Peter Montagnon speaks like a man who has experience on both sides of the interview. He has constructed a career on the periphery of the world’s great financial debates. For 20 years Montagnon covered the development of the world’s capital markets for the Financial Times, reporting on the 1982 Latin America debt crisis, the 1997 Asia crisis and other watershed moments in the development of the global financial system.
But, frustrated after decades spent outside the quote marks, Montagnon endeavoured to build a career within.
In 2000, he joined the Association of British Insurers, a lobby group representing institutional investors, where he soon developed a reputation for being an outspoken defender of investors’ rights.
In April this year, he was appointed senior investment adviser at the Financial Reporting Council (FRC), which was looking to strengthen its relationship with investors and promote a new investor code.
On the fifth floor of the FRC’s Aldwych House headquarters, Montagnon is calm, almost eager to push on with the interview. He is confident, his answers unhurried, his words, measured, intoned.
“The press always panics first, journalists are not paid to think of answers,” he says. “The press is always geared up to challenge, it is not geared up to find answers and so the press actually presume rather quickly that there are no answers, but actually there have got to be and there have got to be people who find them.”
On Tuesday he stood shoulder-to-shoulder with business secretary Vince Cable, at London’s Grange City Hotel, in an event to promote the Stewardship Code. It represented the complete metamorphosis of Montagnon, from journalist to decision maker.
“I thought being a journalist was fun and quite nice, but there is an opportunity to do something more,” he says.
“When I was a journalist, I used to say to people ‘this is far too difficult you’re never going to do anything about it’ – if everyone said that, nothing would happen.”
In July 2009 former British banker Sir David Walker, released his long awaited post-crisis review into corporate governance, justifying new extreme recommendations by stating “it’s our children and grandchildren who are going to have to pay these costs so the basis for the anger and frustration is profound”.
On page 13 of the 142-page report sit recommendations 16 and 17, which call for a new set of principles for institutional investors and fund managers. The code, to be created and maintained by the FRC, was coined a “stewardship code”. The name stuck. Stewardship as a concept has come to underpin the FRC’s foray into investor regulation.
Guy Jubb, head of corporate governance at Standard Life Investments, described the term as “a tonal word – much better than governance – it has got a quality to it, it has got a professional quality.”
The 12-page UK Stewardship Code was released in July with the aim of promoting “purposeful dialogue” between investors and companies. Montagnon, drawing on his experience at the ABI, was put in charge of promotion.
Institutional investors represent a largely untapped governance source owning about 40% of shares in the UK and, by motivating this often quiet area of the market, it’s hoped there would be a population of investors ready to warn companies of the risky strategies which provoked the crisis.
“What we are trying to do with the code is to isolate, nurture and encourage a critical mass of people with a long-term interest so, when issues arise in the future… you will have people who are going to take the responsibility of ownership seriously,” Montagnon says. “There is a gap if shareholders are not actually acting effectively to do their bit,”
The challenge for Montagnon is to encourage sufficient engagement from the investor community. But investors can be a fickle, disparate and unmotivated bunch. Bringing them on board meant the FRC had to take an active role in promoting the code, and Montganon was leading the charge.
“It is a challenge and we have to confront and deal with it,” he says. “The climate for doing this is better than it was, because the system has been rocked to its core and investors know that. They have suffered and they don’t want to suffer in the same way again.”
He is careful not to say that the code could have averted the collapse of banks during the crisis, but does say that, if in place, it may have emboldened some shareholders to speak up sooner.
“If you look at the figures ascending to the takeover of ABN Amro, I think 95% of shareholders were in support of it. I wonder, I really wonder, whether those 95% were fully confident that this was a good idea.”
Montagnon believes some responsibility must fall on banks’ unwillingness to listen and respond to their concerned shareholders in the crisis, which he believes may have accelerated their downfall.
“Some people I am aware of sold right out of Bank of Scotland after it bought ABN AMRO and they probably did a great service to their clients by doing that,” he says
“There were quite a number of the shareholders who were talking to the banks and their general experience was that some of the banks who got into trouble, were not being responsive,” he says.
