Paul Myners: The issue is ownership

In The Director’s Chair with David W. Anderson: As one of the UK’s most influential leaders on corporate governance, Paul Myners has a challenge for his peers: why haven’t their many reforms penetrated practice?

Paul Myners has résumé enough for three or four successful careers. One-time publisher of The Guardian newspaper, former City Minister in the government’s finance ministry, current fund company chair and partner as well as chair of the Court and Council at the London School of Economics, he’s an influential “outsider” who has thrived in the UK establishment while continuing to challenge the status quo, advocating for better governance and transparency. Here, Lord Myners discusses the inequities and deficiencies that concern him most—the power and responsibilities of institutional investors, and the governance movement’s lack of real success—in conversation with governance expert and adviser David Anderson.

Lord Paul Myners: "The governance debate has missed the relevance of fragmented ownership on the decision-making behaviour of public companies"

David Anderson You’ve acquired the titles, influence and wealth associated with the British establishment, but you weren’t born to it. Do you still feel like an outsider?

Paul Myners On the face of it, I am a clear member of the establishment, being a member of the House of Lords and Chair of London School of Economics and a former chair of Tate, but I’m not a natural member of the UK’s great and good. I spent the first 12 months of life in a home before being adopted into a blue-collar family from an isolated area. Early experience conspired to make me an outsider. It’s given me a freer hand. I ask too many awkward questions. Some say I bite the hand that fed me, as I don’t curry favour, but I do it with a deep thirst for debate and discussion. I’m remorselessly looking for better ways to do things. I don’t do whitewashes.

David Anderson You are a well-armed advocate for fairer, healthier capitalism. You’ve called repeatedly for higher standards in corporate governance. What’s your verdict on the impact you’ve had?

Paul Myners I’m not sure there’s much to show for the host of efforts of which mine have been but a small part. Changes have been more superficial than substantive. Governance codes have been rewritten but are largely motherhood missives that lack real enforceability. We’ve seen an emergence of an ineffective governance industry, do-gooders rather than powerful agents. Not much has changed in the field of law. The governance community must reflect critically on why reform hasn’t penetrated practice. All of us must be challenged as to what we’ve achieved.

David Anderson What explains this lack of progress?

Paul Myners It comes down to the structure of corporate ownership. In the last 50 years we’ve seen ownership fragment as a consequence of the accumulation of peoples’ savings in large funds to provide for retirement and health. Our public companies, owned by these investment-minded funds, are now effectively ownerless corporations. We don’t talk about a need for governance interventions in family businesses and private companies, because there’s clearer alignment between owners and governors, albeit measured in narrow terms of shareholder value. But in public companies we’ve seen this fragmentation accompanied by high portfolio diversification, as portfolio managers seek to capture β rather than α. The result is that the fiduciary owner—large institutional investors—has interests in so many companies it can’t possibly act as a proper fiduciary. These investors don’t think of themselves as owners. Consequently, they are not equipped or rewarded for performing the duties of ownership.

David Anderson As this shift in ownership structure has exposed flaws in public company governance, has the governance debate of the last 30 years missed the mark?

Paul Myners Yes, the debate has missed the relevance of fragmented ownership on the decision-making behaviour of public companies. Instead of addressing fund management companies, debate has focused within the public company on the board and management. Even here, where the debate has tried to address the governance weaknesses of ownerless corporations, it has focused more on board structure than on meaningful advancement in board practice. We’ve simply not focused enough on the behaviour of directors. We’ve created rules about board structures and designed a complex set of interlocking committees, but proof that we’ve missed the mark is this: audit and remuneration committees have gotten the attention. The nomination committee is the most important because it determines board and committee membership and thus the behaviour that will define the company and its ownership mindset. It has been almost totally ignored by governance experts.

David Anderson What has been the stumbling block to a widely shared understanding of this fragmentation?

Paul Myners The problem is there has been no real appreciation of the need to redefine the nature of institutional investor responsibility. There’s been a reliance on fiduciary precedent, which doesn’t cope adequately with the complexities of multiple layers of agents. Efforts at reform in governance have really been an attempt to address the loss of direct ownership perspective in corporate decisions at the board level, by goading boards into developing efficacious practices in lieu of what really counts—an owner at the table, or at least on the nomination committee.

