Press release by Polhill Communications on behalf of Sage & Hermes, 14th March 2005

Corporate Governance Activism can stifle enterprise and damage investment returns

In recent years, corporate governance best practice has increasingly compelled institutional investors to intervene in the management and strategy of companies in which they invest. However, investment expert Dr Arjuna Sittampalam argues that widespread shareholder activism can actually damage investment returns for institutions’ underlying investors and, by stifling enterprise, can be harmful to the wider economy.

Over the past decade, there has been considerable movement in the UK towards an activist stance on corporate governance, fuelled by the recommendations of the Cadbury, Greenbury and Hempel Committees, the Combined Code, the Myners Review and the Higgs Report. In his new book, Corporate Governance Activism - Desirable Doctrine or Damaging Dogma?, Dr Sittampalam argues that these recommendations are based on the mistaken belief that institutional investors have a fiduciary and societal duty to their clients to intervene in the board decisions of companies in which they invest. In reality, intervention by fund managers could jeopardise investment returns for their clients, stifle enterprise, detract from market liquidity and efficiency, reduce savers' trust in institutions and increase insider dealing.

Dr Sittampalam contends: "The evidence is that the fund management industry is already playing its part in improving corporate governance through the stock market mechanism and there is no call to risk the potential disadvantages of large-scale institutional intervention. By implicitly encouraging all institutions to indulge in activism regardless of circumstances, the various codes and recommendations increase the potential dangers of intervention. The vagueness of several words used in official codes such as 'dialogue' and 'engagement' makes matters worse by allowing selective interpretation of the guidelines."

He continues: "All those concerned with fostering enterprise and business efficiency, including politicians, regulators and corporate bodies, need to ensure that activism does not adversely affect industry and the long-term vitality of the economy. To this end, there is a strong case to review references to institutional activism in official governance codes"

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