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Home > Blogs > Anthony Harrington > Stewardship – the “other half of the hinge” in corporate governance

Stewardship – the “other half of the hinge” in corporate governance

Shareholder activism | Stewardship – the “other half of the hinge” in corporate governance Anthony Harrington

The UK Stewardship Code was launched by the Financial Reporting Council (FRC) in July 2010 and seemed to promptly vanish, almost without a splash, into that great pool of worthy things that one should do if one ever got around to it. The code - dubbed “the other half of the hinge” by FRC Chairman Baroness Hogg, since it is meant to complement the corporate governance code aimed at corporate board - was widely approved and widely dismissed, though not in public.

While it applies to every investor, including the near mythical Aunt Sally with a single share in BP, it bears with whatever sharpness it can muster, primarily on institutional investors. Its fond intention is to prompt them into a tighter, more focused and active engagement with the companies they invest in. The code’s most notable consequence, since its appearance, has been to inspire the springing up of boiler plate notes on institutional fund management web sites. These boiler plates say, in effect, “What a splendid thing, we approve heartily and will do our duty”. Apart from this, things are trucking on pretty much as they always have. Which is a shame.

There is at least an argument to be made that if investors everywhere had behaved more like a bunch of annoyed hornets instead of like a herd of contentedly grazing cattle, and had pressed management hard, particularly management of investment banks in which they held shares, then much of the folly that led to the great crash might have been avoided. “You’re doing whaaatttt?!!!!” would have been a very salutary yell to send echoing through the offices of some of the biggest fiddlers and swindlers the world has seen for some time. It would, one could hope, have created much the same shiver of guilty fright in the perpetrators that a London bobby’s “‘Ello ‘Ello ‘Ello, what’s going on here then?” would have inspired in a burglar fifty years ago. (Today it would probably get the policeman shot, but fortunately there is no equivalent to this yet in our financial analogy.)

We have seen shareholder activism, of course, before today. The Prudential’s $35.5 billion bid for the Asian assets of the troubled US insurance conglomerate, AIG, was nailed in its tracks by shareholder opposition, mostly because institutional shareholders were jittery after the former RBS boss Fred the Shred’s ill-fated JV takeover of ABN Ambro. That was an instance of shareholders exercising their power to act “responsibly”, namely to block a deal that might have been bad, but wasn’t demonstrably so. After all, what is the Asian insurance market going to be worth in 10 or 20 years?

In fact the Pru deal illuminates both the strengths and the flaws of shareholder activism rather clearly. There is absolute certainty about the fact that the deal was blocked, but far less certainty, at the time at least, that it was a bad deal and one worth blocking. True, it was an ambitious deal, but there is not a one for one correspondence between ambition and failure. In fact failure often accompanies an absence of ambition. If institutional managers start second guessing the management of UK blue chip companies on a regular basis, things will get pretty chaotic pretty quickly.

Now that the crash has passed and management in quoted companies everywhere are struggling to find their way back to steady profits, it is perhaps appropriate that institutional investors do not appear to be particularly gingered up by the code. In fact, it is a little difficult to see that it is having any effect at all. Perhaps its finest hours lie ahead of it...

Further reading on corporate governance and shareholder activism:

Tags: AIG , Asian insurance market , corporate governance , Financial Reporting Council , FRC , Prudential , shareholder activism , Stewardship Code
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