The era of the 'absentee landlord' shareholder is well and truly over, says Jennifer Walmsley, director at Hermes Equity Ownership Services.
Never before has there been so much focus on the role of shareholders. In a few weeks' time, the Investment Management Association will publish the results of its survey of shareholder voting and engagement in the UK. This review of asset owners and the fund managers who invest their assets will look at whether they are actually doing what they say they are doing. It is the first official test of whether the Stewardship Code is leading to better, more productive conversations between companies and their owners.
When the Stewardship Code was launched in July 2010, it marked the first time, anywhere in the world, that a regulator had taken steps to influence investor behaviour. The Code calls on institutional asset owners to monitor their investments, intervening where necessary and escalating engagements as appropriate. It also requires funds to be transparent about their policies on voting and engagement and to report regularly to their clients or beneficiaries.
Coming as it did in the immediate aftermath of the financial crisis, it is clear that the Code is intended to be a game changer, shaking up the way the fund management industry behaves. During the financial crisis, Paul Myners talked about "ownerless corporations", criticising shareholders for behaving like gamblers and "absentee landlords". And Sir David Walker, who undertook a review of UK banks' corporate governance, said shareholders must share the blame for the collapse of the banking system. In short, the industry wasn't working properly, and shareholders were not living up to their responsibilities. They had not been asking the difficult questions about strategy and performance, scrutinising compensation arrangements and questioning whether the people running the company were the right ones.
It seems clear that, unless asset owners - or fund managers on their behalf - are asking these sorts of questions, and more, then the value of their investments is at serious risk. A huge amount of research has been done in this area, and there is one very clear and compelling conclusion in favour of shareholder engagement. Companies with active and engaged shareholders are far more likely to create value than those without. However, being an engaged owner of companies is not easy. It requires significant investment in senior resources with the right sorts of skill, set as well as patience and persistence. But surely it is worth it.
On many occasions, Hermes has taken actions that have led to concrete changes at companies, such as the appointment of an independent chair or non-executive directors, the sale of underperforming businesses, the introduction of remuneration schemes that better align executives with shareholder interests, improvements in risk management or disclosure. Over time - and shareholder engagement is a long-term game - such changes will add value to the companies owned by the pension funds we represent.
Will better conversations between companies and shareholders prevent the next BP or the next banking crisis? It would be foolish to make that guarantee. But asking the tricky questions and challenging companies on the thorny issues that they'd rather not think about surely lowers the risk. It just has to be the right and responsible thing for long-term shareholders to do.
One thing is certainly true: the era of acceptance of the 'absentee landlord' shareholder is well and truly over.
Jennifer Walmsley is director of Hermes Equity Ownership Services