CITY AND SUBURBAN
Brownie points for good practice and the cure for a fine old conflict
CHRISTOPHER FILDES
The case of the AE pension fund shows how far we still are from guiding these huge aggregations of money by good law, or even by good practice. Hill Samuel, merchant banker in the case, pleads an unprecedented conflict of interest. It has a simple cure. The bank was defending AE, the engineering group, against a bid from Turner & Newall. Hill Samuel Investment Management was managing the AE pen- sion fund. The fund owned, and hung on to, AE shares amounting to 2.3 per cent of the company's capital — which was less than the margin by which Turner & Newall's bid failed. Cries of foul then split the air, and the Takeover Panel now reports that Hill Samuel had indemnified Hill Samuel Investment Management against any loss sustained in not taking the bid or not selling in the market. That, says Hill Samuel, shows the impermeability of the Chinese wall between the bank and the fund managers. What it shows is the conflict of interest which is always latent when a company's pension fund buys the company's shares. The trustees of the fund are likely to be directors or officers of the company. In theory they need Chinese walls built straight down the middle of their heads. In practice, a fund can be expected to vote as the board wishes. Some boards intend this. Some think they know, better than the market, what the com- pany's shares are worth — which, if they are right, may amount to insider trading. Some never think at all, until the heat is on. Thought would show them that a separately constituted pension fund is there to segregate the fortunes of pension- ers, actual and prospective, from those of shareholders. The world and the markets are wide, and why, of all shares, need the fund buy the company's? The straight answer is that it never should. Until the law (or the Occupational Pensions Board) en- forces that, it should be enforced by example. Fund managers should require it as a condition of their contracts, and Hill Samuel, which now needs the brownie points, should show the way.
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