City: Investors need to shout louder

The head of Legal & General's investment arm, Peter Chambers, told the Treasury select committee earlier this month that he and other fund managers had challenged Royal Bank of Scotland on its strategy in the months before it crashed, but once the board chose not to follow up on their concerns there was nothing they could do.

His individual view was echoed by his trade body the Investment Management Association, which said in evidence that its members did all they could to prevent banks hurtling to their doom, but shareholders could shout loud enough to be heard.

The way the IMA is leaning, to judge from other comments it has made, is to seek to mitigate this problem by demanding more of the non-executive directors. But it is hard to see how that might work in those businesses where the chief executive dominates the board. It cannot ignore an opinion poll of non-executives, which showed with remarkable candour that almost a third doubted they could exert any influence on the chief executive.

The fund managers are misdiagnosing the problem - and not using the hold they do have properly. The main reason they are weak and ineffectual is that they make their complaints in private, and almost always keep them private, so it is easy for them to be ignored by a board. As the activist investor Eric Knight of Knight Vinke pointed out in a letter earlier this month to the Financial Times, they could tilt the balance of power dramatically in their favour by making their criticisms in public and demanding public answers.

For the past 12 months he has led an attack on the strategy of HSBC. A hallmark of this has been the mobilisation of the press to act as a megaphone for his concerns, and to force the board to respond. As a result, though he has a minuscule shareholding in what is now probably the world's largest bank, he has been remarkably successful in forcing the boards to engage.

What our institutional investors need is not more legislation. They need to understand the power of publicity and how to communicate.

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