The Kay Review advocated the setting up of a mechanism whereby institutional investors could engage better with public companies. This was seen as a way to improve understanding between investors and companies, to encourage more long-term thinking, to enable debate on strategic options and to tackle such problems as excessive pay.
A first step has been the setting up of a “Collective Engagement Working Group” under the Chairmanship of James Anderson of Baillie Gifford. It has produced a report on how such a forum would operate which can be obtained from here: http://www.investmentfunds.org.uk/current-topics-of-interest/investor-forum
It is focussed on how asset managers and asset owners can achieve a “deep cultural change” as the report puts it. It says “In order to establish this, companies must be confident that asset managers and owners prefer to be supportive rather than critical. We must be consistently engaged rather than occasionally outraged“.
All fine words, but lets look at some of the practical issues they have faced. The first problem is that institutional investors are now typically very fragmented (in large public companies it is unusual for any one investor to hold more than 3% of the equity), and in addition the majority are now overseas based. It is not clear how members of the Forum are to be selected or whether it’s going to be just a few of the larger UK institutions who are active in corporate governance.
But the concept is to create a Forum with a “skeleton” secretariat. It is proposed that only asset managers and asset owners would be included in the Forum (not industry representative bodies such as the ABI, NAPF, etc.). And note that no private investors will be represented even though in total such investors usually own a lot more of a company than any individual institutional investor.
When a problem company or issue is identified, an “Engagement Action Group” will be created of those investors interested and such a Group will then try to engage with the company concerned. One question raised is whether the “secretariat” should disseminate their knowledge of an issue more widely and to whom – there is no answer provided.
One of the difficult aspects of such engagement is the legal problem of the members of the Engagement Action Groups potentially becoming insiders. it is proposed that the Forum engage a legal advisor to handle these problems and Forum participants (and presumably Engagement Action Group” members) are not made insiders by access to price sensitive information or by decisions to take particular action. How the proposals will avoid problems in this area are not at all clear – all the document says is that there will need to be discussions with the FCA to ensure there are no concerns there.
It is also proposed that Companies should have an “annual strategy meeting” for institutional investors to which no third parties such as analysts or brokers (and presumably smaller investors) are invited. Presentations given at such meeting may be published, but it seems clear that otherwise the questions and answers will be kept secret.
Comment: One must welcome this attempt to improve the oversight of public companies by investors. However, they have sidestepped a lot of the legal and moral issues of a small group of investors having access to information that is not widely known. They suggest that Forum members can avoid becoming insiders but that really is nonsensical. For example, if the issue is that investors lack confidence in the Chairman or Chief Executive of a company, and are seeking changes, how can that possibly be considered non price sensitive? In essence they are trying to “square the circle” where it is proposed that companies can be influenced by Forum members without them becoming insiders.
The report also suggests that a kind of cosy relationship can be established by the Forum with company boards where mutual understanding will solve problems. But the Local Authority Pension Fund Forum (LAPFF) quickly issued a press release after the Working Group report was published effectively indicating they were not happy with the proposals and stating that “Shareholder engagement must also deal with the more immediate agenda such as incompetent directors, excessive and unjustified pay, neglected shareholder rights and short-term decisions not in shareholders long-term economic interests. It’s not just about ‘building trust’, it’s also about challenge – something UK institutions have been poor at“. Very well put indeed.
The LAPFF also indicated that they believed governance control should be in the hands of asset owners rather than asset managers (presumably because the latter are more likely to be sympathetic to the interests of company directors – for example, the report makes clear that “routine remuneration matters will not be a core focus of the Forum” so they will only intervene if they become strategic questions). The LAPFF will be publishing its own proposals.
This author agrees with the LAPFF that this looks much too much like the creation of a cosy club of a few institutional investors who will be pretending not to be insiders when they effectively are. The lack of public disclosure and access by other investors to the information disclosed in meetings to “Engagement Action Groups” will create a slanted playing field in what should be open public markets. This is surely not the way to move this forward.
ShareSoc is considering making representations to this Working Group and to Government Ministers on this subject so if you have any views on this topic, please let us know.
Roger Lawson
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