Major UK institutional investors boadly welcomed David Walker's report on improving corporate governance in banks, but baulked at the idea of the financial regulator monitoring fund managers' compliance on engagment.
In a widely anticipated report, Walker said on Thursday bank governance should be overhauled and institutional shareholders should be made formally accountable for the first time for their engagement with bank boards.
"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," said Richard Saunders, Chief Executive of the Investment Management Association.
"We do not believe the regulator should get involved in what is the best way to manage money."
Key plans include a proposal for the Financial Services Authority (FSA) to monitor whether fund managers are fully disclosing compliance with new rules on engagement with banks.
Walker, tasked by Prime Minister Gordon Brown to examine the governance failings that sparked the near-collapse of the banking industry, also proposed greater powers for the Financial Reporting Council (FRC) to ensure fund firms stick to new "principles of stewardship" set out by an industry body.
"YOU GUYS ARE POWERFUL"
Peter Montagnon, director of Investment Affairs of the Association of British Insurers, said: "We do not believe that the authorities should assess the level of compliance – this does not happen to companies under the Combined Code."
Walker told Reuters that his proposals were tough and would not be popular with some fund managers.
"What I am trying to do is make institutional shareholders behave more like owners. I am saying 'You guys are powerful and you should use the power you have in a more effective way with an eye to improving sustainable performance in the long term'."
Institutional investors, the biggest owners of London-listed companies, have been blamed for failing to hold companies to account, especially banks, in the financial crisis.
Last month in its first official response in the wake of the financial crisis, the Institutional Shareholders Committee (ISC), issued new guidelines in a bid to strengthen investor activism.
The ISC rules will form the bedrock of the new principles of stewardship in the banking sector that all UK fund managers will have to conform to on a "comply or explain" basis, Walker said.
He said his report could be applied more widely.
"Institutional investors will, for the first time, have to comply or explain the extent to which they execute engagement responsibilities on behalf of clients. There is no place to hide," said Shade Duffy, head of corporate governance at AXA Investment Managers.
"It places a large onus on institutional investors to carry out high level engagement and to put sufficient resources behind this."
COLLECTIVE ACTION
The report also recommends the creation of a memorandum of understanding to establish an informal but agreed approach to specific corporate governance issues that may arise.
The report has called on the FSA to seek to develop further guidance on the interpretation of acting in concert, often criticised as a regulatory grey area which can stop investors forcing change at companies.
"Helpfully, it removes the concern that there could be negative legal implications for shareholders who collaborate on engagement activity," said Axa IM's Duffy.
"That's useful because informally, some shareholders have been collaborating on a wide range of issues including governance but others have said they couldn't support such work and now there is no excuse."
Fund managers should also exercise their voting powers and should disclose their voting record.
