Good Governance Should Be Next Focus

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Byline: Kit Bingham

Europe's fund managers are under increasing pressure from their pension fund clients to demonstrate cogent and active corporate governance policies.Jim Stride, managing director for UK equities at Axa Investment Management UK, says: "It is ultimately going to be impossible to supply fund management services to external clients without a clear governance policy and without reporting to clients on how you have exercised the ownership rights attached to shares held on their behalf. Europe is following the UK and the US in this area."

Stride says fund trustees and fund managers have concluded that an active and engaged approach to corporate governance adds value. "There is a general recognition that better corporate governance in the long run gives a lower cost of capital. Economically, it is as straightforward as that."

The economic argument is bolstered by evidence from the US and Europe that governance failure carries a high price. Jean-Nicolas Caprasse, a partner with Deminor, the Brussels-based consultancy which provides governance analysis to pension funds and fund managers, says: "There is a lot more thinking about corporate governance. Asset managers cannot ignore it any more.

"When we met fund managers last year, they were firing dozens of people and were not thinking much in terms of providing corporate governance analysis to their clients. But Ahold and other failures have prompted people to think these issues through more closely."

Stride says: "Attention to corporate governance has been heightened by events such as the collapse of Enron, Tyco and WorldCom. But there have also been events from a European perspective, such as Vivendi or Ahold. They highlight the need for greater transparency, control and improved checks and balances."

The problem for fund managers wanting to develop an enhanced approach to governance is that establishing specialist teams and securing research is expensive.

While the value of good governance may be apparent at a macro level, it is difficult to identify in quarterly performance figures.

The result is that fund managers are concentrating on "low level" activism, such as voting their shares. Caprasse says: "We have seen a surge of demand for basic corporate governance services, such as voting advice. Asset managers want to show clients that they are doing something in this field, but only rarely do they commission detailed, high-level research."

There is also little sign in Europe of fund managers establishing significant governance teams, with a handful of UK managers being the exception.

Managers such as Morley Fund Management, Isis and Hermes have committed substantial resources to governance analysis. Hermes, for example, has a governance team of 10, the biggest dedicated governance unit of any fund manager worldwide. Certainly no fund manager in continental Europe comes close to matching this kind of headcount.

The UK's leadership is partly due to its open corporate culture and the relative importance of equity investors. But UK fund managers are also more engaged in governance because of pressure from the government.

The UK Pensions Act 2000, for example, required funds to publish governance policies and communicate them to their managers. …