Business

Why Obama matters to every British investor and pension fund

Colin Melvin
10.11.08

The Obama victory has been hailed as a historic moment but what does it mean for British pensioners, institutional investors, shareholders and companies? Very few people have completely grasped how ordinary people in the UK own large swathes of corporate America, through our pension funds and investments.

The credit crunch which started in the US, resulted in billions of pounds being wiped off our pensions and investments overnight, this could have been avoided if the owners of those companies had behaved responsibly.

There will be huge pressure on Barack Obama and his new Treasury Secretary to restore confidence in the banking system and stabilise the American economy.

Despite the fact that governments have stepped in around the world to help ease the situation, there is still growing concern around the safety of our savings, with trust and accountability in the entire financial system continuing to suffer severe erosion.

America is at the forefront of those worries. Shareholders' rights in the US are not as strong as they are in the UK so even though you and I are owners, by default, of big companies in America, our powers to hold these businesses to account are limited. Most of us are still oblivious to the fact that our pension schemes are invested in companies that are taking unacceptable risks on our behalf and paying executives excessive and unjustifiable bonuses — all things we can do very little about because of our limited rights as shareholders in the US.

However there may be hope in sight as Washington will be powerfully motivated to protect hard-hit pension funds. In Obama's first 100 days of office we can expect to see the rights of shareholders strengthened. He understands the need for change to the economic landscape to prevent a recurrence of the greed and overtrading which have driven the current crisis.

Obama needs owners to shoulder their responsibilities so that the regulators can focus where they can best add value. This will include a “say on pay”, and access to the proxy (the ability to propose directors to the board).

There may also be legislation that will breathe new life into defined benefit retirement plans — where the employer has responsibility for managing the pension fund — rather than contributory schemes — where the onus has been on the employee. This will spur institutional investors such as pension fund trustees (the guardians of our retirement income) to take up their responsibilities as owners and will give important new tools to do the job.

Given the already more open world view of the Obama administration, I expect this to become a two-way exchange internationally, with the US providing important leadership in addition to borrowing practices from abroad.

These initiatives will lead to more meaningful director elections and more accountable boards, to the long-term benefit of us all as corporate owners through our pensions and investments.

Obama's team have been for some time working with the current regime to ensure a smooth transition and have been involved with many of the decisions on bailout packages, so these are unlikely to be reversed.

I hope that pension funds and other institutions will rise to the new opportunities that they are given by his leadership to create a stable platform for future growth. In any case, we are at the beginning of an exciting moment in the quest for an accountable capitalism. Some on Wall Street do worry that the Obama Presidency will inexorably mean greater regulation and red tape.

But I believe a more constructive dialogue between companies and shareholders in the US will create a more sustainable solution to the credit crisis and a better future for all of us.

Colin Melvin is CEO of Hermes Equity Ownership Services.

© Associated Newspapers Limited 2008