UK -  Paul Myners, the City Minister, has warned trustees should do more to use their shareholder positions, as part of their "legal duty" to protect the value of assets held on behalf of beneficiaries.

Speaking at the National Association of Pension Funds (NAPF) seminar on corporate governance, Lord Myners argued shareholders are an owner of a business irrespective of the size of the investment, and said that ownership brings both rights and duties to ensure the company acts in the interests of all stakeholders.

He stated: "If you own or manage shares on behalf of others, as trustees do, you cannot justify a failure to ensure effective governance. You have a legal duty as trustees to your beneficiaries to protect the value of assets held in trust on their behalf and a duty to the businesses in which you invest. Shareholders need to meet these responsibilities as owners and should live up to their fiduciary obligations."

In his speech, Myners suggested "seemingly few [trustees] want to do governance and attempt to free ride on the efforts of others to hold boards to account". He argued this has led to fragmented share registers and the non-existence or inconsistency of investor engagement.

"The true owners, pension fund trustees and others, have been intermediated out of the story by agents who do not think and act as economic theory tells us they should as owners," said Myners.

He argued applying this strategy means investors have had to accept a dilution of their interests where government and the Bank of England have stepped in to help banks, for example, or take a stronger position in shareholder engagement.

In particular, he highlighted research published yesterday showing British companies  paid £10bn less in dividends in 2009 than the previous year, and warned this downward trend "could have direct and costly consequences for the funding status of defined benefit pension funds and insurers". (See earlier IPE story: Dividend-seeking investors warned against reliance on energy)

He suggestedt there are a number of ways for the industry to take the initiative, including the establishment of an industry-led review on the pricing practices in equity underwriting.

He argued: "Government should not seek to intervene when there are perfectly practical ways in which investors can act in their own interests; using their voice and influence to deliver satisfactory outcomes. When, however, poor governance requires the taxpayer to pick up the tab there is a role for government and the regulator."

Highlighting the work of the Walker Report last year, Myners said the recommendation to get fund managers to disclose compliance with the new stewardship code should "encourage trustees to consider engagement track records in their fund manager selection criteria and be more probing about governance strategies, competence and records and in so doing address aspects of the free rider effect".

As part of this strategy, he said an independent industry body should be established with a mandate to represent institutional investors and raise the profile of governance and engagement as an investment strategy.

"It should be independent and membership should comprise mainly of long-only, long-term institutional investors whose clients have most to gain from good governance. It needs to be chaired by a respected industry expert, an individual embodying the organisation's credibility and independence. Its role should be to coordinate investors on governance and to speak with one voice for investors as a whole and not on behalf of any one industry group, type of product provider, faction or individual," he said.

He also highlighted discussions by the Institutional Shareholder Committee (ISC) on restructuring options, and suggested the organisation has the potential to step into the "vacuum" if it makes changes such as distancing itself from various industry trade associations.

In the meantime, he said trustees should challenge the actions taken by fund managers on remuneration issues, while also pressing for simpler payment packages in the future, particularly in relation to banks.

He added: "They should also question why compensation schemes need to be revised quite as frequently as they are. A good compensation scheme should be quite durable, so we have to ask again why benefit consultants in particular might be generating a constant revision of the guidelines and structures of benefit schemes. This is what you as an owner ought be able to do."

Joanne Segars, chief executive of NAPF, noted in her opening remarks while "we recognise and have acknowledged publicly that we could have done more and perhaps should have done more", pension funds do very little direct investments these days.

She added: "A very large part of that investment activity is done on the pension fund's behalf and at the trustee's discretion by fund managers. So it is vital these fund managers work effectively for trustees and report accordingly."

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