LISA BUCKINGHAM: Shareholders should use their power

By LISA BUCKINGHAM, MAIL ON SUNDAY FINANCIAL EDITOR
Updated:

Trouble: Getting rid of Fred Goodwin is not proving as easy as hoped

Trouble: Getting rid of Fred Goodwin is not proving as easy as hoped

How simple it was for the Queen of Hearts. The merest slight was met with her command: 'Off with their heads.'

It was not so simple, as a Treasury Select Committee hearing discovered last week, when shareholders tried the same approach to bank bosses who had amassed suicidal levels of toxic debt.

Shockingly, Legal & General - the country's biggest investor - revealed that it had sought repeated meetings with Royal Bank of Scotland to clarify the bank's capital position, but was repeatedly batted away, only for RBS to turn round within a matter of weeks and seek £12billion of new funds from investors.

The rights issue was painfully completed, but Peter Sutherland, the bank's senior non-executive director (and outgoing chairman of BP) failed to put into action demands from shareholders that chief executive Sir Fred Goodwin and chairman Sir Tom McKillop should leave.

L&G is not given to grandstanding. It accounts for about five per cent of the stock market, is one of our most highly regarded governance institutions and prides itself on sensible discourse with company executives.

How on earth could the three senior people at RBS simply ignore such calls from their major shareholders, who, after all, do actually own the business - much as they must wish they didn't?

Peter Montagnon, head of investments at the Association of British Insurers, whose members speak for about one in three shares in the market, said there should be improvements in the way managements communicate with shareholders. He is right.

Shareholders have been accused of sleepwalking into the credit crunch. They allowed bloated executive remuneration packages, demanded cash from share buybacks that left balance sheets weakened and turned a blind eye to many a dubious management story.

Yet the Select Committee heard that L&G held no fewer than 26 top-level meetings with banking executives.

Unless L&G just popped in for a cup of tea, that sounds pretty activist. But as any
parent knows, questions about their little darling's homework are easily batted away until it is too late and notice of a detention arrives.

Shareholders do, however, have an opportunity to make greater demands on management. In the past there has been a reluctance to go public on disputes with company executives. This should no longer be the case.

Though investors claim applying pressure behind closed doors is the most successful way to encourage boardroom change, they should not shy in extreme circumstances from enlisting the support of others to call an EGM, rather than waiting patiently for the annual meeting to register displeasure.

Shareholders have a golden opportunity to impose change. They can refuse to support the current stream of rights issues - likely to total £30billion this year - without insisting on fresh curbs on executive remuneration.

If they need their backbone stiffened they have only to remember the utterly fatuous arguments that bank bosses had to be paid more than £1million before bonuses and pensions because they were so talented and in demand globally.

Shareholders should demand new oversight of non-executive directors and should refuse to support the appointment of any non-executive of a failed or tainted board to any other role.

They may not want a say over the colour of the chief executive's car or the seating arrangement in the atrium, but after Barclays' sale of shares to Middle East investors and last week's asset-for-share swap between mining group Xstrata and its biggest shareholder, Glencore, they must be more vigilant than ever that all shareholders are treated equally.

With many debating whether capitalism can ever develop a greater sense of social responsibility, institutional investors have an increasingly important role to play, not only to protect those who entrust them with their money, but also to watch out on behalf of those private individuals who are looking at the stock market as an alternative to earning nought per cent in bank accounts.

Small shareholders are beginning to step back into the market - if for nothing else than to top up their Isas before the end of the financial year.

They should be able to invest with confidence knowing that they can depend on strong organisations to keep management in check.

Most watched Money videos