By Simon Mumme
Talk isn’t cheap in Peter Butler’s line of work. His in-depth discussions with company chairmen, executives and directors about how they can better steer their businesses come at a cost.
“I’ve heard it again and again from company chairmen – that they write letters to their top 20 shareholders and get one or two responses.”
Frank Curtiss
“Arranging meetings, preparing and delivering presentations to companies, and discussing their responses all takes time. Companies should consider paying fees to those who attend such meetings,” says Butler, founding partner of Governance for Owners (GO), a London-based fund manager.
His clients pay for this work – known as “ engagement” or “stewardship” in corporate governance circles – plus an asset management fee for GO’s equity funds. The most pragmatic and equitable way to finance more of these discussions on a much larger scale, so that more companies and investors may benefit, is to make companies pay, Butler says.
“If the company pays, the whole share register pays. This solves the free rider issue,” Butler says.
True engagement involves ongoing verbal and written dialogue between investors and corporate executives, chairmen and directors. Voting on management proposals at annual general meetings (AGMs) is also crucial and seen as a focal point.
Spring break
In 2012, many European shareholders voted to oppose executive pay resolutions in the socalled “Shareholder Spring”. This took place amid the UK government’s enquiry into the accountability of companies to shareholders and the public led by economics professor John Kay.
Analysis by ISS, a proxy voting advisory firm, shows that more investors participated at the AGMs of Europe’s largest 750 companies in 2012 than in the last five years.
The number of votes rose to an average of 65.9% in 2012 from 60.4% in 2008. Directives forcing companies to issue proxy statements at least 21 business days before meetings, except for extraordinary general meetings, has fostered voting by improving the flow of information to investors, ISS director of Europe Jean-Nicolas Caprasse says.
European shareholders dissented on 3.78% of votes in 2012 to equal the discontent they expressed in 2009, according to ISS. Investors primarily targeted remuneration proposals, then share plans – bonus incentives involving greater employee stock ownership – particularly if they compromised existing shareholders’ pre-emptive rights to reserve stock in future issues, Caprasse says.
UK pension fund the Universities Superannuation Scheme (USS) is currently focusing on the independence of auditors in long-running relationships with FTSE 350 companies.
“Investors rely on the audit to reassure us that accounts provide a reliable, true and fair view of company health,” says Daniel Summerfield, co-head of responsible investment at the £35bn fund. “It is vital that the audit is not only technically robust but is demonstrably independent.”
USS will now vote against resolutions from FTSE 350 companies seeking to re-appoint audit firms whose tenure already exceeds 15 years. Such partnerships are “untenable”, Summerfield says.
“The lengthy tenures of audit firms, which is prevalent in many FTSE 350 companies, can risk the objectivity and independence of the audit process. We’re saying to FTSE 350 companies that there can no longer be an assumption that audit firms can stay in place in perpetuity.”
Owners of the movement
“It’s chicken-and-egg,” says Mike Clark, chair of Russell Investments’ global sustainability unit, about the evolution of engagement in the UK.
“We’ve made a bit of progress, but how far we get depends on the end owners,” he says. Pension funds and other institutional investors, in their role as asset owners, are ultimately responsible for entrenching engagement and sustainability risk analysis into investments.
“Asset owners should take responsibility for stewardship and make sure it gets done. Whether fund managers or other service providers do the job is another question,” says GO’s Butler.
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