Pot calling kettle black

When the big corporate bosses met their investors over lunch, they turned the tables.

by Patience Wheatcroft, business and City editor of The Times
Last Updated: 31 Aug 2010

The communique issued after company chiefs and investment managers shared a meal at the RAC Club recently declared the meeting 'constructive and informative' and looked forward to more meals to come. The get-together has been characterised as peace talks, but the result was more of a standoff than a mutual embrace.

A look at some of the heavy hitters that accompanied CBI director general Digby Jones reveals a team unlikely to cower before a bunch of fund managers.

Far from arriving in a mood of contrition for any perceived boardroom excesses, they seem to have entered the RAC believing that attack is the best form of defence.

Sir Francis Mackay demonstrates his attitude to corporate governance box-tickers by chairing two FTSE 100 companies, Compass and Kingfisher, a responsibility that Sir Derek Higgs declared too much for any individual.

Outwardly the most affable of characters, Mackay has shown enough steeliness to have prised Sir Geoffrey Mulcahy out of Kingfisher before he was ready to go.

Sir Nigel Rudd is another CBI stalwart whose list of directorships has drawn criticism from investors. Besides chairing Pilkington, he is now installed as chairman of Boots and still finds time to chair car dealer Pendragon and sit on the board of Barclays Bank. Rudd has been as disapproving as some investment managers about the payments for failure that companies have made to departing executives, but he has repeatedly supported generous boardroom pay packages for those who stay.

Adding to the formidable corporate firepower were Lord Blyth of Rowington and Sir Victor Blank, both of whom have demonstrated a refusal to be influenced by adverse comment from often anonymous investors. Blyth, a former Boots chairman, ignored critics to carry out his job swap with John McGrath - he became chairman of Diageo, while McGrath left Diageo to chair Boots.

And Blank, a lawyer turned banker turned boardroom boss, has always been determined to do things his way, whether floating Burberry as chairman of GUS or refusing to dispense with the services of Piers Morgan as editor of the Daily Mirror, despite embarrassing revelations over his share dealing.

Having made a fortune years ago by backing the team that took over Woolworths and turned it into Kingfisher, Blank feels no need to pay lip service to those who pay his salary.

If the fund managers assembled at the RAC thought they could lay down the terms for a peace treaty, they underestimated the toughness of the opposition. The bosses have had enough of being brow-beaten by the corporate governance brigade and, after voting battles that have damaged the image of business as a whole, they are ready to fight back.

They started by pointing out that different fund managers demand compliance with differing codes beyond the official Combined Code. Perhaps the fund managers could try to be consistent.

And why do they often cast their votes against a move that they previously endorsed? Several of the corporate bosses had experience of painstakingly explaining to an investor why they had decided not to comply with an aspect of the Combined Code, being promised the investor's support and then, weeks later, finding that the investor had voted against the proposal.

The investors were not surprised. It was the result, they said, of the box-ticking being done by different people from those who managed the money. Well, suggested the corporate chiefs, would it not be sensible for such practices to be changed? If the meeting persuades investors to ensure that their voting reflects the views of those taking investment decisions rather than those who are making a career out of corporate governance, then it will have served a useful purpose. But there were other arguments that could have been deployed against the fund managers had they shown an appetite for continued high-profile hostilities.

Two years ago, Paul Myners, a fund manager turned gamekeeper, criticised funds for unnecessary trading of stock. 'About 70% of equity unit trusts would have produced better returns if the managers had left their portfolios completely unchanged for three years,' he said. Yet the latest figures, from consultancy Fitzrovia International, show a quarter of UK funds changing more than 75% of their investments over the course of a year, and three-quarters of them changing up to half the portfolio. Such dealing bumps up costs, but is cited as justification for high charges and the enormous salaries that some fund managers pocket.

Which takes us to Jones's trump card. For whereas quoted companies are being pushed for complete boardroom transparency, there is a cloak of opacity over how most fund managers make their investment decisions and are rewarded. If that was not mentioned over the RAC dinner, it surely will be soon.

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