Investors must act as watchdogs, argues FSA

Large investors should be more active in overseeing the companies they invest in, the chief executive of the Financial Services Authority said yesterday.

Addressing the National Association of Pension Funds, Hector Sant said, “The principal responsibility for managing firms responsibly remains with the management … and … shareholders are the principal mechanism for holding these managers accountable.”

Investors and their representatives should be “active in the risk management process” and assess how likely business strategies are to fail, he said. They should refuse to take company-presented information at face value and may need to intervene before a plan reaches the stage of a public vote, when “often the stakes are too high to vote down”.

If investors are dissatisfied with a company, “their primary response is to sell the shares rather than to press for changes … [but] it is in everyone’s collective interests that good governance is maintained,” said Sant.

Acknowledging a degree of regulatory failure, he also held investors partially responsible for the credit crunch.

“The crisis has arguably been driven among investors by an intense search for yield; a desire to gain as much as possible at a ‘risk free rate’,” he said. “These imbalances stimulated demand which has been met by a wave of financial innovation in the form of complex securitisation. How many of these different ways to satisfy demand and ‘add value’ … were truly understood?”

The market cannot be trusted to correct excesses, according to Sant. “If anything, market behaviours have been pro-cyclical,” he argued.