Self-evidently, the code is a reaction to governance failures revealed by the banking crisis. But others have reacted as well, most notably the European Commission. In that respect, the code is one more piece in the old game of heading off Brussels.
The key text is the recent EU green paper on corporate governance in financial institutions. For our purposes, this poses two questions. Do bank boards owe a duty of care to other stakeholders, besides shareholders? And is the concept of shareholder control still credible?
The Commission is now broadening its fire to listed companies in general, and a further paper is expected by the new year. Both those questions will be on the table.
From a UK standpoint, the issue of shareholder control boils down to whether the Anglo-American model is still capable of the long-term view. The EU thinks not, and is flexing its muscles accordingly. So the City – prodded by the code’s regulator, the Financial Reporting Council – is hastily assembling a response.
The snag is that the institutional view on long-termism is less clear on inspection. This was brought out at an FRC-sponsored gathering on the code last week, where stalwarts such as the chairman of HSBC and the investment head of Standard Life pushed the party line.
But there was a gadfly in the room in the form of Anne Kvam, investment head of Norway’s $500bn sovereign wealth fund.
Her investment horizon, she said, was 30-50 years. And of course, she engaged with the companies she owned. But why should she have to? Did she not have the right not to exercise stewardship? And how good were shareholders at running companies anyway?
Why, come to that, should she always be long-termist? The market was there to allow her to buy, sell and buy again. Why should that opportunity be taken away?
And finally, she owned stakes in 1,100 companies in China and 400 in the UK. Corporate governance in the UK was already excellent. Surely, then, she should spend her time engaging with her Chinese companies rather than her British ones?
Some of that was addressed by Keith Skeoch, the Standard Life investment chief. The ultimate purpose of the capital markets, he said, was to link savers with companies. Thereafter, it was the job of shareholders to support managers in changing their business or market model.
In that respect, investors’ obsession with secondary market liquidity was irrelevant. “We commit to the management”, he said, “that we will take the loss-absorbing part of the capital. That’s the root of the system, and it has served us well for 300 years”.
But that commitment, of course, entails rights. It follows that any dilution of those rights will be fiercely contested. This is where the Commission’s thoughts on stakeholders come in.
Here again, the code is presented as a rebuttal. As the FRC is at pains to stress, the point of the code is to promote long-term value creation. Issues of human rights, the environment and so forth should only be raised with boards if they have a direct bearing on that.
Similarly, there was short shrift given at the FRC meeting to the notion – not specifically raised by the Commission – of a two-tier system of preferential rights for long-term shareholders.
The institutions were, of course, opposed. But so was the chairman of HSBC, who argued that it would encourage complacency in boards and would be a nightmare to administer.
All that said, the EU position must be taken seriously. The green paper raises some pertinent questions, to which the UK lobby has yet to provide satisfactory answers.
It is indeed the case, for instance, that the shareholder base has been fragmenting, and that increasingly large parts of it – the fast traders, the passive and exchange-traded funds and so forth – have no rational reason to engage with boards. And the code, remember, does not require them to do so – merely to make clear that they do not.
Similarly, it is one thing for institutions to require the fund management firms they hire to spend more time talking to companies. But asked whether they were prepared to pay for that, the institutions at last week’s meeting were distinctly non-committal.
All in all, the UK should brace itself for further skirmishes. As Ms Kvam cheerfully put it, Brussels will doubtless come up with something, and that won’t work either.
Press release
© FT plc
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