FOR private investors, the idea of “shareholder power” has long invoked a weary grimace. Companies driven off the rails, payments for failure and the resilience of the fat cat bonus culture have sunk hopes that excesses can be brought to heel or corporate cultures changed.
Particular ire has been vented against the seeming passivity of big institutional investors. When it comes to shareholder protests at annual meetings, many are seen to stay on the sidelines or abstain where they have not voted for the status quo. The lack of engagement of overseas institutional investors adds further to the sense that shareholders can achieve little by seeking to challenge managements.
There are honourable exceptions to this state of affairs – Standard Life is an active institutional investor, as is Legal & General. The threat of institutional revolt has at times helped to effect change, as has lobbying out of the public eye. But the events of the past decade have highlighted how much work still has to be done after the first cries for better corporate governance were raised by the Greenbury and Higgs reports of some 20 years ago.
Against this bleak background I was intrigued to read last week that institutional investors have set up a forum for long-termism and collective action, launched by the Collective Engagement Working Group. The forum aims to “promote shared commitment to long-term strategies and sustainable wealth creation among asset owners, asset managers and companies”.
The group, chaired by James Anderson, a partner at Baillie Gifford, is a direct response to the Kay Review on equity markets and long-term decision making. Its objective was to identify how investors might be able to work together in their engagement with listed companies to improve both long-term company performance and overall returns to end savers.
It all bristles with ambition and good intention. The working group seeks to create a new “Investor Forum for Collective Engagement” to enable “the broadest possible range of institutional investors – especially international asset owners and asset managers and sovereign wealth funds”. The action groups will seek to maximise the voice of institutional investors, drive cultural change and “promote the commitment of more resource to long-term stewardship and engagement by institutional investors”.
It suggests major listed companies should hold an annual strategy meeting for institutional investors, outside the results cycle, “where investors and company executives can link governance to the company’s long-term strategy without the focus on short-term results”. Supportive statements have come from grandees including Vince Cable, Business Secretary; Professor John Kay; Robert Swannell, chairman of Marks & Spencer; Geoff Cooper, chairman of Dunelm Group and chief executive of Travis Perkins; Robin Freestone, chief financial officer of Pearson and chairman of The Hundred Group of finance directors; Lord Davies of Abersoch, senior independent director of Diageo; Sacha Sadan, director of corporate governance, Legal & General Investment Management; Daniel Godfrey, chief executive, IMA, and Otto Thoresen, director-general of the Association of British Insurers.
Several questions are prompted. The first is why it has taken institutional investors so long to get their act together? A generation has come and gone – and a banking system almost brought to its knees – since the cry of corporate governance was first raised.
Another is how effective such an initiative will prove in galvanising overseas institutional investors, who now account for a very significant proportion of FTSE 100 share ownership. They have preferred in the past to dump their shares and walk away rather than engage in earnest corporate governance discussion.
But the most challenging of all is whether too many investors – and would-be investors – have lost confidence not only in institutional shareholder activism but also in the oversight of “soft touch” regulatory agencies put in place to promote the aims of the Collective Engagement Working Group. There is now a resignation that only the intervention of the law – and hefty fines and penalties – will bring about change.
We have moved on from the starry-eyed idealism of the “shareholder democracy” championed in the 1980s to a more Hobbesian view of the corporate world. This is not to deny the many benefits that finance capitalism has brought about and will continue to do so, but to recognise that it must operate within a firm framework of sanctions-backed regulation and the rule of law. The ship of well-intentioned gentlemanly guidance and persuasion has surely long since sailed.