Co-op refuses to invest in six companies

Co-op refuses to invest in six companies

Co-operative Insurance Society refused to invest in six major companies last year because of their stance towards corporate governance and has taken a tough line on at least three others over boardroom issues.

The Manchester-based group has £19bn under investment, including £2.5bn in unit trusts. It is the fund management arm of Co-operative Financial Services, a key part of the co-operative movement.

Its exclusion list contains retailer French Connection, publisher Euro-money Institutional Investors, home shopping group N Brown, cruise line Carnival, technology company Amstrad and - until recently -Asian miner Kazakhmys.

The fund manager also provides three examples where issues such as boardroom pay have led to serious discussions about investment decisions and prevented the group from taking a more positive stance. These are banking groups HSBC and Royal Bank of Scotland, and fund manager Aberdeen.

Ian Jones, head of responsible investment at CIS, said there were some companies with governance issues so bad that the group could not consider investing in them. Much of his concern stems from "dominant shareholders", which he regards as a "potential threat".

The group held a stake in French Connection until deciding to sell after failing to extract changes from chairman and founder Stephen Marks. Euromoney Institutional Investors is also on the list because of the stake held by Daily Mail and General Trust, and N Brown is.....continued below

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there because of the 33% stake held by Lord Alliance, its chairman.

Carnival is excluded because CIS found the group "very difficult in terms of willingness to engage" with shareholders. This is despite CIS's assessment that it is an attractive investment as it operates in a duopoly with Royal Caribbean and has good prospects for long-term growth. CIS sold off its holding in Carnival because of its broader concerns about corporate governance.

CIS objected to Amstrad, bought by BSkyB in September, because of its relationship with Sir Alan Sugar.

Kazakhmys was recently removed from the exclusion list because it has moderated its stance towards corporate governance by appointing new non-executive directors.

It is the only one of the six companies on last year's list to have outperformed the FTSE All Share index in 2007. French Connection's performance is almost a negative 50%, Euromoney Institutional Investors close to 40%, N Brown almost 30% with Carnival not far behind. Amstrad's underperformance is close to 10%.

The CIS claims to be only the fund management group in the UK to "fully embed" environmental, social and governance issues into its decisions about which stocks to buy and sell.

There are instances where corporate governance assessments reinforce the investment case. For instance, the improvement in management of telecoms group Vodafone and its strong cash generation were backed up by "profitable sustainability opportunities". Similarly, Scottish & Southern Energy's good management of power generation assets was supported by high scores on governance and environmental issues.

guardian.co.uk © Guardian Newspapers Limited 2008