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IPE Views: Liboring under false pretences

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The Libor and Euribor fines expose not only the importance of engagement, but also the cost of inaction for pension funds, says Jonathan Williams.

The European Commission this week announced the latest in a slew of fines against banks for misconduct – not, this time, for mis-selling products to retail clients, or for their role in triggering the sub-prime mortgage crisis, but the more complex matter of colluding to manipulate the inter-bank lending rates that govern global financial institutions’ lending.

The €1.7bn Libor and Euribor charge levied by the Commission against six banks may be dwarfed by the multi-billion settlements agreed between JP Morgan and the US Justice Department, but they add to an ever-growing bill for shareholders of lost dividend and equity value. Share prices only now have certainty of outcome, two years after proceedings began and more than five years after financial stocks took a beating in the wake of the Lehman Brothers collapse.

As Mark Fawcett, CIO of the UK’s National Employment Savings Trust, said in late November, the $100bn (€73.6bn) in fines suffered by the largest US banks in recent months serves to underline the financial cost of failing to focus on stewardship and governance issues.

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“This is not just a ‘nice to have’ thinking about using our stewardship role appropriately, it’s a must. And it’s not just for the long term, it’s to protect members’ money now,” he told delegates at a National Association of Pension Funds’ conference.

Trustees and pension managers will be all too aware of their duty to preserve and increase the fund’s value. But many – such as the Swiss pension association – will often point to the cost associated with engaging with companies in which they only have small holdings by exercising their right to vote.

Of course, making use of shareholder votes is not the only, or best, way to engage with firms. In fact, some might appreciate, and be more responsive, to a quiet word ahead of an AGM over a potentially humiliating shareholder resolution.

To this end, the UK’s Kay Review recommended the launch of an investor forum, which will be launched next summer.

Despite his enthusiasm for greater cooperation between shareholders to tackle any underlying problems within listed companies, James Anderson, the chair of the working group in charge of the investor forum, seems uncertain if the forum’s existence now could have prevented the Libor fines.

Framing the question around a forum’s ability to prevent the damage inflicted on RBS by its acquisition of ABN AMRO, he says the problems would have started occurring much earlier on than immediately prior to the financial crisis.

“Fred [Goodwin, chief executive at RBS during the ABN Amro deal] was much more obsessed about whether the filing cabinets were tidy than whether he understood what was going on, or what they might be good at – particularly the investment bank side,” he adds.

He notes that, ahead of the problems at the bank, he sold many of the shares his clients held in the bank – a decision vindicated by the fallout that was to come.

“But it would have been far better, ultimately, if we had all said ‘Look, there is a real serious problem at RBS’,” he says. “Perhaps taking collective action would have been intensely valuable within that environment.

“It was plainly an organisation in which narrow monetary targets and incentives were the dominant ethos, more than anything else – so I think having a strategy from that point of view and having a different set of values, if you like, might well have made a difference.”

Whereas Barclays and UBS shareholders saw the banks avoid €690m and €2.5bn fines, respectively, over their involvement with the euro and yen interest rate cartels, the potential for significant fines – and the combined €1.7bn raised from Deutsche Bank, RBS, Société Générale, Citigroup, JP Morgan and RP Martin – underline the importance of shareholders assuming an interest in their portfolio.

The past relaxed attitude of shareholders is not only detrimental to the economy as a whole, but directly impacts pension trustees’ ability to make good on benefit payments. It’s clear that engagement is now a must – not only for the large asset managers, or during times of scrutiny such as last year’s shareholder spring – but on a day-to-day basis, outside of AGMs.

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