies (in Thursday's Walker Review) but in the
main, it makes sense for companies in general -- and some of
that will be transported to the Combined Code next week."
PICKING UP BATON
Walker, whose report was commissioned by and has been
endorsed by the government, called on the Financial Reporting
Council (FRC) to ratify a new Stewardship Code for shareholders,
which outlines best practice and a commitment to scrutinise
boards on strategy and policy. [ID:nGEE5AO18S]
The Institutional Shareholders Committee's (ISC) principles
form the basis of the new code. [ID:nLG222766]
Institutional investors will have to publicly declare
whether they have signed up to it -- and those falling short of
expectations will be called to account on a "comply or explain"
Peter Montagnon, director of investment affairs at the
Association of British Insurers (ABI) said Walker's report was a
"useful indicator of the way forward".
"It is very important that the overall conclusion is on the
side of 'comply or explain', and against statutory regulation,
on the way boards behave and how shareholders engage. We will do
our best to deliver as investors," he said.
But some corporate lawyers argue it is questionable whether
shareholders, who need to be able to act for their own benefits
to ensure the best returns possible, should owe a wider
obligation to management.
"Investors might quite properly conclude that they prefer a
short-term strategy, with the manager addressing
underperformance by selling rather than through engagement with
the board," said Stuart Pickford, financial services litigation
partner at law firm Mayer Brown.
Corporate governance body PIRC (Pension Investment Research
Consultants) said the report, which also demands banks disclose
top salaries, elect chairmen annually and that top executives
and non executive directors are focused and qualified, had
merely "tinkered in the face of overwhelming fiduciary failure".
"In the face of the almost total collapse of the UK's
banking system in Sept. 2008, the report fails to take the
radical steps needed for reform of our financial market
governance," said Alan MacDougall, Pirc's managing director.
"The public and many of our pension fund members and
insurance services clients have a right to expect more."
WALKER DROPS MOUs
Walker dropped plans for shareholders to form formal lobby
groups and sign a memorandum of understanding if they disagree
with board strategy -- partly because this risks being seen as
"acting in concert", which is illegal.
Walker, who accuses investors of engaging in too much
trading activity and taking too little ownership responsibility,
still wants investors to disclose whether and how they vote at
company meetings -- a proposals some lawyers say turns investor
rights into duties.
But he dropped plans that would have seen the Financial
Services Authority (FSA) call on major selling investors to
explain why they have chosen to divest shares.
Instead, he has switched onus onto boards, which are now
responsible for contacting the FSA if major shareholders dump
stock over a short period. Boards should also be aware of large,
cumulative changes in the share register.
"Shareholders need to raise their game, absolutely," Walker
told Reuters. "And I am certain that what I am proposing is
directionally correct and I think they will do it.
"But is it enough? That I don't know."
(For a column on the Walker review, please click on
((email@example.com; +44 207 542 7987; Reuters