Shareholders, including institutional investors, were at the core of the obsession with short term returns by corporates, and are key to its reversal, according to Sir Winfried Bischoff chair of the UK regulator, the Financial Reporting Council.
Bischoff, who is also chair of JP Morgan Securities, started his career at Schroders in the 1960s, at a time where the Schroders family owned 48 per cent of the company, something he attributes to its very long-term business-model thinking at the time.
But he says as ownership has shifted to shareholders they have been driving for higher returns.
“In the 2000s shareholders were demanding returns well over 15 per cent when inflation was 3 per cent, that is not sustainable and shareholders drove that. It’s up to investors to recalibrate that,” he says.
Bischoff encourages institutional shareholders to interact with the companies they invest in on an individual basis, and if they have no traction to then act collectively via groups such as the Investor Forum in the UK.
“There were two calls I’d always return as chairman of a company, no matter what happened, to my largest shareholder and to the regulator. I don’t think large shareholders have been as proactive as they could be,” he says.
“At the moment the power of the company is bigger than the power of the shareholder, it’s the principal-agent idea. The farmer produces the income but ultimately the owner of the land is more important. The shareholder is ultimately more important.”
He says the recent Business Roundtable statement expanding what the purpose of a company is, does not discount the importance of shareholders.
“I’m delighted the Business Roundtable came out that way. The statement does not say shareholders are not important but that it is wider than that. It takes me back to Joe Bower’s famous saying that ‘it is not the wealth of shareholders but health of the company that is important, and that includes the wealth of shareholders’.”
Bischoff has devoted his career to financial services, serving in many senior roles in banking including chair of Lloyds Bank, CEO and then chair of Schroders, chair of Citigroup Europe, and interim CEO (during the crisis) and then chair of Citigroup.
He says he is very worried about the level of debt in the global financial system. In addition to the huge amount of illiquidity and low interest rates, the fact investors were willing to invest in investments that are illiquid or not very credit worthy was a concern.
“I worry about that, it is very odd being driven into less and less credit worthiness in search for yield,” he said. “Pension funds have a fiduciary duty but invest in these structures. They are being driven by consultants to invest more in debt instead of equity, but pensions are there for the long term, this obsession with de-risking pension funds is overdone.”
Commenting on the recent independent review led by John Kingman, which recommended the dismantling of the FRC to make way for a new regulator, he said regulators are in a tough situation.
“He saw the FRC construction as a ramshackle set of buildings and wants it more connected. A regulator can’t win, if they are too tough they are seen as holding back business if there are business failures they are seen as not tough enough. We have had quite a number of corporate failures and John says you’re not tough enough,” he said.
On governance
Bischoff says good corporate governance is essential and can be kept under review through effective investor engagement.
The FRC has consulted on the UK Stewardship Code, which was world leading when introduced in 2010, but now needs to be, and is being, refreshed.
“Investors – those who put up their own money, not those who manage it – should demand high quality stewardship by their fund managers, and managers in turn must respond to that demand,” he said. “The new Stewardship Code – which has not yet been published, but the consultation on which has been largely completed – most significantly demands that fund managers not only explain their policies, but also then report on the outcomes they have achieved. This proposed major change, the disclosure of outcomes, rather than spelling out policies only, will be far-reaching and should allow clients and customers to make better informed and differentiated judgements on the distribution of their fund management mandates.”
Speaking on the regaining of trust, Bischoff says that respect needs to precede trust in business.
“Without respect, you cannot achieve trust. To achieve that, boards must be held to account to challenge senior management and the decisions they make for long-term viability of their company. For this challenge to work, it has to be realised that culture is an important factor of business success,” he said.
During his five years as chair of the FRC, there have been a number of steps to help business regain respect and trust including the updated Guidance on Board Effectiveness alongside the revised UK Corporate Governance Code.
He will step down as chair of the FRC next year but will remain as chair of JP Morgan Securities.
