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Legal & General says that investors must be allowed to seek changes

June 18, 2009

Aggrieved investors should be able to join forces to lobby for change at Britain’s largest companies, the stock market’s most influential investor said yesterday as it launched its biggest call yet for boardroom reform.

As part of a newly published five-point plan to overhaul company practice, Legal & General (L&G) said that the chairman, senior independent director and heads of committees at listed companies should face re-election each year. In time, every director should be approved by shareholders each year.

The plan forms the basis of the group’s submission to Sir David Walker’s inquiry into bank governance, to be published next month. Its is the most public example of a big City investor demanding an overhaul of corporate behaviour in the wake of the banking crisis.

Peter Chambers, chief executive of Legal & General Investment Management (LGIM), L&G’s funds division, asked: “If you are an investor who has struggled to get your voice heard, what else can you do to get them to listen?” He added that being subject to an investor veto would have “focused minds” at Royal Dutch Shell, whose remuneration report was rejected by 59 per cent of voting shareholders last month. “No” votes on remuneration should be binding, he said.

Being able to act collectively could have forced change faster at Rio Tinto, the Anglo-Australian mining group that was forced to rethink a controversial capital-raising plan in the face of investor outrage, Mr Chambers said.

LGIM wants boards to be externally evaluated each year. Non-executives should work harder and be paid more.

The investment manager owns about 4.5 per cent of every listed company through its tracker funds. It could own a further 5 to 10 per cent through its active funds. “It makes us a very meaningful presence,” Mark Burgess, LGIM’s head of equities, said. He added that companies were adopting a “divide and rule” tactic when dealing with their investors. “We have been told more times than I would care to mention that ‘you’re on your own here’,” In turn, shareholders were talking to each other as never before, he said. Being able to combine their efforts without fear of breaching stock market rules could help to force change more quickly. “There needs to be a forum where institutional shareholders can get together and collectively engage with companies,” Mr Burgess said.

LGIM met 640 companies last year, about 130 of those to raise corporate governance concerns. It will not oppose cash windfalls for Barclays executives, including £22 million for Bob Diamond, the president, after the sale of Barclays Global Investors.

However, LGIM added that it continued to object to Sir Stuart Rose’s combined role as chairman and chief executive at Marks & Spencer.

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