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Institutional Activism
talking to other investors, and ultimately you can
go public and you can, certainly in some environments,
call meetings to dismiss the board.
This is one of the great fears the Americans
have about opening the proxy to shareholders:
there will be constant demands, and votes against
the whole board. My reply is that it has happened
very, very rarely in the UK, although we do have
a fairly “open” system for doing such things. In
my experience, we only voted off one board, and
that was only an investment trust, not a huge
commercial organisation. When it comes to it,
most people put their hands up and say: “If the
shareholders are against this sufficiently, we will
go quietly rather than make a fuss.” Institutional
investors can be a catalyst for change and a catalyst
for improved performance in companies, as
the board themselves can be too blinkered to see
that change is necessary.
This brings us to my fourth question, which is
who should do this As many people have pointed
out, institutional fund managers are not qualified
to manage companies (arguably, many of
them are not qualified to manage institutional
funds!) – at any rate, they are certainly not business
people. What we found when we set up the
Hermes Focus Fund, which I still chair, was that
in order to do this in a professional, commercial
way, it is no good just having fund managers trying
to intervene. For one thing the executives or
the boards of companies will say, “what do you
know about it You couldn’t run a candy floss
stall.” So that’s what we worked on at Hermes.
We built up a skills base of business people and
strategic consultants, in addition to fund management
analysis people (because you have to do
the fundamental analysis of the company in a
normal investment way, to make sure there is a
value gap there that might be addressed by the
changes you are seeking to catalyse).
This is a very interesting change in the way
that institutional investors can address the situation,
and the great problem for the institutions is
to be properly resourced. Very, very few of them
are properly resourced in this, and corporate governance
monitoring tends to be done by very few
people within the organisation. We’ve got Guy
Jubb coming this afternoon from Standard Life. I
think he has three or four people who work for
him, and he has a larger department than many.
At the Pru (Prudential), you have Hugh Jones,
whose job title is Corporate Finance Executive.
He is behind the Chinese wall, so we can talk in
confidence to him about these issues because he
is not involved in buying and selling the shares.
But there are very few institutions which have
sufficient resources and the right sort of people to
be proficient in the kind of activism that I am discussing.
Hermes now has 47 people involved in
all this, and it’s only because we set up these
commercial funds, in order to earn hedge-type
fees, that we have been able to allocate the
resources that we require.
I say that we are only scratching the surface,
but that is because it is very difficult to do this
right. I talk to a lot of institutions about this
wearing my Morgan Stanley hat, and many of the
investing institutions say, “Well, it’s not going to
add one basis point to my performance, so why
should I invest in all this There is a huge free
rider problem. We do all the work, at our cost,
and every investor gets the benefit.” It is a
conundrum for the institutions, and I don’t think
the institutions are doing better than, say, six out
of ten (possibly seven out of ten) in their
attempts at appropriate interventions in companies.
It is better than it used to be, but we’re not
doing a great job, and if you look around the
world at all the companies that institutions invest
in, there are really too many companies to look at
and not enough people looking at them in this
context.
Well, I’ve taken my fifteen minutes, but those
are the four questions, and I hope I have
answered my own questions too. There are probably
lots of other questions I hope you will ask
aside from the “why,” “what,” “how” and “who.” I
would also be interested to hear whether Ronnie
thinks this is a reasonable approach or whether
he thinks this is outrageous and that we should
get our tanks off his lawn.
Sir Ronald Grierson, our next
speaker, has had an
extremely distinguished
career in British corporate life,
Dr Paul
Flather
but I always think of him as a sort of European
Britisher, or a British European, as he is so
involved in so many different projects – not least
ours, of course. Ronnie, do you think boards are
“too blinkered” I heard “not qualified” and then
“tanks on the lawn” - what do you think
Thank you for that
Sir Ronald
over-generous introduction.
I would
European
Grierson
like, first, to express my
Chairman,
Blackstone
pleasure that the
Group, and former
Vice
Europaeum, which I
helped to co-found with
President, GEC
my friend George
Weidenfeld, has flourished
so remarkably under Dr Flather’s leadership. He
has done a fantastic job and we’re all enjoying the
fruits of it in this room today.
I hope it is not too disappointing, but I don’t
disagree with anything that Alastair has said. I
have never taken the view that it is wrong for
shareholders to make their wishes known, in
whatever form is most appropriate and most
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