Bookshelf: Corporate influence

Investor responsibility is at the top of the agenda, but how should shareholders exert their power?

by Rory Sullivan, World Business

Before commenting on The New Capitalists, I should set out my view on the question of investors' responsibilities,. That is that institutional investors have a responsibility to encourage the companies in which they invest to adopt higher standards of corporate governance and corporate responsibility, and to encourage these companies to develop and implement strategies to ensure the longer-term sustainability and success of the business. This book - written by Stephen Davis, Jon Lukomnik and David Pitt-Watson, who have been among the leading corporate governance advocates in the US and the UK - should prima facie speak to many of my prejudices.

The book sets out with the objective of explaining why and how individual investors - through their participation in collective savings vehicles such as pension funds - can exert influence on institutional investors and thereby ensure that companies are run in the long-term interests of their ultimate owners. The authors present examples of corporate excesses and failings, and identify a range of causes, including the failure of investors to discharge their proxy voting responsibilities, conflicts of interest in the investment industry, inappropriate incentives for asset managers and weaknesses in accounting frameworks. They argue that individual investors are starting to exert influence directly on the companies (in particular through proxy voting), on politicians and policy-makers (through lobbying for corporate regulation and greater public access to information) and, perhaps most significantly, on their pension funds and asset managers.

Yet, disappointingly, I think that the book fails to do justice to these issues. It has four major problems: the first is that the book is extremely US-centric in its analysis, to the exclusion of the experience in other share-owning democracies. For example, suggesting that investors should have the right to approve remuneration reports is a sensible recommendation, yet the authors do not discuss the experience in the UK where such a provision has been in place for some five years.

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