Jim Mellon has been in fund management since 1978, with GT, Thornton and then Tyndall. He and two colleagues set up Regent Pacific in 1991 - said an interview - with Hong Kong businessman Vincent Chan. From its inception, Regent has targeted 'undervalued opportunities' in emerging markets, especially closed-end funds. [Further biographical details can be found in 'Institutional Investor' magazine, January 1997]

"the responsibility of a company is exclusively and absolutely to the shareholders - it does not have responsibility to its employees, management or customers other than to further the interests of the owners"

Q: It appears you have a particular approach to corporate governance, seeking out opportunities to acquire and exercise voting rights where there are 'undervalued assets' - how did you arrive at this strategy, and what does it entail?

Our strategy is to buy undervalued assets wherever they are in emerging markets - it's increasingly less the case that we exercise voting rights. When we started our company, the obvious target was closed-end funds selling at discounts - public companies whose assets were fundamentally undervalued. We would use our voice as a shareholder to reconstruct those companies, for ourselves principally but also, by ramification, to the benefit of other shareholders. While this is a strategy we are most heavily identified with, it is not the overriding feature of our business - in most cases our investments are passive.

Q: As corporate governance issues and proxy voting become hotter topics, do you expect better opportunities to target other financial institutions, or simply to encounter stronger defences?

Just as we have now become a public company, anyone who puts themselves into the public domain should expect scrutiny. In the case of closed-end funds or, for example, of Hambros Bank, we have done nothing other than to exercise our rights as a shareholder. So, although some might describe our activities as 'ungentlemanly' or even 'sharp', whatever we do is within the framework in which the shares of those companies were sold in the first place. In the same way, now that we have gone public, if people wanted to shake us up because we'd done a poor job, we would have to accept it.

Q: You discipline management through the markets, by carefully targeted and timed buying, selling, and value-based activism. Do you think that this is the best mechanism for encouraging good governance?

The best way to start the ball rolling is to talk to the management directly. Unfortunately, in most cases, the reason the company is under-performing is that management is inadequate and therefore unreceptive to the sort of proposals we might make. We are then forced to take action through the constitution of the company and try, though external methods, to restructure it.

Looking first at closed-end funds, the arguments are straightforward - their assets are easy to identify and value, and they typically sell at a big discount. The validity of the closed-end fund is no longer there because the market is now liquid, but the managers have no incentive to close the gap between share price and net asset value because they are paid on the value of the underlying assets not the market cap. of the fund. They have almost an annuity stream of income, at the expense of the shareholders. We have done fourteen reconstructions in five years, every one successful, from our point of view on behalf of our investors and for the other shareholders who were otherwise stuck indefinitely at a substantial discount.

In the case of Hambros, the arguments are similar. We are not trying to 'raid' Hambros, nor the closed-end funds - simply to restore a balance between share price and NAV.

Q: How do you answer the charge that your methods of shareholder activism are often "self-serving" rather than furthering the cause of all the minority shareholders?

We are in business for ourselves and for our clients, and to that extent we are self-serving. We don't present ourselves as crusading knights, and it is not our objective to go out and help other minority shareholders, though they tend to get carried along. It is indeed a form of naked capitalism, but I don't think our own shareholders and fund holders would be pleased if we operated as a charity for the benefit of minority shareholders around the world!

Q: Looking at corporate governance more generally, from your perspective, what are the principles at the heart of 'the corporate governance debate?'

In my view, the responsibility of a company is exclusively and absolutely to the shareholders - it does not have responsibility to its employees, management or customers other than to further the interests of the owners of the capital. That's a very Anglo-Saxon view of corporate governance, but it's the view that I hold. To that extent, a company should not be run for the maintenance of a lifestyle for management and employees, it should be run exclusively for profit. I don't think that companies should, without reference to shareholders, make any political or charitable donations, give substantial options or other remuneration packages to senior personnel, nor make serious changes in the nature of their business. The thread running through it all is ultimate accountability to the shareholders, and not to some kind of body corporate for communal benefit.

