This is a great interview with Paul Myners -- I hope you read it. Thanks to the folks at Responsible Investor for letting me post it.
By Hugh Wheelan, July 4, 2011
By his own account, Paul Myners, former UK Financial Services Secretary and now UK Chairman at Cevian Capital, made more speeches on corporate governance during less than two years in office (October 2008 – May 2010) than any of the other combined governments before him: “Some say too many…” he says, half in jest. But it is a theme that has come to define his outlook on the financial and corporate worlds he has straddled: from asset management (Chief Executive at UK fund manager, Gartmore) to the boardroom (Chairman of Marks & Spencer) and politics, to cite but a few of his many previous offices.
In institutional investment, the Myners Report, published in 2001 as a UK review, became a de facto blueprint for much of European pension fund governance, both internally and externally. To his credit, he’s never stopped banging the governance drum, even as he moved into the UK’s House of Lords in 2010 to become Lord Myners. A former journalist with a lively turn of phrase, he coined the term ‘ownerless corporations’ to describe company ownership that prioritises short-term, risky profit over long-term value, both financial and social. Speaking to Responsible Investor, Myners says Vince Cable, the current UK government Business Secretary is broadly supportive of the position. Cable’s recently announced investigation into investor short-termism led by John Kay, a leading economist and columnist for the Financial Times, suggests as much. The parameters of the review are classic Myners: examining the systemic problems in shareholder ownership and whether the investment chain between asset owners and managers is impeding better oversight of companies by their owners.
Describing the problem again, Myners is no less colourful with a metaphor for recklessness shareholders: “When you rent a car you tend to drive it a bit hard, and you don’t worry about cleaning it up before you hand it back. That’s what the stock market has become. You wouldn’t drive your own car in the same way.” Myners, however, can’t be accused of not putting his money where his mouth is. His return to the governance fray at the age of 62 with Cevian, a below-the-radar, activist fund manager, belies his appetite for the challenge. A multi millionaire, he has taken an equity stake in the firm, although he declines to say how much. Sweden-based Cevian, founded in 2002 by Christer Gardell and Lars Förberg, is Europe’s largest activist fund manager with €3.5bn of assets under management. The Florida State Board of Administration and the Canada Pension Plan Investment Board number among its clients. Myners says Cevian takes a “forensic look” at a company, its suppliers and clients to identify those it believes are underperforming and where potential valuation increases are not priced into the stock. These might include potential spin-offs, capital structure issues, but frequently, he says, board leadership deficiencies. Its average stock hold period is 3-4 years. Unlike some activist funds, notably in the US, Cevian prefers quiet diplomacy strategy with the dozen or so companies in which it has stakes. Its style is akin to Hermes Equity Ownership Services, the UK activist. “We want to work with companies to improve value and wouldn’t look to talk about that publicly until all other routes have been explored. We are in that respect, I believe, less muscular than the US style of activism,” says Myners.
Having joined an activist fund manager, he describes himself as “a bit more realistic” than when in government about what might begin to actually change the market in terms of better corporate governance. He believes shareholder activism could see some of the highest growth in assets, and that a growth to about 5% of the market could start to shift the other 95% forward to better governance practices: “The presence of a small, dedicated group of shareholders can work like antibodies to cleanse the whole, unhealthy body,” he says. Cynics will argue that Myners is cutting his coat to suit his cloth. He argues in turn that box-ticking has achieved little progress. Indeed, the Statement of Investment Principles (SIP) for pension funds that was mandated post the 2001 Myners Report, was seen by many as just that. To this end, he warns against the UK Stewardship Code (a 2010 voluntary initiative on shareholder engagement and voting), proposed while he was UK Financial Services Secretary, becoming “a kind of political correctness”. He disagrees with the position of the Financial Reporting Council (FRC) that oversees the Code, which he says appears to be seeking a maximum number of sign ups: “The 5% can talk to the 95% and we’ll see managers with different styles accommodated. I’d rather see proper governance conviction. I don’t want it to become just to become a gesture like the United Nations Principles for Responsible Investment.” Asked to explain his cynicism on the UNPRI, Myners adds: “It’s hard to identify what the UNPRI has done so far outside of collecting a lot of names.” He admits he has “a certain purist view” on such initiatives: “I don’t apologise for that. But, of course the world is more complex.”
