A year after the ‘shareholder spring’, when shareholders of some big companies succeeded in restricting executive bonuses, it will be interesting to see if shareholders are even more assertive this year or return to more customary quiescence during company AGM season. And will foundations join the growing band of shareholder activists?
The desirability of companies being actively stewarded by their shareholders was a key theme in John Kay’s Review of Equity Markets and Long-Term Decision Making (2012). Kay asserted the benefits for asset owners and their beneficiaries, as well as for companies and the wider economy, of moving to an investment model with less trading and more intelligent dialogue between investors and companies. His stewardship vision is about far more than directors’ pay. It is about company strategy, internal investment, risk management and ethics.
Among asset owners, pension funds are starting to get to grips pretty actively with the responsible stewardship agenda. Within the foundation world, by contrast, energy directed at investor activism and innovation has been focused more on impact investing than mainstream equity portfolios.
There are several reasons for foundations to develop a more engaged approach to equity ownership. One is purely financial. It is clear from the spectacular failures at the banks and at BP that inattention to poor risk management can be costly. Making sure that your asset managers keep a close eye on the culture and governance of companies and challenge boards directly about risks that may be building up is therefore more than an ethical imperative. It is increasingly recognized as a matter of financial prudence.
While non-charitable investors enter dialogue with companies principally as a means of reducing financial risk, investor engagement is also proving to be an invaluable spur to socially responsible behaviour by big companies.
For foundations, there are a number of possible components of a company engagement plan. First, given that equity portfolios are overwhelmingly managed by external asset managers, foundations will want to ensure their portfolio managers have signed up to and are applying the Stewardship Code. The Code was introduced in 2010 to encourage conscientious investor oversight of companies in the light of the financial crisis and dramatic loss of value in financial services firms. The great majority of UK fund managers have signed up to it. While this is welcome, there is more than a whiff of box ticking involved in many cases. Indeed, 79 per cent of FTSE 350 companies report no increase in engagement by investors since the introduction of the Code, and the remaining 21 per cent report only a slight increase. Thus, foundations may want to question their fund managers closely about engagement priorities, objectives, measures of success and the tactics used to secure the attention of company decision-makers.
Second, foundations might choose to identify one or two themes for company dialogue that align with their charitable objects, their particular beneficiaries or their current grant-giving priorities. For example, a foundation with a mission to promote health or international development might use its influence as an investor to encourage companies to adopt leading practices on occupational health or on promoting local talent in the developing world.
Companies do respond to their shareholders, particularly when a long-term investor puts a reasoned and well-researched proposal to them. Although most foundations are small compared to other institutional investors, by virtue of their focus on public benefit they can be particularly credible and influential.
This model of mission-related investor activism is a new phenomenon in the foundation world. As such, there is a good case for foundations to collaborate with each other on a small number of carefully chosen engagement topics, thus sharing both the costs and the learning with each other. Indeed, a network is emerging, comprising a small group of foundations, whose main purpose is dialogue with listed companies.
The biggest players on the London Stock Exchange have a vast social, environmental and economic footprint. Successfully influencing them to take a more enlightened view of their role and purpose will, and does, deliver impressive impact. For foundations seeking to work their assets harder in a time of volatile investment performance, targeted engagement with investee companies presents an important opportunity.
Catherine Howarth is chief executive of FairPensions – The Campaign for Responsible Investment. She is working with a group of UK foundations on a programme of investor engagement. Email firstname.lastname@example.org