Investment managers too often have very little understanding of the businesses in which they are investing, delegates were told at a meeting in Brussels during the launch of a new study on stewardship.
And when meeting with a senior management teams of a company, few fund managers are able to discuss the ‘big picture’.
Most fund managers are “fixated by near term financial measures and some [are] are just plain rude”, said Charles Cronin, director of the European Capital Markets Institute, at the unveiling of the paper, ‘An Investigation Into Stewardship’.
Cronin’s went on to discuss what he termed a “dismal situation”, a picture gleaned, he said, from research that canvassed the opinion of several chairman from some of Britain’s leading public companies. Cronin also places blame for the present situation on poor mandates given by fund trustees to the fund managers.
At the paper’s presentation, Cronin outlined a strategy for reform, based on engagement. “Hunting for inside information is not engagement,” Cronin told the gathering in Brussels. He explained that engagement between the fund manager and the investee company should mean “discussing strategy, the composition of the board, risks and opportunities of the business”. He described this approach as “thoughtful ownership. Some would say this form of engagement is costly, and not worth the effort,” he added to his critical onslaught. “We would say that without a thorough understanding of the business, you are not able to determine its value.”
He blamed the status quo on the fact that while the fund manager is hired for his skill as a stock picker, his ability to pick stocks is judged on how he performs quarterly, relative to a designated benchmark.
Hence, the manager’s portfolio can contain many hundreds of stocks , which he said was “too many to value with confidence under conventional fundamental principles”. In a previous interview, with IPE, he faulted fund trustees, not managers, for short-term thinking, It was the asset owners’ employment of fiduciary duty that needed attention, he said.
His said remedies included upgrades to investment legislation. A start could be made by adding appropriate additions to the EU’s Occupational Retirement Provision Directive (IORP), at present under revision. The need would be to clarify the duties of asset owners and trustees.
The 39 page stewardship paper, authored by Cronin and John Mellor, of the Foundation for Governance, Research and Education, was drawn up to respond to a fact finding exercise by the European Commission - the EU Corporate Governance Framework - which is aimed at combating investment short-termism.
At the Brussels presentation meeting, Eddy Wymeersch, noted that Cronin’s position is based on research in the UK. The chairman of the European Corporate Governance Institute commented: “I see a lot of action on the Continent”.
Marc Hertgen, policy officer in the Commission’s Corporate Governance Unit told the meeting that a synthesis of responses to the exercise could be expected, probably, in November.
The stewardship initiative has to be seen in light of earlier work by the British National Association of Pension Funds (NAPF). In a guide addressed to pension fund trustees, the association also argues against excessive focus on short-termism. One of its principles is that institutional investors “should monitor their investee companies”.