Investor Working Party issues recommendations on stewardship [updated]
GLOBAL - Six major institutional investors have issued four recommendations to improve the stewardship of UK companies.
In the 2020 Stewardship report, the investor working party - comprising Aviva Investors, BlackRock, Governance for Owners, RPMI Railpen, Ram Trust and the Universities Superannuation Scheme (USS), supported by think tank Tomorrow's Company - focuses on how to improve the quality of stewardship exercised by institutional investors, as well as how to achieve a "critical mass" of stewardship investors.
Its recommendations include:
• The development of a Stewardship Framework for equity investors to identify the level of stewardship they intend to undertake. It is envisaged that signatories to the code would complete this framework providing a common basis for comparison. This is to help asset owners to make more informed decisions.
• A series of good-practice steps that would enable investors and companies to make better use of each other's time.
• A feedback mechanism between companies and investors so that the quality of stewardship could be further improved over time.
• Suggestions for companies to build up a critical mass of stewardship investors.
The report recognises that many of the problems identified require changes across the whole chain of engagement - from shareholders to companies.
But it focuses on a small number of key weaknesses that can be remedied.
It says the quality of meetings and engagement needs to be more purposeful, effective and productive.
It says there is too little information that enables asset owners to compare the stewardship approaches of different asset managers, and that index investors are often dismissed by companies and could be harnessed more effectively to support stewardship.
It also argues that companies need to have a critical mass of stewardship investors on their shareholder registers - the working party suggests 25-35 - but do not always appear to have a plan for achieving this.
In addition to submitting the report to Professor John Kay as evidence for the next stage of his review of equity markets, the working party is inviting the Financial Reporting Council (FRC) to incorporate these ideas into its programme to improve the effectiveness of the UK Stewardship Code.
The report's implied criticisms of the Code were articulated more explicitly at its formal launch, hosted by Aviva Investors in London on Monday.
Amra Balic, EMEA head of corporate governance and responsible investment at the company, said: "Before we can move on to address the more complex issues around stewardship, we still need to address the more basic aspects of stewardship that still don't work."
Discussion focused on the working party's major innovation, which was to suggest a more detailed framework with which to describe the different elements of stewardship and levels of engagement, so that asset managers could group themselves into one of four categories - 'Full Range of Stewardship Activities', 'Some Stewardship Activities', 'Limited Stewardship Activities' or 'Exemptions/Further Explanations'.
BlackRock indicated that it intends to begin disclosing its activities according to these categories.
Daniel Summerfield, co-head of responsible investment at USS, said: "There are 160 signatories to the UK Stewardship Code, and the only differentiation drawn by the FSC is between asset owners and asset managers."
In a somewhat short-tempered exchange, the FRC's senior investment adviser Peter Montagnon cautioned that complicating the details of the definition of stewardship could stifle action and end up as "the asset management community talking to itself".
But, also from the audience, Penny Shepherd, chief executive at the UK Social Investment Forum, indicated the extent of the problem when she recalled a recent meeting with the head of governance at a large UK company who appeared to believe that only 2% of its shareholders were "SRI".
When Shepherd looked at the share register, she found that the largest shareholders, owning 20% of the company, were almost all "investors who would regard themselves as responsible investors - including the Norwegian Global Pension Fund, Standard Life, Legal & General and BlackRock".
Balic noted that both asset owners and companies needed to be able to distinguish between asset managers that really are able to engage and those that are not, to make the engagement process as a whole more efficient.
Peter Butler, chief executive at Governance for Owners, added: "Distinguishing in this way will take us some way to finding out whether or not there really is a stewardship resource shortfall."
On that subject, the representative of company management invited to speak on the panel, Geoffrey Cooper - chairman of Dunelm and chief executive of Travis Perkins - warned against assuming that engagement between companies and investors was "broken".
"We need to build upon what we already do, not throw current practice away," he said.
He also stressed the need "to be clear about the separation of roles between investors and the board of directors to whom management of the company has been delegated".
He contrasted the "long-term investment" in his companies by its suppliers and, especially, its employees, some of which have spent more than 40 years in Travis Perkins's yards, with the interests of investors with even the longest time horizons.
"I do find it odd that someone can buy a share and vote on it straight away," he said.