A review of corporate governance in UK banks and other financial industry entities: the role of institutional shareholders Robert A. G.

Monks

Robert A. G. Monks, in his article A review of corporate governance in UK banks and other financial industry entities: the role of institutional shareholders, states that the problem with the British and American corporate governance system is that the majority of the shareholders, both institutional and individual, do not act as owners. The aim of this article is to determine why there is a lack of commitment among the majority of the shareholders and to suggest some measures in order to encourage them to have a more active role in the companies they own. In the first section of the article Monks observes that 30 per cent of the U.S. and U.K. shareholders invest in index mode and 20 per cent, based on mathematical-based algorithms. In both these cases the rulings are made by mechanistic formulae with no human decision-making being present. Another 30 per cent rely on their friendly broker, meaning that only 20 per cent of the shareholders are actively involved in their portfolio companies and are prepared, if necessary, to take steps to ensure that flaws in the governance, strategy or execution by managers are properly addressed. Moreover, the author notes that the number of these intrinsic investors (such described by McKinsey, the premier consulting firm for corporate management) may be weakened because of the dirty little secret of benign neglect of conflict of interest. Monks continues by making a short presentation of the major categories of institutional investors from the perspective of activity encouraging conflict of interest and thus inhibiting responsible activist ownership. Furthermore, Monks acknowledges another issue that suppresses shareholder activism the negative publicity. He observes that the ones who volunteered to be a leader of shareholder
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activism were faced with undesirable problems of publicity and sometimes conflict of interest. The author further reinforces this statement by quoting what the former CEO of UK-owned Crocker Bank, Frank Cahouet, replied to him in a letter: We are very reticent to position ourselves as an activist shareholder in domestic or international securities. The problem for us is how we are perceived by our customer base. The risks are such that it probably does not make sense for us to take an aggressive position. Monks continues by presenting the opinion of the American economist Alan Greenspan on this matter, which is that the todays corporate governance system will probably continue to be guided in the same manner that it always had by the CEO. This direction could only change if the shareholders would begin to exert more control concerning corporate matters than they are currently willing. Monks argues that Greenspan, while confirming the right place to begin, does not take into account the fiduciary law or rather the disappearance of any practical or legal respect for the fiduciary standards. In order to enforce the changing of governance trends and to encourage shareholder activism, Monks advises that the government should be involved. In his opinion, only the government has the power to clearly define the responsibilities of shareholders. Concerning the index funds, if they are to be an element of shareholder activism, they should focus on a more holistic approach, relating to the market place as a whole. By contrast, the intrinsic holders should focus on individual companies. In the last part of the article, Monks comes with a series of proposals in aid of the system of effective stewardship, such as: the government should affirm the fact that the active participation of shareholders in their portfolio companies is in the national interest and that there should be no power without accountability; all pension funds trustees and other fiduciaries holding shares must focus on the long term benefits of its shareholders; shareholders should have the right and the duty to nominate at least three non-executive directors per major quoted company. The author concludes that these changes can only be made through explicit legislation and commitment to enforcement by all the branches of the government.