David Anderson If changes in ownership structure precipitated our challenges, how should ownership be re-balanced to better suit today’s realities?

Paul Myners Fragmented ownership leads me to conclude we have too many public companies. Large funds in the UK have begun investing directly in private companies. In Canada, the largest institutional investors have already disintermediated the fund manager—a commendable achievement. Why should these funds want to invest in public companies when immediate liquidity is not a requirement and they face a de facto lower return for the ability to exit promptly? There should be fewer public companies each with far fewer shareholders, taking a longer-term view and showing conviction in their portfolio construction.

David Anderson Given your experience as chair of Cevian, a fund manager, how do you assess the capacity of institutional investors to bring ownership discipline to their portfolio companies?

Paul Myners I have a simple three-part test for fund management organizations. First, how well-resourced is the governance function of the fund, given the number of securities held? I recently spent time with a fund management group that has investments in over 4,000 companies worldwide yet employs only three people in its governance group. Second, are the governance people taken seriously by their colleagues? Often, governance people are not consulted about important investment decisions nor are they present at important decision-making meetings. Third, do the governance people have immediate and direct access to their own CIO or CEO? Typically they don’t. Against these tests most governance units in fund management organizations fall short. Most organizations are indifferent to the governance in their portfolio companies. There is little or ineffective pressure on the part of institutional investors to bring an owner’s discipline to companies via the tools of governance.

David Anderson You continue to be a critic of the fund management industry. How bad can it be?

Paul Myners The fund management industry takes a trillion dollars in fees and rents out of the world economy and in aggregate delivers little that is socially valuable. In so doing, it is allowed to exercise great power and influence. Fund managers influence decisions on the location of important R&D facilities and attitudes toward innovation or policies on tax avoidance. In so doing they can destroy lives and communities. Fund managers exercise huge soft power by reference to a simple metric—share price—without any challenge to the way they exercise that power and influence. Larry Fink at Blackrock and similar people have extraordinary powers to set the tone for the way in which we think about capital structures and the issue of unequal reward, but are not required to defend their positions or be accountable. Fink has risen to this challenge.

David Anderson What’s your objection to unequal reward?

Paul Myners The increasingly inequitable distribution of employment income is built on a set of beliefs around rewards and behaviours which simply don’t stand up to examination. True to form, executive remuneration often involves the use of a currency—the company’s equity—which is often inappropriate, undervalued and inefficient. There is little evidence to support the view that, beyond a quite low level, financial incentives productively influence performance. Evidence suggests gross inequality in organizations is alien to the collective pursuit of corporate purpose.

David Anderson How ought boards to structure executive pay?

Paul Myners I have a basic rule that if people are paid more than 150% of those who report to them, a bell should ring. At the highest levels of corporations, remuneration often exceeds this ratio. It’s a litmus test because it’s often not healthy for the organization. Why have we allowed this distancing? Are we failing to recruit good people lower down? Have we given too much power to the chief executive? I think it’s an agency failure. Executives realized that the door was open and if they pushed there would be no resistance. Here, too, ownership matters. Institutional investors like to see reward structures replicating goals set for fund managers.

David Anderson Has the manner in which fund managers are paid influenced both executive pay and short termism in corporate decision-making?

Paul Myners Yes, a fund manager in the environment of highly diversified portfolios has limited interests in the long-term health of the underlying company. They are but owners of a temporary claim on the company. The fluidity of their ownership elevates the short term over long term. Research shows CFOs regularly kill projects with long-term potential that would be disruptive to the short-term expectations of the market and hence detrimental to their compensation. The use of shares as compensation for executives has been pushed by fund managers. The pressure to enhance the short term at the expense of the long term is strong.

David Anderson How can owners, boards and management together defeat short termism?

Paul Myners We need to reassess and articulate a better sense of corporate purpose. We currently define corporate purpose largely in terms of shareholder value, as measured by share prices. Shareholder value is the bedrock of how we explain our performance and reward people, yet it has nothing to do with purpose. We’ve elevated the financial owners’ interests to the exclusion of others. Ironically, this is frequently not even in their interests, as share price is frequently wrong as an indicator of value. Capital markets have achieved a reverse alchemy, turning long-term capital into short-term; gold into lead.

