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The Directors Chair

Paul Myners

The issue is ownership

In The Directors Chair with David W. Anderson: As one of the UKs most influential leaders on corporate governance,
Paul Myners has a challenge for his peers: why havent their many reforms penetrated practice?
Photography by Zoe Norfolk

Paul Myners has rsum enough for three or four successful careers. Onetime publisher of The Guardian newspaper, former City Minister in the
governments finance ministry, current fund company chair and partner as
well as chair of the Court and Council at the London School of Economics,
hes an influential outsider who has thrived in the UK establishment while
continuing to challenge the status quo, advocating for better governance
and transparency. Here, Lord Myners discusses the inequities and deficiencies
that concern him mostthe power and responsibilities of institutional investors, and the governance movements lack of real successin conversation
with governance expert and adviser David Anderson.

Paul Myners
Primary roles
Chair of the Court and Council, London School of Economics and Political Science; Chair and partner, Cevian Capital LLP
Additional roles
Life Peer, House of Lords, UK parliament; Non-executive chair, Autonomous Research LLP, Edelman UK, Nomad Holding
Ltd; Non-executive director, Ecofin Water & Power Opportunities plc, MegaFon, RIT Capital Partners plc
Former roles
Government and civil society: Financial Services Secretary (City Minister), HM Treasury; Member, Prime Ministers
National Economic Council; Reviewer of Institutional Investment for HM TreasuryMyners Principles on Asset Management; Independent reviewer and Senior Independent Director, The Cooperative Group; Chair, Low Pay Commission,
Personal Accounts Authority, All Party Parliamentary Group on Corporate Governance
Private sector: Publisher, The Guardian, The Observer; CEO, Gartmore Investment Management; Chair, Gartmore Group,
Guardian Media Group, Marks & Spencer Group plc, Aspen Insurance Holdings Ltd.; Non-executive chair, Ermitage,
Land Securities Group; Deputy chair, PowerGen; Non-executive director or member, Bank of England, Bank of New York, Land
Securities Group, Marks & Spencer Group plc, National Westminster Bank plc, Platform Acquisition Holdings Ltd., Telefnica
Europe plc, The Co-operative Group Ltd., Synovia Capital LLP; Executive director, GLG Partners Inc., Henderson Global Trust plc
Charitable service: Chair, Tate; Trustee, ARK, Glyndebourne Arts Trust, Smith Institute, Tate Foundation
Academic appointments
Executive Fellow, London Business School; Visiting Fellow, Nuffield College, Oxford University
Education
Honours degree in Education; Certificate in Education, University of London
Honours
kCommander of the British Empire

kHonorary Doctorate in Law, University of Exeter

kHonorary Fellow, Association of Corporate Treasurers

Current age
67

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David Anderson Youve acquired the titles, influence and wealth

associated with the British establishment, but you werent born

to it. Do you still feel like an outsider?
Paul Myners On the face of it, I am a clear member of the establishment, being a member of the House of Lords and Chair of London
School of Economics and a former chair of Tate, but Im not a natural member of the UKs great and good. I spent the first 12 months
of life in a home before being adopted into a blue-collar family from
an isolated area. Early experience conspired to make me an outsider. Its given me a freer hand. I ask too many awkward questions.
Some say I bite the hand that fed me, as I dont curry favour, but I
do it with a deep thirst for debate and discussion. Im remorselessly
looking for better ways to do things. I dont do whitewashes.
David Anderson You are a well-armed advocate for fairer, healthier capitalism. Youve called repeatedly for higher standards
in corporate governance. Whats your verdict on the impact
youve had?
Paul Myners Im not sure theres much to show for the host of efforts
of which mine have been but a small part. Changes have been more
superficial than substantive. Governance codes have been rewritten but are largely motherhood missives that lack real enforceability.
Weve seen an emergence of an ineffective governance industry, dogooders rather than powerful agents. Not much has changed in the
field of law. The governance community must reflect critically on why
reform hasnt penetrated practice. All of us must be challenged as to
what weve achieved.
David Anderson What explains this lack of progress?
Paul Myners It comes down to the structure of corporate ownership.

