Institutional investors of British banks have got more powerful over the years, at the expense of the retail investor. This power has been somewhat diluted by the weighing in of government in the form of bailouts.
Further evidence of executive compensation becoming the most scrutinised aspect of financial reporting is also revealed in the article, where majority investors expect to vote on pay and perks at the AGM.
From the Times online, 19 November 2008:
The City’s leading institutional investors are gearing up for their biggest assault on corporate Britain by demanding the right to vote out the board of every listed company each year.
Fund managers have been spurred to act after seeing their rights eroded during the Government’s £37 billion bailout of the banking sector and in the wake of a controversial £7.3 billion capital-raising drive by Barclays. The bank attempted to win over angry shareholders yesterday by offering its entire board for reelection next April. It also sought to mollify investors by promising that executives would not be paid bonuses this year.
Leading investors say that they want to extract more accountability from executive directors of British companies as they brace themselves for a severe recession. Peter Montagnon, director of investment affairs for the Association of British Insurers (ABI), said: “The annual election of directors is a desirable thing because it increases their accountability. A number of companies already do this and have found that it works. It adds to stability at companies because directors are more circumspect about the consequences of their actions.”
Companies must have individual directors reelected every three years, according to the Combined Code on Corporate Governance. That tends to entail a third of a given board being voted on each year.
Mr Montagnon said that annual elections would be especially useful when there were tensions over directors’ pay and perks. “The fact that they are prepared to stand for reelection could mean that shareholders could allow them greater latitude in designing remuneration policies. These could then become less formulaic and better tailored.”
The ABI represents powerful professional investors that, among them, own more than a fifth of the stock market. The National Association of Pension Funds (NAPF), a similarly influential lobby group, echoed the call. David Paterson, of the NAPF, said last night: “It is standard practice in the US and other parts of Europe [to select boards annually] and a number of our members think it is a good model for the UK. We would encourage the boards of all UK companies to offer themselves for reelection each year, and this will form part of the review of our corporate governance policies in 2009.”
The ABI welcomed the move by Barclays, which will give investors the right to oust members of the 17-strong board. However, Mr Montagnon lambasted the bank for failing to consult its shareholders before offering preferential terms to Middle Eastern investors, who could end up owning about a third of the bank. Despite the bank’s concessions, the ABI issued its most serious alert on Barclays’ capital plan yesterday. Fund managers said that they were furious over the bank’s handling of its fundraising but were unlikely to vote it down at an emergency meeting on Monday because of the risk of causing instability.
Alistair Darling, the Chancellor, also suggested that there would be a heavy price to pay for any successful rebellion, saying that any bank requiring government assistance in the future would not receive terms as generous as those already reached. Analysts said that that also represented a warning shot against any effort to derail the merger of HBOS and Lloyds TSB before a vote by Lloyds shareholders today. They said that it also implied that the present round of government aid may not be enough.
At present share prices the Government faces a loss of £10.4 billion on its £37 billion investment in the banks – equivalent to 3p on income tax or more than the cost of the 2012 Olympic