List all of the fora, working groups, initiatives, statements of principles, codes and associations dedicated to pursuing better corporate governance and other sustainable business and investment goals, and you would think that this was a hive of world-changing activity.
To be fair, our special report does reveal a lot of progress in the two years since the spate of board shake-ups known as the Shareholder Spring. If much of that has been establishing elaborate talking shops for the generation of fine-sounding words, as our lead article suggests, that is because we have really only just begun to consider how the investment infrastructure must change to affect these goals. There are deep challenges. Which institutional investors have the resources to get involved? What do we do about different corporate cultures and structures across the world? And do we even agree on what the core principles are?
Those challenges are put into sharp relief by our industry’s response to the UK Stewardship Code. Resource-constrained pension funds will rely on consultants to help them and their agents meet their own obligations under the Code – but commentators feel that consultants have signed up to the letter of the Code without taking its spirit seriously. This does not help when there is a “cultural blindspot” for governance across the capital-markets industries.
Where there has been a little more action – executive remuneration – there has also been resistance, even from those sympathetic to the ESG cause. Our article outlines the legislative developments and finds that, while many regard innovations such as the UK’s binding vote rule at best pointless and at worst counterproductive, there is now at least broader recognition of how remuneration structures relate to longer-term corporate performance.
We end the report by looking at the pressure that engaged investors can put on management to return cash rather than plough it into new investment; and investment activism.
The 30 companies in the Dow Jones Industrial Average spent three-times as much on share buybacks as on R&D in 2013. Should that dismay us? Is it a knee-jerk response to investor short-termism? Or does it enable a healthy re-allocation of capital to productive growth opportunities?
If we want it to be the latter, our article suggests a key role for the management-investor strategy meetings described in the Kay Review and the December report from the UK’s Collective Engagement Working Group. While not about micromanaging portfolio companies, such a forum would certainly move governance practice away from the traditional arcana of voting procedures and towards more hands-on engagement with long-term corporate strategy.
The fact that the mainstream is thinking in these terms explains some of the newfound respectability of the ‘governance entrepreneurs’ of activist investing. Our final article traces the development of US-style activism, but also finds signs of a more consensus-based, European approach gaining currency Stateside – not least in the more subtle approach that CalPERS now takes with its famous Focus List.
Given the apparent pay-off from these unapologetically hands-on strategies, perhaps we should simply expect greater pursuit of activism to provide the action to match all of today’s conversation about corporate governance?
Source: Investment & Pensions Europe