In the last 50 years weve seen ownership fragment as a consequence

of the accumulation of peoples savings in large funds to provide for
retirement and health. Our public companies, owned by these investment-minded funds, are now effectively ownerless corporations. We
dont talk about a need for governance interventions in family businesses and private companies, because theres clearer alignment
between owners and governors, albeit measured in narrow terms of
shareholder value. But in public companies weve seen this fragmentation accompanied by high portfolio diversification, as portfolio managers seek to capture rather than . The result is that the fiduciary
ownerlarge institutional investorshas interests in so many companies it cant possibly act as a proper fiduciary. These investors dont
think of themselves as owners. Consequently, they are not equipped
or rewarded for performing the duties of ownership.
David Anderson As this shift in ownership structure has exposed
flaws in public company governance, has the governance debate
of the last 30 years missed the mark?
Paul Myners Yes, the debate has missed the relevance of fragmented
ownership on the decision-making behaviour of public companies.
Instead of addressing fund management companies, debate has focused within the public company on the board and management.
Even here, where the debate has tried to address the governance
weaknesses of ownerless corporations, it has focused more on board
structure than on meaningful advancement in board practice. Weve
simply not focused enough on the behaviour of directors. Weve created rules about board structures and designed a complex set of inter-

locking committees, but proof that weve missed the mark is this: audit
and remuneration committees have gotten the attention. The nomination committee is the most important because it determines board
and committee membership and thus the behaviour that will define
the company and its ownership mindset. It has been almost totally ignored by governance experts.
David Anderson What has been the stumbling block to a widely

shared understanding of this fragmentation?

Paul Myners The problem is there has been no real appreciation of

the need to redefine the nature of institutional investor responsibility. Theres been a reliance on fiduciary precedent, which doesnt cope
adequately with the complexities of multiple layers of agents. Efforts
at reform in governance have really been an attempt to address the loss
of direct ownership perspective in corporate decisions at the board
level, by goading boards into developing efficacious practices in lieu
of what really countsan owner at the table, or at least on the nomination committee.
David Anderson If changes in ownership structure precipitated

our challenges, how should ownership be re-balanced to better

suit todays realities?
Paul Myners Fragmented ownership leads me to conclude we have
too many public companies. Large funds in the UK have begun investing directly in private companies. In Canada, the largest institutional investors have already dis-intermediated the fund managera
commendable achievement. Why should these funds want to invest
in public companies when immediate liquidity is not a requirement
and they face a de facto lower return for the ability to exit promptly?
There should be fewer public companies each with far fewer shareholders, taking a longer-term view and showing conviction in their
portfolio construction.
David Anderson Given your experience as chair of Cevian, a fund

manager, how do you assess the capacity of institutional investors to bring ownership discipline to their portfolio companies?
Paul Myners I have a simple three-part test for fund management organizations. First, how well-resourced is the governance function of
the fund, given the number of securities held? I recently spent time
with a fund management group that has investments in over 4,000
companies worldwide yet employs only three people in its governance
group. Second, are the governance people taken seriously by their colleagues? Often, governance people are not consulted about important
investment decisions nor are they present at important decision-making meetings. Third, do the governance people have immediate and
direct access to their own CIO or CEO? Typically they dont. Against
these tests most governance units in fund management organizations
fall short. Most organizations are indifferent to the governance in their
portfolio companies. There is little or ineffective pressure on the part
of institutional investors to bring an owners discipline to companies
via the tools of governance.
David Anderson You continue to be a critic of the fund management industry. How bad can it be?
Paul Myners The fund management industry takes a trillion dollars
in fees and rents out of the world economy and in aggregate delivers little that is socially valuable. In so doing, it is allowed to exer-

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cise great power and influence. Fund managers influence decisions

on the location of important R&D facilities and attitudes toward innovation or policies on tax avoidance. In so doing they can destroy
lives and communities. Fund managers exercise huge soft power by
reference to a simple metricshare pricewithout any challenge
to the way they exercise that power and influence. Larry Fink at
Blackrock and similar people have extraordinary powers to set the
tone for the way in which we think about capital structures and the
issue of unequal reward, but are not required to defend their positions or be accountable. Fink has risen to this challenge.

as an indicator of value. Capital markets have achieved a reverse alchemy, turning long-term capital into short-term; gold into lead.
David Anderson Why have influential investor bodies such as

the International Corporate Governance Network (ICGN) not

done more to address governance problems arising from ownership structure?
Paul Myners Im bound to conclude the ICGN is beset by conflict of
interest as any other trade body, and like many trade bodies, tends to
end up speaking to the converted.

