Queen’s Speech 2014: Will the Transparency Reforms really bring more control and greater scrutiny?

3^rd June 2014

ShareAction's David Clarke on responsible capitalism and its inclusion in this year's Queen's Speech

The nature of company ownership can be a murky business. Obscure structures and impenetrable trails of paperwork can often keep the public in the dark over who’s really in charge of the 3 million firms registered in the UK.

Vince Cable has announced the establishment of a company ownership register to be included in Wednesday’s Queen’s Speech. Individuals with a shareholding interest of over 25 per cent will be disclosed on a publically accessible list. The idea is to reveal who’s pulling the strings, and to cast a spotlight on owners who are up to no good.

In particular, it is hoped that the move will make it more difficult for firms to evade tax or funnel the profits of corruption. It comes after a sustained campaigning effort by NGOs including Save the Children, who have warned that shell companies based in the UK allow bogus owners to dodge tax in some of the world’s poorest countries.

The creation of the register espouses an important principle; that it should be clear to the public who is running a company, and for what purpose. But this principle can be applied much more widely than simply to those companies which may be engaged in unethical or illegal activities.

The rise of funded pension schemes through automatic enrolment means that millions more working people are entrusting their retirement savings to capital markets. Since listed companies exist to create value for their beneficial owners, this should mean that they are run in the interests of ordinary pension savers who ultimately possess a large proportion of UK shares.

But the reality is quite the opposite. The exercise of ownership rights on behalf of savers can be just as murky. Control over shareholder rights is concentrated in the hands of opaque financial institutions which are unaccountable to the ordinary people whose money they manage.

These institutions have often acted in a way which is at odds with their clients’ interests. Pension savers need their investments to deliver a decent retirement income decades in the future, but the decisions made by pension funds and their managers often fixate on the reckless pursuit of short-term profits.

In advance of the financial crisis, many pension fund managers actively encouraged banks to inflate short-term shareholder returns by irresponsibly taking on more risk. For example, institutional shareholders voted in overwhelming numbers for RBS’s disastrous takeover of its rival ABN AMRO. The crash that followed wiped 21 per cent off the value of pension fund assets worldwide.

Decisions about the exercise of ownership rights are of huge significance to ordinary savers. Issues such as executive remuneration and human rights clearly exercise public opinion, but very few realise that their investments give them a stake in these outcomes. Pension savers currently have extremely limited rights to information about where their money is invested and what votes are cast on their behalf. And rights to participate, for example through consultation on fund policies, are virtually non-existent.

When ordinary people provide capital for big companies, they should have the right to know how those companies are being run. This means being able to scrutinise the exercise of shareholder rights; to have access to a report on what their savings are funding, and to question their fund’s board at an annual general meeting.

The Business Secretary has spoken passionately about the need to develop a more responsible form of capitalism, and the transparency reforms in the Queen’s Speech are an important step towards ensuring that UK companies are run in an open and honest way. But it would be a shame to stop there. Vince Cable should seize this opportunity to shed light on the nature of capital ownership throughout the financial system.