Ever since the financial scandals of Enron and WorldCom that rocked the US, and more recently Parmalat in Europe, there has been a growing awareness among fund managers that they should be more actively involved in the running of the companies that they invest in.
On 10 January, the European Commission launched a proposal for a new directive to boost shareholder rights across Europe. The proposal seeks to remove some of the key barriers that stand in the way of investors exercising their full voting rights and to force companies to be more open in dealing with shareholders.
Internal market commissioner Charlie McCreevy comments: “Shareholders need to be able to get relevant information on time and vote without encountering unnecessary obstacles, wherever they are in the EU, otherwise they can’t exercise their influence properly and make sure that management is acting in their best interests.”
The commission’s proposal coincides with the launch of a report by the European Social Investment Forum (Eurosif), which highlights the importance of “active share ownership” for institutional investors, particularly pension funds.
Last year, Eurosif organised an informal conference that brought together some of Europe’s leading pension funds. All of them agreed that active participation in the running of the companies that they invested in has a positive impact on the profitability of their investment funds.
In its report, which serves as a handbook for those that want to better manage their investment risks across Europe, Eurosif highlights the shift away from restrictions set by national regulators to a much freer way of managing risk.
“Investors are now getting much more freedom in how they carry out their fiduciary duty, and this means that much more responsibility is being placed in the hands of the trustees themselves,” Jérôme Tagger, lead author of the handbook, said.
As an example, Tagger highlighted the growing acceptance of the so-called ‘prudent person’ principle in the EU’s occupational pension funds directive, which marks a shift away from rigid rules to a more flexible way of managing investments.
Erik Breen, head of corporate governance at Robeco AM, underscored the importance of investor co-operation in overseeing good governance of a company. “Often a group of shareholders engage together at the same time with a particular company, and prudent company management consults all shareholders at the AGM before implementing major changes.”
Eurosif also notes that globalisation is playing a driving role in the development of company-investor relationships, with investors acquiring more and more holdings abroad and companies increasingly relying on foreign investments to finance their growth.
“This makes breaking down barriers in Europe all the more important,” said Tagger, who welcomes the commission’s latest initiative.
The importance of active shareholder involvement in the running of a company was reinforced by news that 26 pension funds, led by ABP of the Netherlands, are suing Royal Dutch Shell for exaggerating its oil reserves between 1997 and 2003.
Sources at the pension fund say that, while ABP has a long tradition of active engagement with the companies that it invests in, in the particular case of Shell it did not actively push for better governance – although there had been some concerns about Shell’s accounting at the time.
There remains some doubt that giving more rights to shareholders would, on its own, have changed anything at Royal Dutch Shell. But the commission still hopes that by encouraging investors to be more actively involved in the running of the companies that they invest in, it can help speed up early detection of accounting irregularities before they cause too much damage to investors, the company and, ultimately, Europe’s financial market.
The millions of policyholders who lost their pensions and investments following the near-collapse of Equitable Life received a boost to their quest for compensation, following a decision by the European Parliament to set up a committee to look into the case – in particular, whether the British government failed in its duty to properly regulate the insurance firm as required by EU law.
Paul Braithewaite, secretary general of EMAG, expressed his delight with the decision: “We are very pleased that over 200 MEPs from a wide number of countries have been sufficiently sympathetic to support the requisition and to shine a torch on the British government, which has been trying very hard to sweep this matter under the carpet.”
The committee has 12months to submit its findings to the European Parliament, but an interim report is expected within four. Parliament does not have the mandate to refer member states to the European Courts, but it can put pressure on the commission to do so – and, if the findings of the committee come down on the side of the Equitable Life policyholders, it may be very strongly compelled to do so.