[A-List] UK legitimation crisis: City of London

["Michael Keaney" <michael.keaney@xxxxxx>]

City moves to tighten investment principles

Heather Stewart
Tuesday October 22, 2002
The Guardian

British firms were warned yesterday to expect a rougher ride from the City
as a powerful committee of shareholders and fund managers published
proposals designed to deal with underperforming companies and head off
government legislation.

Members of the institutional shareholders' committee - including influential
City groups such as the National Association of Pension Funds, the
Association of British Insurers and the Investment Managers Association -
have signed up to principles committing them to intervene actively in
companies within their portfolios.

"We invest on behalf of millions of individual savers and we owe it to each
of them to try to ensure that the performance of those companies is up to
scratch," said the ISC's chairman, Lindsay Tomlinson of Barclays Global
Investors.

The ISC - which last flexed its muscles when Railtrack was forced into
administration - named a series of concerns which could prompt its members
to take action. These include "inappropriate remuneration levels",
"independent directors failing to hold executive management properly to
account" and the "company's acquisition/disposal strategy".

Suggested methods for exerting control over firms range from calling ad hoc
meetings with the management team to demanding an extraordinary meeting and
voting to get rid of the board.

"The principles make it clear that if companies persistently fail to respond
to concerns, institutional shareholders and investment managers will vote
against the board at general meetings," the ISC said.

It expects investment managers to publish specific policies on when and how
they will involve themselves with failing firms.

After the Myners review of institutional investment criticised the City's
laissez-faire approach in March 2001, the government threatened to legislate
if there had not been "behavioural change" by March next year.

Ruth Kelly, the financial secretary to the Treasury, welcomed the ISC's
principles but warned that "the key test will be the impact on industry
behaviour".

Coinciding with the ISC's announcement yesterday, Hermes pensions
management - one of the City's more activist fund managers - produced its
own, detailed manifesto for responsible ownership, spelling out "what
shareholders expect of public companies - and what companies should expect
of their investors".

"We want to resurrect the idea that business is a joint enterprise between
the boards and employees of the company and its owners to create shareholder
value over the long term," explained Tony Watson, Hermes' chief executive.

Hermes urges companies to "exploit opportunities for growth within their
core businesses rather than seeking unrelated diversification", and to "have
an efficient capital structure which will minimise the long-term cost of
capital" - if necessary, buying back shares to bring that about.