A few eyebrows were raised late last year when Bank of Ireland’s Richie Boucher defended his €620,000 a year pay packet. Without a hint of irony, he told an Oireachtas enquiry that shareholders had approved it.

That may sound a little strange. Between 2005 and 2010 Boucher was in a position to warn shareholders that their nest eggs and pensions were about to be blown apart by a reckless property lending spree.

Rather than acknowledge the problem in 2008 he instead reassured shareholders that Bank of Ireland was not a Northern Rock.

Bank of Ireland launched a rights issue in 2009 giving shareholders a second opportunity to lose more money; losses from reckless lending were not properly revealed. Even one influential shareholder, Dermot Desmond, objected to his appointment and scenes from various recent annual general meetings suggest that, generally, shareholders are not happy.

So why did the shareholders approve of his generous salary? The answer is unfortunately complex. Shareholders can be broken down into two categories: those who suffer when share prices fall (individual shareholders) and those who don’t (institutional shareholders).

Individual shareholders at Bank of Ireland are generally interested in the long-term welfare of the bank and would have objected strongly had they known, in 2005, that Bank of Ireland followed a lethal policy that not only obscured losses but paid bonuses to bankers who lent recklessly. If shareholder democracy worked, they would have voted out anyone who even attempted this.

Institutional shareholders behave differently. Unlike individual shareholders they can pass on their losses to someone else. The conundrum is that institutional shareholders are more powerful than individual shareholders; they hold a lot more votes. Yet it is individual shareholders who suffer most when bad decisions are made.

Many institutional investors in Ireland have voting power over shares they purchase on behalf of pension funds but can walk away from losses. In theory, the institutional investor should use his votes in the best interests of the pension fund. This means sacking underperforming directors and replacing bonuses with penalties for reckless policies.

The temptation to protect fees rather than act in the interests of the pensioner is high. Most fund managers will “act passively” ie, not vote against directors, in the hope that these directors will look favourable to any corporate finance pitch that the fund managers’ organisation may offer.

Shareholder voting patterns

Corporate governance experts are worried about the complexities of today’s financial markets where directors end up having more influence over their shareholder voting patterns than is healthy.

Some pension funds for instance “rent” their voting rights for a fee. The pensioners end up suffering along with the other individual shareholders in the company. Economists refer to this as a negative externality, ie other people suffer apart from those that abuse voting power.

A study carried out by TC Hu and Bernard Black of the University of Texas suggests that although the problem is difficult to measure it is widespread. The authors claim, for instance, that Calpers, the largest public pension fund in the United States, with $179.2 billion ($134 billion) in assets, makes about $110 million a year from “stock lending” fees.

Unlike many pension funds, Calpers has controls in place to make sure that stock lending is not abused by renting votes. But some hedge funds rent voting power and force companies they control to buy assets from them, at inflated prices.

In Ireland, with corporate finance houses closely linked to pension and investment fund managers, the incestuous risk that the investment fund manager uses its voting power to push up corporate finance fees is high. Although there is no evidence of vote renting in Ireland, the corporate finance culture is one of always backing the directors, ie remaining inactive. This may partly explain why we have a banking crisis.

If you decide to invest directly in a company bear in mind that if the board of directors make a disastrous decision, and this is backed by the majority of shareholders, there is a high risk that those who made the error can pass the consequences to innocent parties.

Consider joining one of the various individual shareholders’ associations in the UK and Ireland. They regularly highlight instances of weak corporate governance and greed and often write to institutional investors where there are concerns.

Conflict of interest

Finally, if a firm that you have invested in has decided to make an acquisition, write to the board of directors and ask what action they have taken to prevent conflicts of interest arising with their major shareholders. For instance do any of the major shareholders earn corporate finance or other fees from the company whose votes they control?

See TC Hu and Bernard Black's study at iti.ms/XxYv9K

* Cormac Butler is the author of Accounting for Financial Instruments and has led training seminars for bank regulators and investors on financial risk. He has traded equities and options