UK - Investors and bodies representing pension funds have criticised a proposal by UK City minister Lord Myners to boost investor engagement by creating a ‘two-tier' shareholder regime.

Speaking to the BBC in a programme aired on Saturday 1 August, Myners suggested banks should give more voting rights to what he described as loyal shareholders, who stay on as engaged owners for longer periods of time, than to those investors who sell early.

Pension funds are more likely to fit into group of investors considered to invest longer-term, however investment houses, shareholder engagement groups and investor  representative bodies have all attacked the idea as creating a two-tier system which would in turn create more problems than it solved.

Lindsay Tomlinson, chairman of the National Association of Pension Funds' (NAPF) shareholder affairs committee, said the differential voting rights would not improve investors' engagement with what are described as "ownerless corporations" because it fails to acknowledge the needs of pension funds.
"A two-tier shareholder system would not be able to take into account the need for pension funds to buy or sell shares based on external factors, in line with their need to look after their members' interests," said Tomlinson.
"A more effective approach would be to improve dialogue between pension funds and their fund manager agents with the companies in which they invest. This would help to ensure there is a better alignment of interests between long-term investors, such as pension funds, and investee companies," he added.

Karina Litvak, head of governance and sustainable investment at F&C, agreed a two-tier shareholder regime would be like "getting to the symptoms, not the causes" and claimed "it would create more problems than it solved".

She acknowledged that institutions and investors can feel uncomfortable with the responsibilities of shareholder ownership - especially in the case of pension funds acting on behalf of members - but argued the government "should think of ways to fulfil [investors'] responsibilities, rather than segregate them and make it worse" as any form of incentive is "ultimately not going to make it better".

Colin Melvin, chief executive of Hermes Equity Ownership Services (EOS), said while he supported the idea Myners' intentions to improve interest in long-term ownership of companies, he would have some concerns given his experiences of such activity in other countries.

"This might come up with unintended consequences," suggested Melvin.

"Specifically, if you provide longer-term holders with more rights, what then happens if they need to rebalance? Does the market seek to trade the voting right?

"It is also not clear whether, as we get more engagement. As we have seen with French companies, it often concentrates control with people who have particular points of view which are perhaps inconsistent with the long-term development of the business," added Melvin.

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