David Anderson Whats your objection to unequal reward?

Paul Myners The increasingly inequitable distribution of employ-

David Anderson Where should investors begin to have more in-

ment income is built on a set of beliefs around rewards and behaviours

which simply dont stand up to examination. True to form, executive
remuneration often involves the use of a currencythe companys equitywhich is often inappropriate, undervalued and inefficient. There
is little evidence to support the view that, beyond a quite low level, financial incentives productively influence performance. Evidence suggests gross inequality in organizations is alien to the collective pursuit
of corporate purpose.

Paul Myners Investors should become intensely involved in selecting

David Anderson How ought boards to structure executive pay?

Paul Myners I have a basic rule that if people are paid more than 150%

of those who report to them, a bell should ring. At the highest levels
of corporations, remuneration often exceeds this ratio. Its a litmus
test because its often not healthy for the organization. Why have we
allowed this distancing? Are we failing to recruit good people lower
down? Have we given too much power to the chief executive? I think
its an agency failure. Executives realized that the door was open and if
they pushed there would be no resistance. Here, too, ownership matters. Institutional investors like to see reward structures replicating
goals set for fund managers.

fluence?
board chairs. The appointment of company chairs is a highly political and stressful exercise. Its often done by the self-appointed nominations committee and favours internal candidates, several of whom
joined the board in the belief that they had been promised the chair! In
my view, investors should sit on the appointing committee. That committee should ask itself how much value it places on incumbency. I
start from this position: persuade me why it would not be good to have
fresh eyes and new perspectives, rather than starting with the other
perspective which is easily arrived at.
David Anderson Capable directors dont always behave well collectively. Why do boards have difficulty living up to their potential?
Paul Myners We struggle to get constructive challenge on boards. We
want members of the board to listen and respond respectfully, but
thats often an excuse for not getting to the heart of the issues. I sat
on a board with a clear protocol to limit your questions. You simply
were not meant to ask a third question on the same subject, on pain of
clearly irritating the chair. If the third question should never be asked,
you dont get beneath the veneer. Chairs must set the tone for the type
of culture and behaviour we want to see.

David Anderson Has the manner in which fund managers are

paid influenced both executive pay and short termism in corporate decision-making?
Paul Myners Yes, a fund manager in the environment of highly diversified portfolios has limited interests in the long-term health of the underlying company. They are but owners of a temporary claim on the
company. The fluidity of their ownership elevates the short term over
long term. Research shows CFOs regularly kill projects with longterm potential that would be disruptive to the short-term expectations
of the market and hence detrimental to their compensation. The use of
shares as compensation for executives has been pushed by fund managers. The pressure to enhance the short term at the expense of the
long term is strong.
David Anderson How can owners, boards and management to-

David Anderson Do you see any bright spots in current governance practice?
Paul Myners One of the few advances has been the board effectiveness review. When done well, it can provide a necessary reflection on a
boards composition, performance and priorities. Its a highly specialized field that shouldnt be done as a door opener by headhunters, law
firms or accounting firms. Unlike in the UK, in the Nordic model investors make up the nomination committee, appoint the board evaluator and see the results. As such, these investors understand the needs
and culture of the board and nominate directors accordingly. In the
UK, we are told who carried out the board review but do not know if
the review was performed well, the results were good or bad, or what
meaningful action has been taken. Sharing review highlights would
begin to reconnect owners with their companies.

gether defeat short termism?

Paul Myners We need to reassess and articulate a better sense of cor-

porate purpose. We currently define corporate purpose largely in

terms of shareholder value, as measured by share prices. Shareholder
value is the bedrock of how we explain our performance and reward
people, yet it has nothing to do with purpose. Weve elevated the financial owners interests to the exclusion of others. Ironically, this is frequently not even in their interests, as share price is frequently wrong

David W. Anderson, MBA, PhD, ICD.D is president of The

Anderson Governance Group in Toronto, an independent
advisory firm dedicated to assisting boards and management teams enhance leadership performance. He advises
directors, executives, investors and regulators based
on his international research and practice. E-mail:
david.anderson@taggra.com. Web: www.taggra.com

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