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Companies Bill - Duty to provide information about exercise of voting rights

19th October 2006

Jonathan Djanogly moves: 'Institutions to which section 1241 applies shall publicise on their website, in relation to each opportunity that they have to exercise voting rights attached to shares to which that section applies, whether or not they have exer

Institutions to which section 1241 applies shall publicise on their website, in relation to each opportunity that they have to exercise voting rights attached to shares to which that section applies, whether or not they have exercised such voting rights.'.- [Mr. Djanogly.]

Brought up, and read the First time.

12.16 pm

Mr. Jonathan Djanogly (Huntingdon) (Con): I beg to move, That the clause be read a Second time.

Mr. Speaker: With this it will be convenient to discuss the following amendments: No. 434, in page 603, line 22, leave out clauses 1241 to 1244.

No. 435, in clause 1241, page 604, line 4 at end insert-

'(7) Regulations under this section shall be subject to public consultation prior to publication, and shall be the subject of a cost benefit analysis.'.


Mr. Djanogly: As we begin the third and final day of Report on the longest Bill ever produced, I want to make a few brief remarks. Unfortunately, an urgent engagement requires me to leave the debate shortly before Third Reading, but my hon. Friend the Member for Rutland and Melton (Alan Duncan), the shadow Secretary of State, will step in. I should therefore now like to thank my advisers and researchers, who have been magnificent, and the Committee team, especially my hon. Friends the Members for Putney (Justine Greening) and for Hornchurch (James Brokenshire)-he joins me today-who made their impressive debuts at the Dispatch Box yesterday.

We have experienced problems with programming and some points of principle. However, progress has been made in a generally good spirit of co-operation with Ministers and we are pleased that many of our points have been fully addressed. All in all, we believe that company law will take a step forward through the Bill.

The new clause and amendments deal with information on the exercise of voting rights by institutional investors. The Bill compels institutional investors to provide information about the exercise of voting rights. On Third Reading in the House of Lords, my noble Friends and Liberal Democrat Members excluded clause 1241 on a vote. However, the Government reintroduced clauses 1241 to 1244, albeit in slightly amended form. Unfortunately, they did not allow proper debate of clause 1241 in Committee and we are therefore left to discuss it on the last day.

The amended clauses deal with some of the technical difficulties that have been brought to our attention. For example, they tackle aggregate voting provisions and allowing only the top fund to make the disclosure if an institution holds shares in a company through more than one fund. The provisions have polarised opinion. On one side stand the CBI and many institutional investors who resent being forced to disclose how they vote, and on the other stand the Government, who frequently appear to be taking orders on clause 1241 from the trade unions.

The Minister for Industry and the Regions (Margaret Hodge): I am interested to hear where the hon. Gentleman and the Opposition stand on this matter.

Mr. Djanogly: If the Minister will give me half a chance, I will certainly come to that.

The Government have not listened to the overwhelming consensus in the business and financial communities. They have reintroduced the clause, yet they have not taken the time to carry people with them by considering a suitable compromise between the two sides that would suit all parties. I am at a loss to understand why the Government have been so last minute with these provisions. It is therefore essential that important stakeholders' views be heard on the general principles behind the clauses. We have received comments from organisations such as the Association of Investment Trust Companies and the Investment Management Association.

A number of other stakeholders are also against the introduction of the clauses, including the CBI, whose October briefing states:

"At House of Commons Committee stage, we opposed the re-introduction into the Bill of provisions or powers to require mandatory disclosure by institutional investors as to how they have exercised their voting rights. CBI members accept that there can be practical problems involved in exercising voting rights by some investors but consider that much has been achieved in recent years by market participants working to resolve the problems. Disclosure of voting is an area where several institutional investors are already disclosing their actions and so we do not see the regulatory need for these Bill provisions. In the absence of deletion of these provisions"-

as is proposed by amendment No. 434-

"there should be full public consultation on any proposal to implement any proposals under the powers taken"

in the Bill. That is what we are proposing in amendment No. 435.

This request has also been made by the Investment Management Association, which states that the reintroduction of the clause as drafted would run counter to the Government's aim of reducing Government red tape. The IMA, while supporting transparency, believes that it would be counter-productive to make this the subject of statutory regulation. The IMA's briefing sets out the reasons why the new clause should be opposed:

"The voluntary system is working and increasing numbers of managers are making certain of their voting records public."

The briefing provides a lot of statistics to back that up, stating that many more managers than in the past are making their voting records public by putting details of how they have voted on their websites, and that mangers such as Fidelity Investments and, recently, Hermes have also stated their intention to do this. It goes on:

"All this clearly shows that the 'culture of secrecy' in the asset management industry that some have claimed exists, does not."

The IMA is also concerned that

"a 'one-size-fits-all' requirement would undermine progress. As well as looking at the number of managers that disclose, the survey analysed voting details published on web-sites. This showed a wide variation in the matters reported, indicating the complexity of this matter and the difficulty of introducing regulations that would require uniform disclosure. In effect, imposing a 'one-size-fits-all' legislative requirement would undermine the progress made to date."

The IMA also believes that the

"introduction of an enabling power could bring this voluntary progress to a halt. Managers considering public disclosure would face the dilemma that if they went ahead in advance of regulation they could face the expense of completely changing their systems, and incurring costs all over again, when regulations are introduced. A number have already told us that they have shelved disclosure plans for this reason."

