UK review calls for investor body to tackle boards

LONDON, July 23 Mon Jul 23, 2012 2:39pm BST

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LONDON, July 23 (Reuters) - A government-backed report has called for the creation of a new institutional investors' forum to help shareholders engage with companies more effectively and prevent Barclays-style board implosions.

John Kay, author of the report examining the impact of short-term profit-seeking in equity markets, said that fund investors would be able to improve returns to their savers if they engaged collectively with company boards rather than individually.

Kay told Reuters: "We have a problem of fragmentation in the asset management industry. And what we want is a collective forum that will give shareholders a single voice to address issues within companies."

He highlighted Barclays as a "classic illustration" where collective engagement would have ensured a more orderly transition for the board after the bank lost its top three executives in the fallout from the Libor rate-rigging scandal.

"The board has little credibility, the chairman is on his way out and there is no chief executive," Kay said. "What we have is a situation where fund managers are acting individually [to bring about change]. This is precisely the kind of issue we want to address."

The Kay Review of UK Equity Markets and Long-Term Decision Making was commissioned by Business Secretary Vince Cable in response to the takeover of confectioner Cadbury by U.S. rival Kraft Foods, which critics said was driven by short-term investors seeking a quick reward.

The report said that the key to restoring confidence in the markets was to ensure that pension funds, fund managers and companies refocus on fiduciary standards with the aim of putting the interests of savers and customers first.

As widely expected, Kay also recommended that companies link their directors' pay to long-term business performance, with incentives to be provided only in the form of company shares to be held until after the executives have retired.

Investor challenges to executive pay rises and management performance gained momentum with the so-called "shareholder spring" as shareholders voted down pay proposals in big companies including WPP, Aviva, Cairn Energy and Pendragon.

Alan MacDougall, managing director of corporate governance lobby group Pensions Investment Research Consultants (Pirc), described Kay's forum recommendation as "particularly helpful".

"The existing architecture for bringing together investors, now called the Institutional Investor Committee, has morphed from an original purpose not far from Kay's vision into a collective of trade bodies principally concerned with coordinating industry lobbying activity," he said. "A fresh start here would be very welcome."

(Reporting By Raji Menon; Editing by David Goodman)