Breaking down the barriers
While investor portfolios become more global investor knowledge on what their rights are as shareholders and how to exercise them in the cross-border context struggles to keep up – to put it mildly.
Cue the new handbook from the Eurosif, Active Share Ownership in Europe. Eurosif notes that “the publication targets investors who are seeking a means to better manage environmental, social and governance risks across their domestic and foreign investment portfolios, especially with regard to their rights as shareholders.”
“The book builds a bridge between the agenda of investors on the one hand, and that of shareholders’ rights and corporate governance on the other,” explains Jérôme Tagger, Eurosif’s head of research.
Currently the European Commission is working on a directive on shareholders’ rights in a cross border context; a draft was issued in December. Eurosif was involved in the consultation process which is now at the European Parliament. “Under discussion is the need to improve the ability of shareholders to access AGMs in other countries,” says Tagger. “This is very problematic: in particular voting can be difficult because of a long chain of intermediaries between the owner of the asset and the local custodian, which can be endless. It is not always easy to identify the real shareholder and who owns the right to vote. There are also problems with the timeliness of data issued abroad and the language in which it is issued.”
The globalisation of investor portfolios is set out in no uncertain terms by Daniel Summerfield, senior adviser on responsible investment at Universities Superannuation Scheme (USS), who was also a member of the reading committee, a panel of experts which examined the issues and difficulties facing shareholders in crossborder engagement, thus providing the basis for the handbook itself. “Approximately 55% of USS’s equities portfolio is now invested in non-UK markets,” he says. “For example, in 2002 we had 8% in US equities and in 2006 this had increased to 13%. So it follows that governance standards in overseas markets matters to us as much as standards in our UK holdings are concerned. As a long-term active and responsible share owner we can longer just restrict our engagement activities to the UK.”
The second reason which Summerfield gives for the increased activity in overseas shareholdings is that there is a now an opportunity for overseas investors to help shape governance standards in overseas markets. “Look at the UK, in the early 1980s, 3% of UK equities were owned by overseas investors, it is now something like one third, while in France the figure is as high as 40%,” he says. “Similarly ,UK investors are now the largest group of overseas investors in the US with approximately $321bn (€255bn) invested in the US market.”
The so-called ‘contagion effect’ is another factor which is driving increased overseas activity by investors. “The US sets the scene where executive remuneration and other issues are concerned,” says Summerfield.
“Given that many FTSE100 companies are exposed to the US market where they have a large shareholder, customer or employee base, some US governance standards are being exported to the UK and other markets.”
Taking these three reasons into consideration the next step was how to become more focused on our activities in overseas markets. “USS’s view is
that working collaboratively with investors in other markets is the key,” Summerfield explains.
“It is important to forge alliances with investors in other countries as they will have a better understanding and knowledge of their own markets. In this way we will know which tools are most appropriate to a particular market, company and situation. For example, class action suits and shareholder resolutions are ways of engaging in the US whereas in the UK different engagement tools are utilised.”
To date most of USS’s cross-border engagement activities have focused on the US. “That is where we thought we could be most effective,” says Summerfield. “Things are changing there in that, for example, US pension funds are becoming more active. So we saw a window of opportunity to become more engaged in the US market.”
Although investors such as USS are engaged in the US, Europe is a different story. “We feel that due to the obstacles that are in place in some markets, it is still difficult to get any real traction as far as collaboration and engagement are concerned,” Summerfield notes.
He adds: “Some of the obstacles such as share blocking are slowly being removed but other issues such as ‘one share one vote’ are still unresolved to a large extent and are currently being addressed by the European Commission.”