Toward truly responsible shareholder activism
What's the best way to improve stakeholder engagement? Juliette Daigre, campaigns officer at FairPensions, explains how transparency is the key.
Shareholder activism has been making the headlines in recent weeks, with an EGM led by Sherborne Investors leading to the replacement of F&C's chair and with rebel hedge fund Laxey Partners laying down the case for Alliance to ditch its so-called 'poison pill' strategies. Some commentators have been questioning this approach and, indeed, the whole value of shareholder activism, asking if it should be viewed as a salvation or a death knell.
But attempts to label shareholder activism itself as wholly good or wholly bad fail to recognise that such activism comes in many forms. To determine its value, one must examine the purpose of the activism. Is the shareholder activist acting as a corporate raider, buying into a company to force through changes in management to achieve a short-term, self-interested rise in share value before selling out of the company again just as abruptly, leaving the other shareholders to pick up the pieces? Or is the activist interested in long-term value creation?
It is possible to use a model of responsible shareholder activism to address a wide range of issues - from finance and corporate governance right through to issues of environmental and social concern, such as climate change and labour standards - from a long-term perspective. Shareholder activism shouldn't be about short-term gains for the company or the investor, but about long-term value for ultimate owners, such as pension fund holders. Yet pensions are perhaps the most obvious example of a long-term investment where short-termism continues to dominate. Earlier this month, the chief executive of Aviva Investors criticised the City for being wilfully blind to ethical ticking time bombs, jeopardising not just social and environmental sustainability but also the sustainability of our pension pots.
So how do we promote a better model of informed stakeholder engagement? While the FRC's recently published Stewardship Code fails to adequately acknowledge the importance of environmental and social issues, we nonetheless applaud its aim to enhance the quality of engagement between institutional investors and companies. The Code explicitly recognises intervention as a method of protecting and enhancing long-term shareholder value and outlines various possibilities for escalation after initial (confidential) dialogue - including meeting with management or the company's advisers, joint interventions with other institutions, making public statements in advance of the AGM or an EGM and the use of shareholder resolutions.
Regrettably, the more robust forms of engagement remain underused in the UK, with many institutional investors unwilling to challenge companies or to recognise that shareholder resolutions may be an appropriate form of escalating engagement with companies. When FairPensions co-ordinated shareholder resolutions at BP and Shell in 2010, only a small number of UK institutional investors were willing to co-file or vote in support. This contrasted with the attitude of investors in North America and continental Europe.
The value of stakeholder engagement also depends on transparency. If engagement between investors and companies takes place behind closed doors, then there is no way for those affected to assess the agenda of the engagement - or the results. The aim of engagement must be securing long-term value for the ultimate owners, namely pension fund members and retail investors, and as such, we must have the right to see how our shareholder power is being used - including through the exercise of voting rights. In the aftermath of the financial collapse, it is clear there is a public interest in knowing how fund managers vote on contentious issues such as executive pay and whether they are encouraging or controlling corporate risk-taking aimed at boosting short-term returns.
When shareholder oversight is seen as a substitute for regulation of listed companies, it is all the more important that measures to improve shareholder engagement and transparency be robustly and properly enforced. Without this, we risk a double regulatory failure. On voting disclosure, despite years of voluntary codes, there is little evidence that disclosure of voting records by institutional investors is improving, and the Stewardship Code's provisions on voting disclosure remain disappointingly ambiguous (despite, it would seem, the FRC's intention). FairPensions advocates mandatory voting disclosure and the provision of a minimum disclosure template reflecting current best practice to improve the quantity and quality of voting disclosure.
With this information more freely available, we might start to see an upsurge in another form of shareholder activism - independent citizen investors taking action to protect their long-term interests, working toward a model that is both financially and environmentally sustainable. Typically, such individuals are concerned about the company's financial performance but are also not afraid to say - we believe in profit, but not at any cost. And that's truly responsible shareholder activism.
Juliette Daigre is campaigns officer at FairPensions