When a public relations firm, in this case Tulchan, publishes a report highlighting complaints by UK company chairs about their dialogue with shareholders, it’s easy to be cynical about the unspoken conclusion: ‘Hire us to improve your comms’.
It’s also easy to criticise the views expressed by 35 chairs (in The State of Stewardship report) as at best nostalgic and at worst deaf to the legitimate views of the company’s owners.
Nostalgia leads them to pine for the days when a recognisable set of UK fund managers were active holders of UK equities on behalf of defined benefit pension schemes. But how many really had the resources to talk to chairs about the strategy and performance of all the companies in their portfolios?
And why would the rise of passive investing make engagement more difficult? These funds are locked in: the only tool they have to improve company performance is to engage with the management. Another explanation is that leading fund managers and analysts talk to the top executives rather than the non-executive chairs.
A line can no longer be drawn between financial performance and the external impact a company has
UK equities still matter
The majority of UK equities are owned by foreign institutions, many with UK-based units that are members of the Investment Association (IA). It is true that the share of the domestic market in total equity allocation has shrunk, but it still represents about a quarter and was second only to the US at the end of 2021 (peak Big Tech). For better information about the UK investment scene, see the IA’s annual survey.
Requirements have increased for asset managers to reveal what they are doing on politically important issues
On the ‘decline in the quality of engagement’, the FTSE chairs might have half a point. The shift in focus towards environmental, social and corporate governance may have detracted from traditional analysis of corporate performance; so might cost-cutting on equity research. But many long-term investors believe that a line can no longer be drawn between financial performance and the external impact a company has.
Data driven
The quantity of engagement is set to keep going up; witness the Financial Reporting Council’s Stewardship Code with its emphasis on activity. Requirements have also increased for asset managers to tell end-savers what they are doing on politically important issues. Protest votes – often on executive pay – are a feature of this. But surely this qualifies as ‘if you can’t stand the heat, get out of the kitchen’.
Venerable chairs are stewards of assets that are increasingly owned by younger generations
‘Box-ticking’ is another old complaint, but the chairs are missing something important. Modern investment relies on data. Analysis of it enables firms to screen hundreds of companies as part of decisions on what to buy/sell or engage with. This helps focus firms’ resources and spares companies that are doing fine from unnecessary intrusion.
The future of equity investing lies with funds that are open, including defined contribution pension schemes and individuals’ long-term savings. Venerable chairs are stewards of assets that are increasingly owned by younger generations, whose concerns they need to understand.
More broadly, if corporate leaders made reports fair, balanced and understandable – as they are supposed to – they would find that less is ‘lost in translation’ between them and shareholders.
