Share traders should not govern companies
David Walker’s review of bank governance acknowledges the lack of effective engagement between UK companies and their shareholders and the contribution this made to the financial crisis. But it fails to recognise that weak shareholder engagement and control leaves a gaping hole in the UK’s corporate governance system.
In the UK, shareholders have a key role in corporate governance. Key areas, from directors’ pay to decisions about mergers and acquisitions, are left to shareholder rather than regulatory approval. This is based on the assumption that shareholder interests are aligned with the long-term success of the company and the term interests of other key stakeholders such as employees and suppliers. It assumes that shareholders have the ability and the incentives to act responsibly in relation to the companies whose shares they hold.
In reality, a declining proportion of the shares of UK companies are held by UK long-term shareholders – down from 52% in 1990 to just 27% in 2006, according to ONS data. Shareholders whose strategies are based primarily on short-term share trading rather than long-term share ownership have neither the motivation nor in all likelihood the capability to carry out responsible engagement with companies. In some cases, such as when shares are subject to short-selling or an investor has taken a ‘short’ position on a company’s shares, the shareholder may actually benefit from a company’s poor performance. Such shareholders should play no role in that company’s governance.
So what can be done? In our response to the Walker Review, the TUC has called for measures to distinguish between long-term and short-term shareholders in terms of their corporate governance role. Measures could include making right to vote shares conditional on a minimum ownership period, or increasing the voting power of a share according to the length of ownership. We also call for measures to boost long-term share ownership, such as increasing stamp duty on share transactions.
In addition, the TUC has always supported a different model of corporate governance that would require directors to balance the interests of different groups with a stake in the company, including employees and suppliers. We would like proper consideration – not the one-line dismissal it is accorded in the Walker review – given to the Continental two-tier board system, which in some instances includes employee representation on a supervisory board.
We need a far-reaching public debate about how to improve corporate governance and shareholder engagement, but the starting point must be – ‘it’s broken, so fix it’.