Strength in numbers
As the issue of corporate governance gains in importance so cooperation among shareholders on engagement issues has come to the fore as a vital tool in the management of pension fund portfolios.
One prime example of this is the Netherlands. Michael Bruyn, director international client relations of Deminor highlights how key this engagement is to Dutch business culture: “we have the famous saying: you don¹t buy Royal Dutch shares, you own them”.
The Tabaksblat Code, the Dutch code of corporate governance drawn up by the former Unilever CEO, “leads the way in many respects,” according to Bruyn.
The code states first that shareholders should use their voting rights and if they don’t they should explain why. It also says that they should be willing to enter into dialogue with the companies they are investing in.
“We strongly suggest that institutional investors cooperate because they have the same interest,” says Bruyn. “Together they have more critical mass and are a more credible discussion partner for the companies they are engaging with.”
He adds: “And of course while you are working together you can exchange ideas together, and also develop governance knowledge. So you can get a lot smarter along the way as well.”
Bruyn believes that too often dialogue is confined to the AGM. “If that is your engagement policy you have not been engaging in the right way,” he says. “Constant dialogue is needed and we don¹t think the AGM is the best venue for that. AGMs don’t provide scope for in-depth dialogue. But nobody is to blame for that.”
With these issues in mind a new corporate governance platform has been created. “The Governance Platform is a fully independent foundation co-founded by the participants and ourselves,” Bruyn explains; “the engagement is then delegated to Deminor. As far as governance is concerned the foundation supervises the whole process, so the participants are the bosses, so to speak.”
The platform’s unique approach, Bruyn explains, is the longer term view. “It is not activism that the platform practices because activism is ex-post,” he says. “So we tend to look at issues that have a longer time orientation. For example, we talk about strategic disclosure, what the long-term business objectives of the company are and how they can be quantified. That is an area where there is still a lot of ground to cover, but it is important that we do so.”
He adds: “The problem which we encounter is that objectives are often not quantified satisfactorily. Performance indicators are not always fully transparent and if these factors are not clear enough then the management remuneration cannot be transparent either.”
Which brings us to another area of interest: executive compensation. “The total volume is a factor but we focus on the extent to which executive pay is related to the company shareholder value,” Bruyn notes. “We see room for improvement in this area, also in relation to, say, dividend payout.”
The initial reaction of the listed companies to this initiative has been cautious. “Initially some companies were reluctant to participate because they feared that this was some short-term media attention-grabbing exercise,” says Bruyn. “But as soon as we got into discussion with them they were pleasantly surprised.”
He adds: “In the Netherlands the fact that corporate governance is here to stay is no longer a subject for discussion for serious companies. What they prefer is to talk to a group of serious professional investors which represent a substantial amount of assets.”
Initially the platform’s engagement activities are focused on Dutch blue chips. But expansion is imminent. “We are now moving to a European level,” says Bruyn. “We are now negotiating with foreign parties to join the movement. By 2007 we would like to be engaging with the top 50 European holdings. There will probably be a fair degree of overlap with the Eurostoxx 50.”
The members of the platform have formed a so-called ‘Investor Circle’ where members communicate via monthly conference calls as well as on an adhoc basis via email. “With them we formulate our engagement policies and the actions that are to be taken for any given company,” says Bruyn. “As a result the ‘autopilot syndrome’ is less likely to occur.”
We must however be cautious not to overestimate the potential of this approach. As Bruyn notes, “even if you are a big party you may still not have a majority shareholding in a large cap company. But at the same time, your influence through ideas may of course reach well beyond your voting power.”