Shareholder accountability

Written by YRK Reddy | Updated: Sep 29 2007, 04:40am hrs
Regulators, institutional investors and multilateral bodies have been pushing listed companies to adopt corporate governance norms swiftly to meet the demanding international standards set by the OECD. They are assessing country-level compliance in the form of reports on observance of standards, insisting on financing criteria being met, giving their thumbs-down on structures, procedures and institutions that do not match their expectations, and even penalising some firms.

The focus of many corporate governance specialists has now shifted to institutional investors and their own standards of accountability. Ira Millstein, the guru of global corporate governance, had pithily observed that there is need to clean things up. The International Corporate Governance Network (ICGN) had flagged this issue much ahead of the current crisis originating in the Mecca of corporate governanceit pointed out that shareholders cannot enjoy shareholder rights they demand without being accountable themselves. Many corporate watchers have called upon institutional investors to raise their own responsibility, accountability and transparency levels. Pension funds, insurance companies and mutual funds have also been receiving flak. There is little transparency on their policies for voting and appointment of directors in their investee companies. They are often seen to cozy up with the management. They are being accused of being far-removed from the interests of the true beneficiaries.

Sadly, the thousands of investors who comprise the public are dispersed and have no voice of influence in decisions made by institutions. There are also accusations that these intermediaries, which get more complex by the day, benefit from conflicts of interest that are not evident. It is believed widely that they are profiteering unduly by taking performance bonuses even as risks still loom large on the principals. As a result, there is now a call for disclosure of the compensation paid to brokers, advisors and fund managers. Observers allege that they place their own interests above those of bonafide beneficiaries. Hedge funds have particularly come under attack for their short-termism from several quarters, including trade unions. Some see them more as renters of shares than shareowners, given their short investment horizons. Mark Anson of Hermes has been cited as saying, How can shareholders practice good governance if they are flipping their portfolios every year

ICGN has noted the need of promoting corporate governance norms among all shareholders. It has brought out a shareholder responsibility statement that could serve as the essential framework for securities regulators for the setting of standards and oversight mechanisms. The internal systems are aimed at improving the quality of oversightbetter transparency and disclosures to all beneficiaries along the chain of complex intermediaries and measures to prevent conflicts of interest.

Other ideas proposed during the ICGNs 2007 meet include a public commitment to relevant codes of best practices and compliance; efforts to involve, educate and engage beneficiaries proactively; generation of active demand for accountability from beneficiaries; development of an ethical culture among investors; encouragement of long-term, sustainable investments; adherence to socially responsible investment standards; increased use of the Internet for the dissemination of meaningful and material information for the benefit of beneficiaries and stakeholders without resorting to obfuscation by information overload; and improvements in the regulatory/legal frameworks to facilitate an environment that creates incentive/disincentive mechanisms appropriate to promoting shareholder accountability.

Poor corporate governance among financial intermediaries is at the heart of the US subprime crisis. The cracks are probably due to an increasing imbalance between the interests of beneficiaries and the actions of their complex chain of agents eventually represented by institutional investors. It is time these shareholders start setting an example in fiduciary duty, transparency and disclosureswithout resorting to double standards.