The IMA states that

"Government-mandated disclosure would be costly. The Regulatory Impact Assessment published with the draft clauses...addressed the ongoing costs of disclosure. It did not address the costs of: setting up systems; determining whether voting rights have actually been exercised; vetting the information; and monitoring compliance with legal requirements. These costs are likely to be significant."

As we can see, the IMA has made some serious points.

The Association of British Insurers believes

"that the principle of transparency is right. Market forces are, unsurprisingly, supporting the development of voluntary transparency in this area and reflecting this, major institutional investors including ABI members...are all making their voting information public."

However, the ABI also believes that

"the costs of legislating in this area have been underestimated and since statutory rules would impose a very significant regulatory and compliance burden that would dwarf any benefits. Indeed, it would be likely to lead to less considered voting, as resources are devoted to legal compliance or to the outsourcing of both decision-making and disclosure functions. The possibility of introducing future requirements under the reserve powers of the Bill could deter those companies seeking to voluntarily disclose voting information."

There is a growing movement among many in the investment management community voluntarily to disclose how they vote. Hermes, one of the country's largest and most successful fund managers, has now taken this step. It is the 12th UK fund manager to decide to publish its entire voting record at annual shareholder meetings, and many others have also done so.

The Conservatives welcome this voluntary disclosure. We are in favour of business moving towards greater transparency of its own accord, rather than of the Government issuing edicts from on high as to how investment managers should act. Self-regulation from the bottom up will always be more effective than forced regulation from the top down in this complicated area. The Conservatives fully support transparency from institutions, towards their own investors and towards third-party stakeholders. We welcome the sector's move towards voluntary disclosure and encourage it to go further. An open and transparent institution is likely to be a successful one, but if an institution wishes to maintain secrecy with its investors, that should be its choice, and we should respect that. People do not have to invest with it.

A good middle view on this matter was put forward by the ABI, which has stated:

"The proposed clauses provide sweeping and ill-defined reserve powers which provide little, if any, intimation of their purpose or of their justification of being in the public interest. They are targeted in a discriminatory way, imposing duties on certain types of shareholder whilst leaving others unaffected. This is a violation of the principle of equal treatment of all shareholders."

The ABI goes on to state:

"For example, the clauses do not apply to important categories of investor such as hedge funds and overseas holders. Their stake is nowadays frequently as large, if not larger, than that of traditional UK institutional investors. If the latter should disclose their voting record in the public interest, then surely this should be an obligation on the former. As the requirement is constructed, it appears to be UK institutions and their clients who will have to bear the costs of disclosure...Furthermore, the clauses as drafted would require disclosure by fund managers even when they are passing on voting instructions on behalf of their clients. Where these clients have different views the fund manager's public disclosure would show that it gave instructions to vote for, against or abstain on the same resolution. It is evident that disclosure of this nature will frustrate the presumed purpose of these provisions, to inform those with an interest in a particular fund how the shares in which they have an actual interest have in fact been voted."

The ABI briefing goes on to state:

"Clause NC433 (4)(a) allows any person to whom disclosure should be provided to institute civil proceedings if this does not happen. If it is intended that the obligation will be to publish information, this means that any member of the public would be able to instigate legal action against a shareholder or fund manager even though that member of the public has no interest in the shares in question."

The ABI concludes:

"The practical effect of introducing regulations is likely to be to reduce the quality of institutional shareholder engagement with companies-a process which can add real value to the beneficiaries' holdings. Institutions will become less concerned with considered voting as their resources are switched instead to compliance with these complex disclosure requirements. There will be an increase in outsourcing of voting decisions to proxy lodgement agencies, and in some cases, a decision to refrain from voting as a conscious policy in all but exceptional circumstances."

That is pretty forthright stuff.

12.30 pm

Let us be clear: what we are being told by those independent bodies that represent people in the industry is that the effect of the Government proposals will be fewer institutions being likely to vote so that they do not have to disclose how they voted or intend to vote.

In addition to transparency, an important issue, which is not covered by these clauses, is participation. We in the Conservative party very much want to encourage institutions to vote and participate. That the effect of these Government provisions could be to replace participation with non-voting is, to our mind, a potential disaster. In reality, the Government are addressing the wrong issue with these provisions. Our amendment would reconcile those views and find a middle way.

As we have made clear, the Government's threats of compulsion are cack-handed and over-regulatory. Accordingly, we have tabled new clause 15, which seeks a compromise that would be acceptable to all parties. We support institutional investors having to disclose whether they have voted, rather than how they have voted, although, as I have said, we support more institutions declaring voluntarily how they have voted, after the event.

That is why the amendment would require institutions to publish whether, rather than how, they had voted. That in turn would enable institutions to show engagement in the companies in which they invest. Individuals and larger funds whose moneys are managed by those institutions could take more part in running the company that they part own. The cause of shareholder democracy would be advanced in a non-heavy-handed manner, whereas if the provision is left as it is, there will be a real danger that some institutions do not vote at all to avoid having to disclose how they would have voted.

We believe that that would defeat the purpose of the clause by preventing institutions from engaging with companies, so we take this opportunity to warn the Government that this potential disaster is what we shall face if the clause is left intact. Over recent days, the Minister seems to have been saying that if the institutions continue to move towards voluntary disclosure, the clause might not be needed and might not be enforced by the Government. We have to say that that threat approach is counter-productive, and indeed sounds arrogant to those who are subject to its provisions.

I hope that the Government will now see reason on those provisions and simply get rid of them, as proposed through our amendment No. 435.

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