The stewardship code is enforced via “comply or explain”, successfully used within the UK Corporate Governance Code. It includes a number of escalating steps shareholders can take, including releasing public statements prior to annual general meetings or requisitioning emergency sessions to oust board members, if they are concerned about a company’s policy. Montagnon, however, believes these extreme steps will be rare.
“This business about releasing statements is pretty rare. Vodafone is a case where they did and it did not make a huge amount of difference,” he says.
In 2007, Vodafone shareholder Efficient Capital Structures (ECS) urged the telecoms giant to abandon its 45% stake in Verizon Wireless, an American mobile-phone firm. ECS’s proposal was defeated and its concerns shrugged off. In that case investor activism made the headlines but failed to sway an unsympathetic board.
“Determined companies, who don’t want to be diverted from what they want to do by shareholders, are actually pretty clever at deflecting initiatives and concerns,” he says.
Montagnon believes the code will better provide a structure for this activism, but doesn’t foresee a new breed of belligerent investors. “It doesn’t mean you have to be tough and brutal with all companies, as most of them are doing well. The difficulty arises only with a very small number of problem cases.”
Montagnon has so far had some success in convincing UK investors to adopt the code. In September, eighteen companies published statements stating their commitment and more are expected to follow. But he has a more delicate task ahead if the code is to be deemed a real success.
There remains one species of investor Montagnon wants to bring on board, however, this may see him negotiating not in the square mile, but rather Downing Street.
Sovereign wealth funds hold an estimated $3.97 trillion stake (£2.49 trillion) in the world economy. Controlled by foreign governments, these slow-moving behemoths are difficult to engage, ever concerned any financial worry they may voice will be viewed through a political prism.
The Abu Dhabi Investment Authority, believed to be the largest fund, has an estimated $627bn (£390bn) invested throughout the world, 12% of which comes to Europe.
Motivating these investment giants has taken top priority for Montagnon, who hopes the code can provide a structured means by which fund managers can express concerns without being accused of political meddling.
Waking the giants
“If you’re a sovereign wealth fund and you have very long-term horizons, you are very nervous, because of who you are and government relations, about sticking your head above the parapet,” he says.
“They belong to governments, governments have relations with other governments, countries have relations with countries, so it can all be very sensitive, but I think we have to work around that.”
The key to bringing these funds on board may lie in Westminster. If Montagnon can secure an understanding from the British government that it will respect sovereign wealth funds’ right to voice concerns, this may be enough to convince the funds to subscribe to the code.
“If a fund is actually able to say ‘we subscribe to your code and what we do by way of activism is actually in keeping with your code, which has your official endorsement as a government’, I’d say, in my view, you are entitled to a degree of protection,” he says.
So far, Montganon has spoken with Canadian, European and Dutch funds, but is tight-lipped on progress.
There’s a story Montganon likes to tell when asked about his career choices. It takes place in Toronto, Canada, 28 years ago, when a younger Montganon was sent to cover a meeting of the International Monetary Fund against the backdrop of a debt crisis in South America.
“All the countries were going bust in succession, Mexico, then Brazil, then Argentina, it was a potential world banking crisis,” he recalls.
One evening, he recalls, he met Otmar Emminger, who had, until recently, been president of the Bundesbank.
“I said to him ‘I bet you’re glad you have retired so you don’t have to sort out this mess’. He said to me something I have not forgotten. He said ‘no, not really, because that’s what we’re there for, we sort things out’,” he said.
“I learned something there.”
In January 2010 the Financial Reporting Council began consultation on a Stewardship Code. Here are some of the responses:
“In most cases, the only effective enforcement mechanism on organisations that act on behalf of shareholders is the power of the shareholder to remove control of those shares from that organisation” PwC
“Proper integration of engagement into the investment process is critically important. However, the code should not seek to prescribe structures or methods of working within institutions” Association of British Insurers
“Our greatest concern in relation to the implementation of the Code is that disclosure becomes a ‘boxticking’ exercise, with too much focus on voting activity and quantity, rather than quality, of engagement” JP Morgan Asset Management
“Engagement is fundamental to stewardship and exercise of fiduciary responsibilities. Engagement should not be a last resort attempt to mitigate loss of value, but is something that should happen on a regular basis” Quoted Companies Alliance
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