Do boards appreciate fully their role as company stewards?

We need to quantify how big a gap we’re dealing with in terms of a lack of shareholder engagement

By Michelle Perry | Published 16:04, 12 April 12

CoStewardsShareholder activism, it seems, isn’t going away any time soon. And of course it’s refreshing to see. The Association of British Insurers, which represents almost a fifth of UK shareholders, this week raised concerns about Barclays chief executive Bob Diamond’s pay.

Diamond is set to pocket a hefty £17 million. The ABI’s shareholder advisory service, IVIS, had issued an “amber top” warning, indicating it has concerns after first voicing its worries over the pay packet two months ago. Pirc, a shareholder advisory service, said investors should reject Barclays’ pay plan at the bank’s annual shareholder meeting on 27 April.

The need to encourage investors to engage more with the companies they invest in hasn’t gone unnoticed by regulators. Over a year ago the Financial Reporting Council, the UK’s corporate governance watchdog, issued the Stewardship Code, a collection of guidelines to improve investor engagement with corporates, to address this very problem.

But has it done any good?

Recently John Kay, a respected economist who recently completed a government-sponsored report into equity markets, said the Stewardship Code had failed in its goal to promote tighter relationships between asset managers and boards.

Another new report put together by a group of six institutional investors, including Aviva investors and BlackRock, doesn’t so much want to replace the Code, but to “underpin” it. The group called the investor stewardship working party is calling on the FRC to incorporate its ideas to “improve the effectiveness of the Stewardship Code”.

In its report – 2020 Stewardship – the investor group comes up with four recommendations that it says will improve investor engagement. Of the four I think two are of particular note
The first is a proposal to encourage institutional investors who are signatories of the Stewardship Code to be more transparent about the degree to which they intend to plan to apply the code’s guidance.

Peter Butler, founding partner and CEO of Governance for Owners, an investment fund and one of the six investors behind the report, described the proposal as similar to a hotel rating system where investors are rated by the degree to which they adhere to the code. Butler says this would allow company boards and others a clearer view of what they are getting. I agree.

“We don’t need everyone to be a five-star steward but let them self-assess the stewardship they plan to do within an overall common framework and be transparent. This would allow clients to compare different firms and know where they stand.”

The other proposal I think is worthy of further investigation is that of encouraging boards to achieve a critical mass of stewardship investors on their share register, with the aim of getting between 25 and 30 percent.

Butler says the purpose of this is to quantify how big a gap we’re dealing with in terms of a lack of shareholder engagement. Everyone talks about engagement being a problem, but no one knows the real extent of the problem, says Butler.

“Let’s give boards the responsibility for this,” he says. Again I would agree with Butler’s proposal of laying responsibility in the hands of boards and investors, because “No regulator can solve this.”

Maybe it’s time to step up the pressure on boards as well as investors to fully accept their responsibilities as company stewards. It’s worth a try at least.

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