The lunch of April 2nd was attended by 12 of our number, being;-
Sarah Hargraves – Pension administrator with Unison
Jon Thorne – Secretary to the FRC‘s (Financial Reporting Council) actuarial user committee
Anita North – Hewistons
Janet Hennessey – Hennessey Solutions
Hayley North – Wellers Wealth Management
Henry Tapper – First Actuarial
Michael Clark – Capita Fiduciary Management
Simon Kew – Jackal Advisory
Stephen Cohen – In Recovery
Simone Utermarck- Standard and Poors
Stav O’Doherty – Independent Consultant
Ben Mulroney – Fund sales
Stephen Cohen talked on questions of ownership an stewardship. He referred to corporate governance as an “old chestnut of 35 years or more. He gave us its potted history – the emphasis in 80s and 90s had been on improving better governance for large corporates. The perception had been that large companies should be run for the benefit of its management.
As time went by Companies started paying more lip-service to governance and the emphasis moved on with increasing pressure on corporates on social and environmental issues
Recently there has been a focus on owners of business to put pressure on management. This has resulted in the publishing of the FRC’s UK approach to corporate governance.
The document aims to promote high quality dialogue on the “complain or explain” principle….
The document calls on asset managers to “Assist companies to understand the approach of their major shareholders”
But the call is beyond those who actually manage assets and appeals to “trustees and other owners – (whose) actions can have a significant impact on the quality of engagement”.
The FRC called for a body to Monitor the take up of the code. In particular;-
How they are going to disclose
Conflicts of interests
Clear policy on voting
Stephen pointed out that none of this seems very controversial – but on scale of 1-10 he reckoned we currently were at no more than 2.5.
Stephen then reviewed what was going on now
Most fund managers don’t get involved but outsource to Institutional Shareholder Services (ISS).
But the principal recent development has been the report by John Kay to be found here
The report criticises short-termism ,encourages different forms of business ownership, and asks what Government can do to increase pluralism (mutuals and co-ops). Stephen wondered whether his report will get any traction it having been commissioned by a previous Government.
For Stephen, the crunchy bit of Kay’s report is on stewardship.
The report suggests that all business should be required to publish a statement of their business purpose. This would protect managers from short-termism from management.
All investors should be required to sign-up to the Stewardship code.
Pension Funds should be encouraged to take longer term look. They should call for maximum transparency and practices such as shorting should be declared.
The report goes one step beyond the practice of the ISS. It calls on owners to aggregate their interests to put pressure on management.
It suggests realistic and realizable engagement with companies.
Stephen pointed out that there are loads of people can do things on governance- Kay goes beyond governance- engagement is quite expensive – but with an aggregated approach – this can be done for between 1-10bps , Kay reckons for this kind of money you could significantly improve things.
The benefits of the engagement approach would be to revitalise AGMs; create cohesion through aggregation platforms; leadership for this could be pioneered by long term pension funds.
Kay’s vision is to change “ownerless corporations” and promote long-term sustainable value.
There were plenty of questions
Could this work if the majority of owners took a free ride with only a minority bothering to engage (or pay for others to engage)?
Wouldn’t the aims of engagement be better served by Government legislation (the carbon tax was given as an example)?
Couldn’t an incentive for good governance be a requirement for management to pay for or be paid in shares?
Stephen pointed out that nobody had a successful business model for engagement. Is this something that people are willing to pay? F & C are reported to be up for sale, Hermes continue to lose money.
There have been some responses to Kay. On the question of Governance for Owners, BlackRock have published a commentary claiming that what’s needed is some clarity about what you need to do
They lay out different categories of engagement named A B and C
They call for owners to have to signify why they don’t sign up to an aggregation platform
Stephen agree that remuneration structures are often so badly structured that there is no alignment between shareholder value and good performance.
Again there was a call from the tables that Management should be required to buy shares so they have some”skin on the bone”
The lunch wrapped up with a vote. There was consensus that three positions had emerged
Position one; engagement was a waste of time and certainly wouldn’t get on the agendas of any trustee board (other than the likes of BT and USS)
Position two; engagement was too
and the positive outcomes could better be achieved by Government legislation (as in the carbon tax).
Position three; Kay is on the right track , engagement should be paid for and should be universal.
The vote resulted in
4 people reckoning engagement was not worth it
2 people wanted government legislation rather than engagement
6 people generally agreed with Kay’s position and supported engagement,