Banking failures raise corporate governance awareness

Failures in the banking system have raised consumer awareness of corporate governance issues and will lead to investors asking considerably more in-depth questions of advisers in future, according to Co-operative Asset Management (CAM).

The standalone investment arm of the Co-operative group, says corporate governance has been spotlighted by the strategies of banks, in particular the remuneration packages of senior executives.

Senior fund manager Mike Fox says CAM's ethically and socially responsible investment system indicated that it should go underweight banks and financials 12 -18 months ago, a strategy which saved its investors from much of the pain of the plummeting share prices that occurred in the sector.

"We looked at the remuneration packages of many of the banks and considered that most senior executives were being incentivised in a manner that was not to the benefit of the companies they were running," says Fox. "Their focus was on acquiring either market share or other companies through aggressive action. We asked, how can banks be growing by 20% pa when GDP is only growing by 3%. As we know, they were doing so by lending to sectors to which they would not have done had they been incentivised in a more responsible way. The executive packages may have worked for the first year or two but the consequences have now come home to roost."

As a result, Fox says, investors are now very aware of the role of remuneration in how a company is directed and are more likely to be critical of executive pay deals.

"In our investments we focused on executive incentivisation in 2007-2008 and in 2009 we will be doing the same with the level of bonuses of senior management, particularly where targets have not been achieved," he adds.

CAM operates by blending the financial element that produces outperformance in its portfolio returns with a socially and environmentally responsible investment ethos.

This is done in two ways: through screened funds that actively do not invest in areas deemed ethically, environmentally or socially unacceptable and through mainstream All-Share funds that will invest across the board but apply an active engagement overlay. "For example, we will question retailers such as Tesco and Primark offering exceptionally cheap goods just how they are able to do so, where they are manufactured and how," says Fox.

CAM's corporate governance record is also transparent, he adds. "Investors can see from our website how we have voted and why."

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