City protest over Labour plans

THE City is set on a fresh collision course with the Government over ministerial plans to interfere in the way investors do business. The Department of Trade and Industry is proposing to introduce legislation forcing big shareholders to intervene in the way companies are managed.

The proposal has met with huge resistance from trade bodies and fund managers, including institutions that pride themselves on being active shareholders.

Ministers are trying to make pension funds take more responsibility for company performance and believe legislation is the best way to do this. The investment community believes, however, that the move could backfire.

'Fund managers will be asking themselves what they have to do to avoid getting sued, rather than thinking about how to be most effective,' said one senior investment officer. 'Once things get on the statute books, the law of unintended consequences tends to rear its head,' said another.

A consultation document has been circulated to interested parties entitled Encouraging Shareholder Activism. The paper, born out of last year's Review of Institutional Investment from fund manager Paul Myners, suggests imposing on all those involved in fund management 'an express statutory duty to use shareholder powers to intervene in investee companies when this is in a pension scheme's best interests'.

City critics say the principle is good but the proposed method is deeply flawed. They worry that the introduction of legislation exposes fund managers to the possibility of being sued by dissatisfied pension schemes. Managers would then be tempted to base their decisions on the best way to avoid recrimination rather than the best way to improve investment performance.

'Investment managers may be tempted to shy away from equities and into bonds. They may also sell down their stakes in companies to below the threshold at which the activism duty kicks in,' said one source.

Opponents also point to the cost of active engagement with companies. 'It is very expensive. The Government is completely wrong to say the cost implications are marginal. Will pension schemes be willing to pay more for more active service?' said a senior official.

The topic is likely to be widely discussed at the annual conference of the National Association of Pension Funds in Edinburgh over the next two days.