The past couple of years have seen an undeniable and long overdue change in fund governance. Listed company boards, in particular, are being directed by changes to the listing rules and existing regulations, as well as by the implementation of new regulations such as the Foreign Account Tax Compliance Act (FATCA) and the Alternative Investment Fund Managers Directive (AIMFD). In my view, all of this is helping to achieve better governance and greater transparency.
Below-par governance is still a problem, but it is becoming more difficult to get away with, as institutional investors now expect more from the boards of companies they invest in. In 2008, investors being gated or having their investments paid out in side pockets, signed off by the boards, made it clear that a greater focus was needed on who sits on boards and how they conduct their business.
It also made clear that shareholders and boards need to work more closely together, away from the executive management or the investment adviser, to ensure they are in agreement about how the company should be run.
However, there is still further to go in achieving a level of transparency and governance where shareholders feel confident that their company is run in the best possible way. This confidence will come, though, through more governance and through boards conducting direct and ongoing contact with investors.
To this effect, there is still much to be done to improve shareholder communications. It is a difficult area to discuss because often the parties begin by blaming each other for the lack of communication, which is not constructive. I have spoken to many chairs of listed companies who say they are offering meetings to investors but that no one is interested in meeting them. But what does that tell us? What I take away from this is that it is not necessarily meetings investors want.
So what do investors want? I speak on a regular basis to various investors in the listed fund whose board I chair. When issues have arisen, I call the investor to chat about what is going on, and perhaps to explain issues in more detail. I have always found investors to be surprised, but happy, that the chair is calling them directly, rather than writing a letter or passing a message through the broker, investor relations or executive management.
Several investors have told me that they have never spoken to the chair. One said that he did so only once, when the company he had invested in was in liquidation. He said the conversation would have been a lot easier had there been an earlier commitment to direct communication from the chair.
Here is some of what I have picked up from speaking with investors:
• High-quality engagement with shareholders does not necessarily mean more meetings;
• Investors use engagement with directors to gain a better understanding of the rationale behind governance and strategic business decisions, and to ensure that members of the board are ‘plugged in’;
• Shareholders would like to get an insight into how directors think;
• Context is what shareholders are looking for from the boards – boilerplate statements about good governance is not adding much meaning.
Unfortunately for a listed company, a level of boilerplate statements in the annual report is unavoidable, to ensure we cover all the necessary topics. But I believe it is the engagement and contact in between the annual and interim reports that can give investors some higher-quality engagement.
It is the board’s responsibility properly to address any concerns put forward by shareholders, no matter what their size. If many share the same concerns then there is a good basis for an open shareholder meeting, where those concerns can be discussed directly with the board. Where concerns come via proxy companies and voting at the annual general meeting, these areas can be addressed in a shareholder letter from the board explaining in detail the reasons behind their decisions.
Fundamentally, better engagement will generally lead to better governance and ultimately to running the company better and safeguarding stakeholder interests. As such, I see little reason why unlisted companies should not follow the same governance principles as listed companies and I am continually pushing for investors and shareholders to ask for and expect the same level of transparency and governance.
Investment fund boards specifically should be in close contact with shareholders so they feel any issue can be dealt with through engagement with their board.
Boards can then represent shareholders’ interests with the investment manager. Ideally, all investor complaints should go directly to the board but I have heard of several examples of shareholder complaints being lodged with the investment manager and never reaching the board. A stronger connection between the fund board and investors should mitigate that risk somewhat.
To improve engagement we need both boards and investors to take an active part. This does happen on occasion but I think it can be improved, on both sides. Investors should feel confident in expecting boards to do their utmost to communicate in as much detail about how companies are being run as is possible while protecting the company’s interests.
I have a vision of governance being conducted in a much more open, honest and fair way in all areas, in the interests of all involved. To achieve this we need to start thinking slightly differently, perhaps considering that “this is how we have always done it” doesn’t quite cut it anymore.
Shareholders and investors undoubtedly want changes. Now is a good time to improve engagement to increase the understanding of what investors expect from the boards of the companies they invest in.
Do not wait until a complaint is necessary.
Charlotte Valeur is chair of BH Credit Catalysts, a closed-ended fund investing in a master fund managed by Brevan Howard, and founder of fund governance advisory firm GFG