He notes that the majority of fund managers behave entirely rationally by not doing much in the way of governance: “Most institutional clients don’t expect it, so why would they? It was the major problem with oversight of the banking crisis. But it’s hard, for example, to understand what the shareholders of RBS were doing at the time of the ABN Amro merger? The short-termism issue in investment is a difficult thing to fix, and I don’t believe I really achieved a great deal in government on a subject where I made a lot of speeches. What’s certain though is that there’s too much governance power in the hands of funds houses who make the smallest contribution to the bottom line: equity managers that on the whole underperform the index over time. I believe asset owners need to step up.” The latter have been somewhat reluctant to do so, despite Myners’ overtures both in and out of government. The relationship has sometimes been tense. Some within the pension fund community accuse the former Minister of being a rich poacher turned gamekeeper that misunderstands the resource constraints and priorities of smaller and medium sized asset owners. But Myners has identified areas of self-interest for asset owners where they seem strangely reluctant to go.
“It seems incredible to me that though Warren Buffet is the world’s most
successful investor, you don’t see many institutional investors mirroring his
conviction for long-term buy and hold strategies.”
He has been has been particularly critical of the Institutional Shareholders’ Committee (ISC), now renamed the Institutional Investors Committee (IIC), a grouping of institutional investor associations set up at the time of the Myners Report to promote collective engagement, and re-launched during the financial crisis to promote the UK Stewardship Code. Myners says: “The pension fund community is highly rational and quite conservative. I do think, however, that it is very poor that in the two years since they said they would revitalise the ISC (nowIIC), they’ve done practically nothing. The one report that did come out was on fees for rights issues, which was an issue pushed by me. They should also be looking at issues like the voting process, which is defective at the moment because votes get lost or are not processed.” The IIC has recently named an Advisory Council of top pension fund and asset manager chiefs, which could see that agenda strengthened.
Another issue that Myners believes is holding up long-term investing is a lack of relevant, transparent and independent sell-side research. Earlier this year he announced an investment into Autonomous, the research house set up by former Merrill Lynch star banks analyst Stuart Graham, becoming a Partner and Chairman. Autonomous is paid a fixed fee per annum for research. He says: “Sell side research seems to operate on a rather short-term basis. It seems incredible to me that though Warren Buffet is the world’s most successful investor, you don’t see many institutional investors mirroring his conviction for long-term buy and hold strategies.” Despite his time in politics, Myners believes government options are somewhat limited in changing the short-termist ownership culture. Nonetheless, he points to the nominations of shareholders to the board in countries like Norway and Sweden as something that could be legislated. The stakeholder/shareholder-driven agenda, he notes, is one Michel Barnier, EU Internal Markets Commissioner is leaning towards in his forthcoming EU Corporate Governance Directive. “I’m surprised few institutional investors have seriously taken on board his views. Barnier has seen that institutional investment is producing sub-optimal governance outcomes. There may be a shift away from the pure comply or explain basis that many of our governance rules are based on, which is valid because there are some serious issues with it. For instance, many companies don’t believe in the “explain” part, and there’s no case law to deal with that. There is a sense that many corporate governance statements are just produced by lawyers. Personally, I don’t believe any shareholder should vote for a director without meeting them. There should be something like a session to ‘meet the directors’.”
In a recent speech to the Association of British Insurers, Myners suggested that three or four “owner representatives” should be added to an investee company’s Nominations Committee and be included in the responsibility for selecting non-executive candidates to be placed before shareholders for vote. He said this would give shareholders better oversight of board and committee effectiveness, including that of the Remuneration Committee. He said: “This would seem to me to address one of the key anxieties in this space – can investors trust boards and committees to make wise and sensible decisions as agents and to put the interest of the company and its owners before all others?”
It’s an incongruity he comes back to regularly; companies and investors existing in separate worlds. The Financial Times’ Lombard column has called Myners ‘Preacher Paul’, alluding to his study interest in theology but also his lofty, lecturing rhetoric. In a light-hearted parish reference, Myners is happy to don the cassock, but leaves no doubt about his zeal. He recounts that he recently met a FTSE100 chief who told him his ideas were “rubbish”. However, after discussion, he says both found their ground was much more common than had seemed: “You could say that the sermon is not getting across that well, but once we take tea and biscuits in the vestry I think you find that many people agree that we have to find some way to solve this dangerous issue of ownerless companies.”