Investors are put off lobbying fund managers over corporate culture issues over concerns it would destroy the value of their investment, according to an organisation representing shareholders.
The comments follow a report from the Financial Reporting Council calling on investors to put pressure on fund managers to address culture problems in the companies they own shares in, rather than just selling out of the fund.
It noted some shareholders are not convinced they have the power or the ability to change culture.
Catherine Howarth, chief executive at ShareAction, agreed investors often choose to mitigate the risk of value destruction by selling shares in a company, rather than engaging with management to improve long-term performance.
She suggested investors give asset managers clear guidance on how they would like their votes cast where there are concerns over governance.
“Too often executives are incentivised to chase short-term profits over building the long-term wealth-creating potential of their companies.
“They already have plenty of tools, and may soon have even more if Theresa May’s proposal for an annual binding vote on executive pay becomes law,” she said. “The field of responsible investment is growing and we’re cautiously optimistic that more investors are using their rights as shareholders to actively steward investee companies.
Investors ignore culture problems at their peril. Leon KamhiHermes Investment Management, which has a 26-person strong specialist equity ownership team called ‘EOS’ focused on engaging with companies on a daily basis, acknowledged culture helps drive the value in a business.
Leon Kamhi, head of responsibility at Hermes, said investors should ignore culture problems “at their peril”.
Hermes’ annual EOS report revealed that in 2015, the team engaged with 466 individual companies on 1,150 environmental, social and ethical, governance, strategy and risk issues.
According to Mr Kamhi, these engagements usually take place over a sustained period of years, sometime even a decade, as it takes time to see real positive change.
“We recognise culture does not change overnight,” he said, adding tick-box training and executive pronouncements are “far from sufficient”.
A recent example is Alliance Trust responding to pressure to change its board members after one of its largest shareholders raised concerns about the trust’s underperformance and the cost of its internal management.
Jessica Ground, global head of stewardship at Schroders, said fund managers need to do more than just buy and sell stocks.
Her firm’s managers regularly meet with executive and non-executive board members to discuss long-term performance issues, addressing 86 governance issues with UK holdings alone in the first half of 2016.
Baillie Gifford’s head of corporate governance Andrew Cave said he has seen increased interest in corporate governance and stewardship in recent years.
“These issues are now routinely discussed in our regular meetings with clients,” he stated, adding: “Stewardship isn’t a cost of doing business, it’s an investment in its own right.”
John Stirling, chartered financial planner at Walden Capital, said investor responsibility is a difficult topic.
“Getting shareholders to express their views on matters very directly related to the bottom line is hard enough - getting them to express a cogent unified view on something as difficult to pin down as company culture is going to be tricky.
“Many investors put their money in the hands of a discretionary fund manager, who in turn generally buy funds, which invest in shares. Where exactly does responsibility lie?”
Mr Stirling said fund managers have a fiduciary duty to maximise returns, adding the end investor is “rarely educated or interested enough” to express a strong opinion.
“Unless a link between culture and the bottom line can be clearly demonstrated, it is difficult to see professional investors taking a stand.”
katherine.denham@ft.com
