Higgs and the question for fund managers

THE Higgs report may have slipped from the headlines but the debate seethes on below the surface. Earlier this week I heard Derek Higgs robustly defend his proposals and say he believes the working committee of the accounting steering group will produce a revised version of the combined code in the next few weeks that should meet most of concerns expressed since his report was published in January, though it would be a mistake to expect any significant concessions.

Then a commentator at a dining club hosted by management consultancy Intramezzo claimed the whole thing was a Government plot to undermine the position of the chairman and so weakened rather than strengthened corporate governance.

Finally, over lunch a captain of industry pointed out the paradox at the heart of Higgs. In his view, the bad are being put in charge of the good - City fund managers, whose governance is poor, are to be given added influence over the running of companies where governance is adequate. The result, he believes, is likely to be increased instability.

He has a point. The whole debate over fat-cat pay, for example, could end if institutional fund managers put their foot down and told companies to cut out the excess. The reason they don't is that even the average fund manager is vastly overpaid for what he does by any objective standard, while the top people earn telephone-number salaries. They do not, and will not, make a fuss because they do not want the spotlight turned on them.

While demanding pay linked to performance in other people, they as an industry steadfastly resist performance fees - indeed they refuse to tell clients what their fees are. They do not want to be put in a position as individuals where their pay is linked to the performance of the funds they manage. If it was, they would owe every insurance policyholder, every owner of a mutual fund and every member of a pension scheme a considerable amount of money.

Derek Higgs seems bruised by the experience of the past few months. Some say he deserves to be - 'the price he pays for letting the Treasury write his report', in the words of one cynic.

That may or may not be true - though it seems not to have got the measure of a man who is nothing if not an independent thinker. But anyway, content, not authorship, should be the issue. We ought to recognise that most of what is in Higgs would be an improvement, even if it will take a bit of adjusting to. As he says, it will take a generation of management - at least five years - before his proposals become the norm.

Only then can we get on to the real problem that afflicts the British economic system - the fact that ownership of its primary assets is in the hands of investing institutions which for the most part refuse to acknowledge the responsibility this brings to help management of the companies they own to maximise performance.

The core problem is that those we talk of as being the shareholders - the investing institutions - are not shareholders at all but agents of shareholders. As such they have quite different priorities, number one of which is making money for their own firms.

Governance of the fund management industry needs thorough investigation much more than governance of quoted companies, and no doubt even as I write someone in the Treasury is preparing the first draft of what such a report should say.

Right line

ONE of the things Higgs got right was that the pool of non-executive directors needs to be widened.

There are hundreds of people who have run very large business units within companies such as Mars, Unilever or Rolls-Royce but remain unknown outside their organisations because they never quite made it to main board level. Many would be ideal non-executives but never get asked because they have no public profile.

The London Business School's Laura Tyson makes this point today in her report, commissioned as a spin-off from Higgs by Trade and Industry Secretary Patricia Hewitt.

Hewitt's original brief was the barking mad one that Tyson should come up with a list of 100 people from the ranks of the diverse and the minor who were not non-execs but ought to be.

Tyson had the good sense to take the brief but duck the issue and has instead produced a sensibly measured series of recommendations to widen the gene pool, the central one of which is transparency - a proposal to publish an annual survey of diversity on boards to spread best practice and make people aware of who is doing what.

It deserves not just to be read, but to be acted upon.