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Corporate governance and the role of directors

Although only just over one-fifth of shares are held directly by individual mem-

bers of the investing public, all of the remaining shares are owned for the benefit of

individuals. For example, the shares owned by the insurance companies represent

funds set aside to provide benefits to individual life insurance (and assurance) policy

holders, or their dependents.

The percentages shown in Table 1.1 are fairly typical of the relative holdings by UK

investors over the past ten years or more. What has altered, however, is the percent-

age of LSE listed shares that are owned by overseas investors. Whereas in 1997, only

23.3 per cent of LSE shares were held by overseas investors, this had risen to 40.0 per

cent by the end of 2006. At the same time the extent that UK investors of all types

invest overseas has also significantly increased. These are features of the increasing

internationalisation of business, a point that we shall consider in detail in Chapter 15.

Individual institutional shareholders are often massive operations, owning large

quantities of the shares of the companies in which they invest. Each institution tends

to employ specialist staff to manage its portfolio of shares in various companies. It has

been argued that the large institutional shareholders, despite their size and relative

expertise, have not been very active in corporate governance matters. Thus there has

been little monitoring of directors. However, things seem to be changing. There is

increasing evidence that institutional investors are becoming more proactive in rela-

tion to the companies in which they hold shares.

The Combined Code

During the 1990s there was a real effort by the accountancy profession and the LSE

to address the problems mentioned above. A Code of Best Practice on Corporate

Governance emerged in 1992. This was concerned with accountability and financial

reporting. In 1995, a separate code of practice emerged. This dealt with directors’ pay

and conditions. These two codes were revised, ‘fine tuned’ and amalgamated to pro-

duce the Combined Code, which was issued in 1998.

The Combined Code was revised in 2003, following the recommendations of the

Higgs Report. These recommendations were mainly concerned with the roles of

the company chairman (the senior director) and the other directors. It was particularly

Table 1.1Ownership of London Stock Exchange listed shares, by UK based

investors, as at 31 December 2006

Investor percentage held

Individuals 21.4

Insurance companies 24.5

Pension funds 21.1

Investment and unit trusts 6.7

Other financial institutions 16.1

Charities 1.5

Banks 5.7

Commercial companies 3.0

100.0

Source: National Statistics website 13 July 2007

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