Legendary fund manager Neil Woodford has condemned “frustratingly rife” short-termism in the City, lending his support to a stinging criticism of executive pay levels and a failure of investors to hold management teams to account.
The founder of Woodford Investment Management has bemoaned fund managers who “do not behave or think like owners, because they are borrowing stock rather than investing in it”.
Woodford’s comments were made in a new report out today from activist group the High Pay Centre, which aggressively campaigns against high levels of remuneration. The report claims that chief executive pay is not correlated with companies’ performances.
"I believe the problem is getting worse"
Writing in the paper, Woodford said that as a fund manager he does everything he “can to ensure that the executive and board of a company are aligned with shareholders and the course they set for a business will deliver long-term shareholder value”.
Regrettably, this view and approach is not shared by many in the UK investment industry and I believe the problem is getting worse. Many fund managers do not behave or think like owners, because they are borrowing stock rather than investing in it. In many institutions, corporate governance duties have been separated from fund management responsibilities.
The fund boss, who recently raised eyebrows in the City by scrapping bonuses for his staff, added: “Short-termism, which is frustratingly rife in fund management, also hinders the UK’s institutional investment industry’s ability to hold executive management teams to account in an... effective way.”
Shareholder advisory body Pirc has also criticised elements of the investment sector. Alan MacDougall, managing director of Pirc, told City A.M.:
The challenge remains – how can shareholders be sure that asset managers are the best people to represent their long term interests at particular companies, as opposed to their own firms’ interest?
The track record of asset managers challenging short termism is poor. Few in the asset management industry have the analytical business skills to challenge management corporate strategy, or the technicalities of pay schemes for that matter.
"Remuneration policies need to be simplified"
Today’s report is authored by Tory MP Chris Philp and comes after the Prime Minister attacked high pay.
The report calls for the mandatory publication of pay ratios and argues that annual binding shareholder votes on executive pay should be introduced.
It also calls for a mandatory shareholder committee with an employee representative to recommend the appointment and removal of directors, ratify pay policy and pose questions to the board, including on corporate strategy and performance.
Many of its proposals have previously been dismissed as counterproductive by business groups and fund managers.
“We believe that imposing an annual binding vote could be detrimental, forcing shareholders to focus on shorter performance periods when evaluating whether performance has merited the remuneration paid to senior executives,” said Mike Fox from Royal London Asset Management, who disagrees with the report.
“Remuneration policies need to be simplified, with more straight-forward structures and clearly defined performance related metrics.”