Everybody? Somebody?  Nobody? Anybody?

There has been much head-scratching in recent months as the institutional investment community gets to grips with the various responsibilities for oversight that clearly did not fit together to prevent the financial crisis.

One recent provocative contribution to this debate comes from Professional Pensions, which this month published a survey: “Should pension funds do more to improve corporate governance in the companies they invest in?” .

The responses were interesting in a number of ways. Firstly, the fact that the question seems to have provoked a rather defensive response placed firmly in the context of the financial crisis and whose ‘fault’ it was, suggesting that pension funds, as institutional investors, are still smarting and scrabbling for a plausible scape-goat.

Secondly, the article cited a long list of other participants in the corporate governace improvement process. Whilst a valid list (including government, company boards, auditors, investment advisors, credit rating agencies, corporate governance advisors and regulators) in terms of identifying others who impact the governance process, the real mortar between all of these other bricks is that none of them bear direct economic consequences of a governance failure like the shareholders do.

The Professional Pensions article reminded me of the old gem about Everybody, Somebody, Anybody and Nobody. There was an important job to be done and Everybody was sure that Somebody would do it. Anybody could have done it, but Nobody did it. Somebody got angry about that because it was Everybody’s job. Everybody thought that Anybody could do it, but Nobody realized that Everybody wouldn’t do it. It ended up that Everybody blamed Somebody when Nobody did what Anybody could have done.

All of these participants exist because they add in some way to the governance process. What they add is in each way unique from the others, which is why they all contribute something to the whole. If the input of pension fund trustees was completely served by one or a combination of other agencies, trustees would need to have no interest in governance.  Lord Myners and others have sensitively, and correctly, pointed out that trustees have found out the hard way that this is patently not the case. This is, in effect, a team game, rather than one by which everyone assumes someone else is doing it.

As shareholders in a publicly listed company, a pension fund (as a legal entity) is literally a member of the company. Membership commands participation, whatever its shape or form. This cannot be ignored any more than it can be addressed directly by many of the smaller pension fund trustee boards up and down the country.  When Myners talks about the need for pension funds to show they are taking governance more seriously, it doesn’t necessarily imply pension fund trustees should micro-manage the boards of companies they are invested in. It does imply that trustess should ensure they are fully informed about the processes in place for ensuring their controlling rights are properly addressed, and how they should play their part.

That means not simply leaving it to the fund manager to deal with, but asking the fund manager pertinent questions about what they have done and why. It means not relying on the regulator to ensure the rules enforce ‘good ‘ governance for this would surely strangle enterprise. Auditors jobs are to report vital information accurately to shareholders, not to direct the board. Company boards are the agents of shareholders to ensure that the company is run in the interests of shareholders: they can not operate in a directional vacuum. Ratings agencies are only as good as the ratings model they employ –  but do investors understand that? Governance advisors do not share the same investment perspective as all of their clients all of the time, but do their clients understand the advice they are given and sometimes blindly follow?

An effective trustee will understand the inter-relationship between these bodies and the role that they play in the governanceprocess. It is this that it is important for trustees and regulators to understand, before better working together to contribute to a more effective governance model for the future.

Last Updated: 5 May 2009