It is easy to see why the chairman of the National Association of Pension Funds (NAPF) looks more relaxed these days – this coalition government is less keen on beating shareholders over the head.
Lindsay Tomlinson is lounging on a sofa in a bright modern office in the NAPF’s headquarters on Cheapside, opposite the recently-opened shopping centre One New Change. It is a far cry from just a few months ago when Labour City minister Paul Myners and business secretary Lord Mandelson took turns at giving shareholders a kicking.
The pair argued investors had been asleep at the wheel during the financial crisis. They said shareholders had exerted little scrutiny over companies they owned and in some cases let management pursue reckless growth as long as the returns were good. But when the crisis hit it was left to the taxpayer to underwrite large parts of the UK banking system, and by extension, the country’s economy.
Tomlinson, whose members own around £800bn of UK shares and bonds issued by the country’s top firms, leans forward in his seat and says that some of that was deserved – but only some of it.
The youthful pensions chairman, who looks a decade younger than his 59 years, says: “A lot of what the last government talked about didn’t reflect that the influence of UK based pension funds had diminished. Pensions have changed so much in the last 30 to 40 years. And particularly since the end of the 1980s. In 1979 exchange controls went in the UK. And also in the last 15 years a large amount of private equity, sovereign wealth and hedge fund money has moved into the markets.”
Tomlinson’s members own around 12 per cent of the UK stockmarket, with the rival Association of British Insurers (ABI) owning the same percentage. Retail investors own a share, as do other kinds of UK-based institutions. Another 15 to 20 per cent of the UK market is managed by UK institutions for overseas investors. The rest is owned by overseas investors.
But Tomlinson, who is also a managing director at BlackRock, is right to point out that the power of the UK pension funds and insurance groups is waning. A decade ago the ABI’s members owned around 24 per cent of UK public companies with the NAPF holding 18 per cent. And in the mid-1980s around 80 per cent of the UK stockmarket was held by institutional managers based in the UK.
He says UK pension funds “no longer have the critical mass” they once had among the country’s biggest companies. He adds that institutions have also been moving into bonds over the last decade or more in order to diversify their holdings.
Sovereign wealth funds and hedge funds now have a great say in UK firms. And Tomlinson says the trick is to get them to subscribe to the 1992 UK Combined Code on corporate governance, based on the comply or explain principle.
Tomlinson says: “It’s definitely in their interests for these funds to abide by the Combined Code. But they have a lot of other things to worry about. Other codes in other countries, for one thing. But also UK companies are regarded as well run. Whereas there are firms in other regions that are based around family structures or have unfair voting rights that need more attention. So these funds reason: why spend so much time on the UK system? Also, foreign funds don’t want to get caught up in the politics of a situation. If an issue looks like being highly political they want to avoid it.”
However, in recent months shareholders have showed a firmer hand at the tiller of the companies they own. Investors rejected Prudential’s proposed $35bn (£23bn) takeover of AIG’s Asian business as too expensive and told the insurer to think again.
“Before the crisis the collapse of the Pru deal would not have happened,” says Tomlinson.
He adds that shareholders were quick to meet with BP’s management in the wake of its Gulf of Mexico oil spill – a fiasco that will cost the firm at least $11bn in compensation and clean up costs.
Tomlinson says: “This was a surprise for a lot of shareholders. They asked the board a lot of questions about how risk management worked right the way through the company. We wanted to understand what went wrong.”
Did shareholders push for the removal of former chief executive Tony Hayward? “I’m a big fan of BP,” says a tight-lipped Tomlinson. “Good boards take action before shareholders ask for it.”
Yet Tomlinson admits “the real test” of this newfound shareholder activism is how long it lasts when the deal market picks up again.
Rather than sniping at shareholders, Tomlinson says, the coalition is more concerned with tackling the budget deficit and making sure the UK’s corporate tax is competitive with other parts of the world.
But this government, like the last, is also fighting its corner in the European Union to ensure that the comply or explain principle runs through the heart of much of the new financial services legislation that is being drafted in Europe. Others in the 27-nation bloc argue this lighter touch regulation has failed and more prescriptive rules are needed.
Tomlinson backs the government. “We want to make the existing system work better,” he says. “And I believe it can be made to work. But this is currently a live argument in Brussels.”
However, Tomlinson, who is also chairman of the Takeover Panel’s Code Committee (which makes amendments to the Takeover Code), is currently in the middle of major rule changing himself. The body plans to overhaul the way mergers and acquisitions are governed in the UK.
Critics argue firms spend months on end fighting a takeover bid, and are also concerned at the number of UK firms that end up under foreign ownership.
Last October the Panel responded to these growing concerns and proposed that the offer period be cut from three months to 28 days, and that the predator firm provide more details about its financing and its plans for the new business.
Tomlinson says: “Companies are under siege for long periods of time. Takeover tactics have evolved over the last 10 to 15 years and have tilted in favour of the firm making the offer.”
However, these proposals fall far short of those advanced by City veteran Sir Roger Carr, who was the chairman of British confectionary maker Cadbury, which was sold to US rival Kraft Foods for £11.9bn in January.
Carr – now at the CBI – complained he could not properly defend the iconic UK firm because once a bid had been made hedge funds bought into the business and were only interested in driving up the price of the company in the short term before selling to the highest bidder. Many in the last government and the unions agreed with him.
Carr argued, among other things, that investors who bought shares during a bid should have their voting rights removed so that “short-term money does not determine long-term futures”. He also said the acceptance level for takeovers should be raised above 50 per cent plus one of shareholders to make it harder for short-term shareholders to ride roughshod over the wishes of long-term investors.
Tomlinson disagrees with this. He says: “We have spent the last 100 years in this country evolving shareholder democracy. I am a firm believer in one share, one vote.” He also adds that observers were wrong to look to revisions in the Takeover Code as a backdoor way of making national champions out of firms.
He says: “That is for the government not for us to decide. But UK governments over a long period of time have favoured open markets.”
Tomlinson says he expects the Takeover Panel to publish a detailed draft of its proposals by then end of the first half of this year. Until then, Tomlinson has plenty on his plate. His members, who have recently found their voice, might not have the all-pervasive influence they once had, but they still have an important say on how corporate Britain thinks and acts.
CV | LINDSAY TOMLINSON
Work: Joins Commercial Union as an assistant actuary in 1973; joins Metropolitan Pensions Association (now Mercers) as a pensions actuary in 1977; joins Provident Mutual as an investment manager; from 1987 holds a variety of senior roles at Barclays Global Investors, (now part of BlackRock, where he is a managing director). Became chairman of the National Association of Pension Funds in 2009 and is also chairman of the Takeover Panel’s Code Committee.
Education: St John’s College, Cambridge, read mathematics
Family: Married, with “five children and four Labradors.” Lives in Sussex.