UK Minister Calls for Association of Investors to Promote Sound Corporate Governance

Noting that governance is not just a corporate afterthought, but rather the means by which stable revenues and value creation are built, the UK Minister for Financial Services has called for an association of investors similar to industry trade associations to promote and lobby for sound corporate governance. In remarks at an asset management seminar, Lord Myners said that corporate governance is not a zero-sum game. Strong investor engagement leading to better corporate performance overall will increase the size of the pie and not just the share of it which goes to the best managers.

While acknowledging that some trade associations have devoted resources to governance, the Minister observed that their primary role is to further the interest of their members rather than investors. That is why a strong, well-resourced body speaking solely on behalf of investors would represent a valuable addition to the forces working for better governance. At a wider level, he continued, the investment community must take seriously the case for an organization to promote and further the debate on good corporate governance.

Governance is the key to good judgments, he said, and robust governance ensures that those judgments are in the long-term interest of the company. In turn, this requires shareholders to take an active role in holding executives to account. In part, the financial crisis was driven by poor judgments, he averred, such as a failure to question overly complex derivatives, as well as a failure to fully appreciate the interconnected nature of some transactions and markets. While regulatory responses will rightly require firms to hold more, and better quality, capital and liquidity and will deliver more coordinated international responses to crises, he said, ultimately underpinning all the problems is a failure of judgment by regulators, by boards and by senior management.

In his view, improved corporate governance is the best mechanism to foster an environment where judgment is better exercised. If delivered effectively, it requires that decisions are made on the basis of sound analysis and evidence. Good governance also ensures that the contrarian voice is heard, the voice that says maybe this isn’t such a great idea; and the voice that challenges core assumptions. Once decisions are made, good governance demands that they be documented in a transparent and complete manner.

Returning to the theme of an association of investors, the Minister emphasized that sound governance requires the full engagement of shareholders, especially institutional investors. The problem is that most shareholders do not believe that they are owners, he noted, they do not feel responsible for the functioning or the future of companies in which they hold shares. This has profound consequences. The reality of ownerless corporations disadvantages public equity as a form of ownership compared with other models, particularly private equity, and leads to pressure for more regulation to offset the vacuum in engaged oversight.

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