Q: Why do you think so many institutional investors either do not vote at all, or have policies of always voting with existing management?

I can't understand a policy of always voting with management - it is rigid and must by default be incorrect in certain cases. For instance, when management is clearly flawed - such institutions are withdrawing from a fundamental right they can exercise not only on their own behalf, but on behalf of their shareholders, or people who are saving with them - they are representatives as opposed to owners of the capital that they are voting for. As for not bothering to vote, I suspect that this has a lot to do with the voting mechanisms. Institutions don't have time to get the proxy forms, review and assimilate the information, and it's all too hard to vote. It may be lethargy, or simply that pressure of other work makes voting at AGMs not a high priority.

Q: Would you agree that this is tantamount to owning something and then not looking after it?

If you are a very large institution you have a huge amount of money and you have to diversify among many companies - a few will fall by the wayside but, generally speaking, most companies will actually be run properly for the benefit of their shareholders. Thus by dint of default and diversification, while the charge may be accurate, it can be glossed over by the fact that there are only a few 'bad apples'.

Q: In view of your actively voting rights in, say, a fund-busting scenario, do you have a policy of active proxy voting as regards the rest of your holdings?

Not necessarily. We obviously look at all the votes that come through, but we are generally passive investors and not looking for a fight, and would usually vote for management or not vote - the latter not through apathy but because we are usually satisfied with the way companies are run.

Q: What do you think of the argument that institutional investors have a duty to exercise their voting rights diligently as part of their fiduciary responsibility?

Well I disagree with that - nobody has got to vote, but I think that institutions have a duty to review the opportunity to vote on each occasion, but that is different from having to vote.

Q: Do you think that institutional investors should concentrate solely on financial added value?

Yes.

Q: What aspects of good corporate governance do you believe add value?

I think greater disclosure, greater transparency, greater communication, greater consultation with shareholders on key issues such as executive compensation and changes in business strategy, and appropriate use of non-executive directors to remove potential conflicts of interest - all those things, racked up, make for good corporate governance.

Q: What do you think that stakeholder theory has to say about wider issues of corporate governance and accountability?

I don't believe in stakeholder theory. What I do believe is that companies should widen ownership in their own stock among their own employees and managers; that the greater the degree of ownership by employees and managers in the company in which they work, the more likely the company is then to return profits to the whole body of shareholders.

Q: Given that the linguistic definition of prudence implies a long-term view, is it possible to pursue purely short-term financial gain and still act as a responsible fiduciary agent?

I don't think that being a long-term investor is incompatible with anything I've said - a focus on the company being run for the benefit of shareholders does not imply short-termism. Companies must address issues of re-investment of capital, dividends, share price, etc. not just for today but beyond tomorrow. I am very much in favour of companies reinvesting, provided the expected returns are high. It is up to the shareholders to ensure that companies are not run in a short-term fashion - if they are, they are more likely to be badly run!

Q: So is there a conflict of interest between institutions' dual roles and responsibilities as both owner and fiduciary?

No, I don't think there should be any conflict at all. Institutions, if they are long term investors (which is what they should be) will take an active & appropriate interest in the businesses in which they are invested, but neither of those things should be in conflict.

Q: Is there any other point you would like to make on these issues?

I have strident and straightforward views on corporate governance - no doubt in highly developed societies such as the US or the UK, some refinements are necessarily imposed by sheer volume and size, but we don't find that here in Asia. The bottom line is that shareholders own the company, shareholders should get the reward.

Q: Do you feel something of a lone crusader on shareholder rights, or are there others doing much the same or, for that matter, do you perhaps see it simply as nothing more than one particular kind of investment opportunity?

It is one of several forms of investment opportunity, and no longer the major part of our business, but it is sometimes disappointing to see institutions not supporting measures that will be protective of their clients. They won't take the lead but, increasingly, will back us once we have - hence the reconstruction of all fourteen funds we have been involved with. We are just waiting for Hambros Bank to be reconstructed as well! We don't like giving up, and there's no reason to give up - Hambros remains a fine investment opportunity.