Big investors told to get tougher with banks

By Raji Menon

LONDON (Reuters) - Institutional investors will be made formally accountable for the first time for their engagement with bank boards as part of a raft of new measures to boost corporate governance in the financial industry.

In a widely anticipated report, David Walker said on Thursday the Financial Services Authority (FSA) will monitor whether fund managers are fully disclosing their compliance with new rules on engagement with banks.

Walker, tasked by Prime Minister Gordon Brown to examine the governance failings that sparked the near-collapse of the banking industry, also proposed greater powers for the Financial Reporting Council (FRC) to ensure fund firms stick to new "principles of stewardship" set out by an industry body.

Institutional investors, the biggest owners of London-listed companies, have been blamed for failing to demand greater accountability from companies, especially banks, in the financial crisis.

Last month in its first official response in the wake of the financial crisis, the Institutional Shareholders Committee (ISC), issued new guidelines in a bid to strengthen investor activism.

The ISC rules will form the bedrock of the new principles of stewardship that all UK fund managers will have to conform to on a "comply or explain" basis, Walker said.

Walker told Reuters: "These proposals are meant to be very significant. Some fund managers will not like this - this is tough.

"What I am trying to do is make institutional shareholders behave more like owners. I am saying 'You guys are powerful and you should use the power you have in a more effective way with an eye to improving sustainable performance in the long term'."