UK - Institutional investors have a "major role" to play in addressing issues arising from the current financial crisis, as they share responsibility for the actions of companies and the resulting consequences, the UK's financial regulator has warned.

Hector Sants, chief executive of the Financial Services Authority, told delegates at the National Association of Pensions Funds' invesment conference in Edinburgh recent market events suggest non-executives of boards should play a greater role in the oversight of executive management and "I think the same can be said of institutional investors".

In his speech, Sants said the traditional belief is while shareholders have a responsibility as owners of a company, their loyalty is primarily to their clients so the main response when dissatisfued with a company is to "sell the shares rather than press for changes".

He outlined "some observations as to how investors could react to the crisis for the benefit of the longer term" as he claimed many delegates "may well maintain you are doing much of this but I do believe there is more that we can all do".

The FSA said it "would encourage" institutional investors to focus on four issues in their role as owners of a firm - governance, risk management, business strategy and compensation - though Sants warned" "To do that, however, you clearly both have to engage more actively with senior management and non-executive directors but also arguably organise yourselves more effectively for collective action."

Sants said the FSA will publish a formal discussion paper on 18 March on its detailed suggestions for proposed changes to the regulatory system, in the wake of the banking crisis, and said "what is, in my view, already clear is that there must be greater oversight and you as owners of the business must be active in the risk management process".

"A lesson for you from this crisis must be that greater interrogation of how well a company is managed and the adequacy of its risk controls are all material factors fundamental to investment management," he added.

In addition, Sants warned shareholders "must also take responsibility to be active individually and more importantly in collaboration with other investors to engage with senior management", although he pointed out "there are also specific questions around how institutional investors voice concerns about business strategy as well as management or performance".

He told delegates many of the failures of the last 18 months could be attributed to poor strategies and business models, and while he confirmed the responsibility for effective delivery is primarily the company management he argued "as investors you should challenge management to ensure their answers are credible".

That said, Sants claimed once an issue gets to a public vote then "often the stakes are too high to vote down" so the FSA "would like to see earlier intervention".

"Historically your influence has only been wielded at board level, it must now extend to the organisation as a whole which is where the real risk is" said Sants.

He also claimed many insitutional invetors, including pensions funds, were "too reliant and unchallenging of 'normal' channels of information" eg company announcements and annual reports, and highllighted an "over-reliance on credit rating agencies, external advice and a willingness to accept the views presented".

"Shareholders going forward have a duty, an obligation, to make that oversight role more effective," sid Sants.

"In order to discharge this obligation you not only have to be more focused and engaged in individual institutions but also you need to give careful consideration to how you more effectively achieve collective action."

He admitted in order to make informed decisions investors "need better information than they have had in the past, but claimed with the information available to investors "I believe more could have been done".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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