As many corporate executives draw public criticism for their governance practices, institutional investors should exercise their power to influence who is appointed to the boards of companies they invest in, and who remains on them, the chairman of Australia’s A$59.6 billion Future Fund, David Murray, said.
Speaking at a RiskMetrics Governance conference on March 30, Murray questioned whether many institutional investors were appropriately engaged as active shareholders particularly since many had expressed interest in the risks that poor corporate governance, social and environmental practices can pose to returns.
He said voting on who runs the boards of investee companies, and whether their performances were satisfactory, was a crucial exercise for institutions.
“A major way [funds] can create superior value for themselves is to choose people who lead the boards of companies,” Murray said.
“What’s out there in corporate governance at the moment will be exposed by the global financial crisis.”
“We have to determine who the right people are to be on [company] boards.”
He said the integrity of a company’ governance practices lay in the quality of its belief systems.
“If you see a company operating with standardised models of corporate governance, you can be sure that something will go wrong.”
Drawing on his experience as chief executive of the Commonwealth Bank of Australia, the nation’s largest bank, Murray said the institution sought three essential attributes in board members: judgment, experience and skill.
While the financial crisis had brought to funds the devastating downside impacts of big investment risks taken by executives of financial companies, its ultimate cause was inappropriate monetary policy and pro-cyclical accounting methods in the US, Australia, and other Western economies, which primed them with an unsustainable level of debt, Murray said.
“It didn’t start with greed, but a serious mistake of monetary policy which was too expansionary for too long.
“Expansionary monetary policy causes money to be artificially cheaper and [investment] returns artificially higher.”
He said that institutional investors were “completely redefining now what we mean by liquidity”, and central banks were “redefining what they mean by reserve adequacy”
The short-termism demonstrated by financial executives, who made big bets to win large bonuses, was a product of the cheap, excess debt that was available.
“The greed flows naturally if you don’t provision for bad and doubtful debts.”