Overview

The view that institutional shareholders' should engage more actively with their listed investee companies is gathering momentum. Whilst it is difficult to produce hard data that shows that such engagement improves shareholder returns, the recent bank failures and continuing upwards spiral of executive remuneration have persuaded the government and regulators that more needs to be done.

Recommendations for more active shareholder engagement are not new, but the changes to UK company law introduced by the Companies Act 2006 failed to make significant reforms in this area. If anything, the abolition of the concept of "ultra vires" (the doctrine which allowed investors to halt transactions which did not conform to the stated aims of the business in which they had chosen to risk their capital) served to underline the shareholder as passive investor. A compromise position on shareholder engagement was reached, with the government taking powers which would enable it to compel institutional shareholders to disclose their voting records, but coupled with a promise only to use these powers if a voluntary regime failed to improve disclosure and only after a full consultation. (This has prompted a significant increase in the disclosure of voting records by fund managers, according to data from the Investment Management Association.)

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