David Anderson Why have influential investor bodies such as the International Corporate Governance Network (ICGN) not done more to address governance problems arising from ownership structure?

Paul Myners I’m bound to conclude the ICGN is beset by conflict of interest as any other trade body, and like many trade bodies, tends to end up speaking to the converted.

David Anderson Where should investors begin to have more influence?

Paul Myners Investors should become intensely involved in selecting board chairs. The appointment of company chairs is a highly political and stressful exercise. It’s often done by the self-appointed nominations committee and favours internal candidates, several of whom joined the board in the belief that they had been promised the chair! In my view, investors should sit on the appointing committee. That committee should ask itself how much value it places on incumbency. I start from this position: persuade me why it would not be good to have fresh eyes and new perspectives, rather than starting with the other perspective which is easily arrived at.

David Anderson Capable directors don’t always behave well collectively. Why do boards have difficulty living up to their potential?

Paul Myners We struggle to get constructive challenge on boards. We want members of the board to listen and respond respectfully, but that’s often an excuse for not getting to the heart of the issues. I sat on a board with a clear protocol to limit your questions. You simply were not meant to ask a third question on the same subject, on pain of clearly irritating the chair. If the third question should never be asked, you don’t get beneath the veneer. Chairs must set the tone for the type of culture and behaviour we want to see.

David Anderson Do you see any bright spots in current governance practice?

Paul Myners One of the few advances has been the board effectiveness review. When done well, it can provide a necessary reflection on a board’s composition, performance and priorities. It’s a highly specialized field that shouldn’t be done as a door opener by headhunters, law firms or accounting firms. Unlike in the UK, in the Nordic model investors make up the nomination committee, appoint the board evaluator and see the results. As such, these investors understand the needs and culture of the board and nominate directors accordingly. In the UK, we are told who carried out the board review but do not know if the review was performed well, the results were good or bad, or what meaningful action has been taken. Sharing review highlights would begin to reconnect owners with their companies.

David W. Anderson, MBA, PhD, ICD.D is president of The Anderson Governance Group in Toronto, an independent advisory firm dedicated to assisting boards and manage- ment teams enhance leadership performance. He advises directors, executives, investors and regulators based on his international research and practice. E-mail: david.anderson@taggra.com. Web: www.taggra.com

Paul Myners — Biography

Primary roles Chair of the Court and Council, London School of Economics and Political Science; Chair and partner, Cevian Capital LLP

Additional roles Life Peer, House of Lords, UK parliament; Non-executive chair, Autonomous Research LLP, Edelman UK, Nomad Holding Ltd; Non-executive director, Ecofin Water & Power Opportunities plc, MegaFon, RIT Capital Partners plc

Former roles

Government and civil society: Financial Services Secretary (City Minister), HM Treasury; Member, Prime Minister’s National Economic Council; Reviewer of Institutional Investment for HM Treasury—Myners Principles on Asset Manage- ment; Independent reviewer and Senior Independent Director, The Cooperative Group; Chair, Low Pay Commission, Personal Accounts Authority, All Party Parliamentary Group on Corporate Governance

Private sector: Publisher, The Guardian, The Observer; CEO, Gartmore Investment Management; Chair, Gartmore Group, Guardian Media Group, Marks & Spencer Group plc, Aspen Insurance Holdings Ltd.; Non-executive chair, Ermitage, Land Securities Group; Deputy chair, PowerGen; Non-executive director or member, Bank of England, Bank of New York, Land Securities Group, Marks & Spencer Group plc, National Westminster Bank plc, Platform Acquisition Holdings Ltd., Telefónica Europe plc, The Co-operative Group Ltd., Synovia Capital LLP; Executive director, GLG Partners Inc., Henderson Global Trust plc

Charitable service: Chair, Tate; Trustee, ARK, Glyndebourne Arts Trust, Smith Institute, Tate Foundation

Academic appointments Executive Fellow, London Business School; Visiting Fellow, Nuffield College, Oxford University

Education Honours degree in Education; Certificate in Education, University of London

Honours > Commander of the British Empire > Honorary Doctorate in Law, University of Exeter > Honorary Fellow, Association of Corporate Treasurers

Current age 67

Photography: Zoe Norfolk

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