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Attention Lord Turner

Created:
28 May 2008
Written by:
Alistair Blair

As we go to press, Lord Turner seems to be a slam dunk as next chairman of the Financial Services Authority (FSA). Apparently the press release confirming this development is on Alistair Darling's desk and will be on the wires next week. I salute this appointment. Although the Morning Star greeted the news with a sigh - "this is like putting a fox in charge of the henhouse" - Turner has the credentials, connections and credibility to move the FSA on. It is a huge body with an important role governing a prickly constituency.

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During Turner's stint as boss of the CBI between 1995 and 1999, he trimmed its Thatcherist tendencies and made it more at home in my namesake's Britain. Later he chaired the Low Pay Commission - a job which no true fox would have entertained. And his Pensions Commission provided a sharp analysis of all the pertinent questions arising in this tortured area of public policy, and made some heroic proposals.

So there is plenty of scope for Lord Turner to ruffle a few feathers as Chairman of the Financial Services Authority, and I would like to propose one means of doing so, which would be in tune with the sympathies Lord Turner displayed during these earlier public appointments.

The FSA's responsibilities include the UK fund management industry, which is responsible for much the greater part of the UK public's savings. As I pointed out last week, despite supplying the overwhelming share of UK capital wealth, fund managers' clients are disenfranchised from the process of corporate governance. Fund managers take their own decisions about how to vote shares at company general meetings, and these decisions are self-evidently at odds with the views and interests of their clients. The public is aghast at the executive pay spiral, but the spiral is waved on day after day by fund managers. The public is ill-served by the weakness of auditors' oversight of corporate reporting, which arises from the fact that auditors are nominated by managers. These nominations are never, ever challenged by fund managers.

So here is my proposal for a new policy initiative from the Financial Services Authority. All institutional investors, including unit trusts, with-profits funds and pension schemes, should be required to ascertain the generalised views of their clients and beneficiaries about the overarching issues of corporate governance - and to publicise those views.

The former would be achieved by means of a simple survey at the time an investment is sold or commenced, and annually thereafter, according to a formula laid down by the FSA. For instance, on the issue of director pay, every unit trust holder, every pension fund member and so on would be asked on an annual basis, "Please indicate the stance you would prefer us to take when voting the interest we hold in trust for you in respect of director pay proposals. If the average director pay in a company over the last five years has exceeded its earnings growth, and where we can identify no ameliorating circumstances, should we vote FOR or AGAINST director pay proposals which would have the effect of increasing average director pay at a faster rate than the consumer price index? Please tick either for or against".

This 86 word question contains three important and clear features.

1) It contains the principle: "vote for or against director pay". That's the essence of it. Everyone knows what that means.

2) It contains a Get Out Of Jail Free card - the trackback to earnings.

3) And in allowing for "ameliorating circumstances", it contains the latitude that institutional investors need to go with their own judgement where they feel that will produce a better outcome than the generalised input of their clients.

As I see it, routinely an institution would split its vote, voting say 13 per cent of its holding in favour of the remuneration report and 87 per cent against, if that was how its clients had voted. But if it identified ameliorating circumstances, it could choose to over-ride this guide.

Of course, institutions would be required to publicise how they had voted at company general meetings. This would not be a major burden: the process of voting is already highly automated. All that is required is for voting records to be made public.

Thus fund managers' hands would not be tied but they would be very much more accountable than at present for divergences between the clear wishes of their clients and their own decisions.

And we might finally obtain a spot of convergence between the two.

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Read more of Alistair's columns at his IC home page.

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Alistair Blair is a past winner of the Business Writer of the Year Award, and has worked in investment banking and fund management.

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