UK - Companies and institutional pension and saving funds should be made to pay a levy to support effective shareholder engagement, Peter Butler, CEO and founding partner of Governance for Owners, told IPE last week.
He argued that this is the only way to tackle the 'free rider' issue - where non-active shareholders benefit from governance improvements secured by more engaged investors - which itself discourages more widespread engagement among institutional investors.
"We won't solve the problem of the lack of institutional shareholder engagement until we do something about the free rider issue, and the only way to tackle that is to enforce engagement as a fiduciary duty and create a pot of money to ensure that there are enough suppliers of governance services out there for those investors unable to do it themselves," he said.
The pot of money would be funded by "a small levy" on companies, asset managers and institutional shareholders, collected by a regulatory body under the FSA or FRC whose "main responsibility would be promoting good engagement on behalf of shareholders, collecting the levy and making sure that money is not wasted," Butler explained.
Under a market-based solution, the suppliers of those services could be asset managers who wish to focus on this issue, Butler said, or ultimately there could be a wide range of providers including industry bodies, specialist providers or large pension funds.
"As a shareholder you could decide to do one of two things: pay the levy and satisfy your fiduciary responsibility to engage in that way, or demonstrate that you can exercise that responsibility yourself, and perhaps even sell the service to other investors via the regulatory body that collects the levy," said Butler.
Asked how this levy-based system would sit in an international context, Butler confirmed that overseas shareholders would have to be involved, probably by having seats on the board of the regulatory body charged with raising the levy.
"In effect international companies will be paying for some of this because part of the levy would be on companies, which would mean that a cost would be passed on to institutional shareholders in those companies," he said. "In that way you'd hope to generate some interest and engagement from those overseas shareholders in how this is done."