The review, which concentrates on the structure and governance of large financial institutions and their boards, has highlighted the problems that can arise when too much emphasis is put on share appreciation. It says the short-term returns sought by fund managers create a vicious circle with boards seeking to encourage short-term share gain.
The review says: “Fund managers whose strategies relate to active trading in stocks may have little interest in engagement with the boards of their investee companies. If they dislike a stock they can sell it. Other institutional investors whose strategies make them at least potentially longer-term investors are confronted with a problem.”
As a result, the review is calling for managers to have a better attentiveness to the performance of investee companies over a long as well as a short-term horizon. It says: “Those who have significant rights of ownership, which enjoy the very material advantage of limited liability, should see this as complemented by a duty of stewardship.”
It says fund managers should, in their literature, have a public indication that they are ready or not ready to have a specific engagement with a company where this is seen as a means of boosting performance over the longer term.
It says: “Such reporting should confirm that their mandates from life assurance, pension fund and other major clients normally include provisions in support of engagement activity and should describe their policies on engagement and how they seek to discharge the responsibilities that commitment to the principles entails.
“Where a fund manager or institutional investor is not ready to commit and to report in this sense, it should provide, similarly on the website, a clear explanation of the reasons for the position it is taking.”
British Bankers Association chief executive Angela Knight says:”The Walker Review is about strong governance, but it is also about getting the debate on pay packages into the right place by ensuring reward structures look to the long term. It is also about addressing thee responsibilities of the major investors to look at long-term strategies and not just short term returns. They are owners, not just investors.”
Investment Management Association chief executive Richard Saunders says: “We question the recommendation that the FSA should encourage commitment to the Principles of Stewardship as best practice. This is not an appropriate part of the process of FSA authorisation as an investment manager’s duties are to the client.
“Managers take a wide range of different approaches to managing money, some involving active engagement with the companies in which they invest, some not. We do not believe the regulator should get involved in what is the best way to manage money. That should be between the manager and the client, and the authorities should not become involved.”