By Kirstin Ridley and Raji Menon
LONDON (Reuters) - City of London grandee David Walker risks opening a Pandora's box if he turns shareholder rights into duties and requires investors to explain why they have sold shares as part of a review of bank pay and practices.
Some experts argue that proposals seeking to make shareholders responsible for company performance and strategy, coupled with a requirement for investors to disclose whether and how they voted, cut to the core of century-old corporate law.
"(Voting) is an entitlement -- and you don't have to exercise or discuss the exercise of entitlements," noted Barney Reynolds, a partner at law firm Shearman.
"As a shareholder, people will be acting for their own benefits ... the idea that they owe some wider obligation to the management is, I think, fundamentally questionable. It's a very, very big change of principle."
Walker, who will next Thursday publish the final report of his government-sponsored review, has outlined 39 recommendations on how banks should be run, ranging from pay policies to board member selection, to help restore credibility to a financial industry vilified by the taxpayers who footed its bailout bill.
Investors have been broadly supportive of the proposals, noting that Walker is "sensible" and that his business acumen and former tenure as chairman of Morgan Stanley bank's international unit make him "a safe pair of hands."
"The report has some rough edges in terms of the prescriptive nature of certain recommendations," said the governance head of one large fund manager in London.
"These edges need to be polished, but in general most of the recommendations as drafted are ones that we were supportive of."
Marc Jobling, assistant director of investment affairs at the Association of British Insurers (ABI) -- whose members own around 15 percent of the stockmarket -- is puzzled by the request for active engagement, however.
"I am not sure what it means to have to engage with a board before selling stock," he said.
"Do you write a letter? Ask for a meeting? What is expected? You say you have concerns -- and the company says it doesn't share your concerns. Are you then allowed to sell? Or do you have to meet with them twice?"
OWNERSHIP QUEST
But shareholders also applaud Walker's attempts to meet concerns that investors engage in too much trading activity and take too little ownership responsibility.
"We strongly support the intent behind Walker's proposals to focus on having accountable and responsible shareholders as well as board members," said Anne Kvam, global head of corporate governance at the Norges Bank Investment Management, the fund management arm of the Norwegian sovereign wealth fund.
Roughly 25 percent of his recommendations affect institutional investors. They call on boards to "ensure that they are made aware of" any material change in the share register, understand why and respond accordingly.
The Financial Services Authority (FSA) should also contact major selling shareholders "to understand their motivation." institutional shareholders are also being called to publicly sign up to new stewardship principles -- showing they are prepared to ensure companies they partly own are well-run.
However, some argue that it is not always cost-effective for shareholders to vote and that calling sellers to account questions the principle that all shareholders are equal.
"You're starting to divide up shareholders and that's not something we've had before," noted one large shareholder. "This requirement to disclose does start to raise bigger questions and opens a Pandora's box."
BONUS SIDESHOW
Much of the focus ahead of the final Walker Review has landed on his proposals to rein in a bonus culture that is blamed for helping allow bankers take excessive risk -- and ultimately destabilise the financial system.
But financial services minister Paul Myners told a London awards ceremony on Thursday evening that executive remuneration was also a matter for shareholders to resolve.
"We have made great leaps, now shareholders must take up the baton. They must engage with remuneration committees and challenge remuneration policies that encourage excessive risk or fail to strike the right balance between rewarding employees and capital," he said.
Walker has, however, also been accused of an "underwhelming" report by John McFall, the chairman of the treasury select committee, because his recommendations call on the industry to "comply or explain," rather than enforcing change in law.
Few expect major changes in the final Walker report, although PIRC (Pension Investment Research Consultants), a top corporate governance body, says plans to ensure non-executive directors devote at least 30-36 days per year to major bank boards will be watered down.
(Editing by Jon Loades-Carter)
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