James Moore: Bumi's big mess reinforces the case for corporate governance of trackers

Outlook Bumi, the London-listed natural resources investor whose misadventures in Indonesian coal-mining have made it a poster child for everything bad about the sector, was at it again today.

The company said a report by Macfarlanes, the law firm, found circumstantial evidence of financial irregularities at one of its operating companies. But this can't be corroborated thanks to the "unwillingness to be interviewed" of certain key parties. And it won't publish because of "legal risks".

The company's embattled directors are caught between the Bakrie family, which part-owns the company's operating assets and want them back, and Nat Rothschild, who spearheaded the operation until a spectacular falling out with the Bakries led to the current state of affairs. He wants to kick out the board and has taken on the Bakries, who are politically not without influence in Indonesia. It's all a big mess, and one that's getting worse by the day.

You might think that if the City of London is happy to have its reputation dragged through the mud thanks to this lot, that's really a matter for the London Stock Exchange, and perhaps the Financial Services Authority, which oversees the listing rules.

And if institutional investors are willing to back natural resources ventures in foreign territories with less than tip-top governance standards, more fool them.

But, as I've written before, Bumi holds a place in the FTSE 250 index of second-tier stocks. That means that if you have invested in an FTSE All Share tracker fund – and in the interests of full disclosure I have – or if your pension fund has, you may well have some money with Bumi. A small amount, maybe, but who has money to throw away in the current economic climate?

It might be a lesser issue if Bumi were the only company with such problems, but it isn't.

London's natural resources sector is chock full of governance "issues". Your starter for 10 is ENRC, which an ousted former director memorably described as "more Soviet than City". It's in the FTSE 100.

Of course, some might say that's what you get if you invest in trackers as opposed to actively managed funds whose managers can steer clear of the Bumis and ENRCs of this world. Trouble is, those funds are expensive, and frequently fail to beat trackers anyway. Picking a good one requires expensive and time-consuming research and a certain amount of luck.

This latest twist in the Bumi affair can only enhance the case for reforming the rules governing trackers. And there is a cheap and easy solution to the problem. Apply a governance standard. Give an external organisation, say the Association of British Insurers, the right to assign a red light to companies which violate the letter, and perhaps the spirt, of the Combined Code on Corporate Governance. This could then lead to their exclusion from tracker funds, and our money wouldn't be used to support companies like this the next time the City scents a fat fee.