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Long-termism, stewardship and collective shareholder action

26 March 2013

This week, the IMA has joined forces with the ABI and the NAPF to set up a Working Group of investors.  The Working Group will examine ways in which the considerable amount of existing collective shareholder engagement can be built upon.   Members of the Group will be drawn from life companies, asset managers, pension funds and others including overseas investors, who are not usually part of the conversation - despite the fact that they own an increasing proportion of the UK stock market.

Since joining the IMA in November, I have been conscious of the need for the asset management sector to make a serious response to the recommendation in The Kay Review - that an investor forum, reaching out to a broad range of investors, especially those from overseas should be formed.  The purpose of the forum, would be to create a stronger investor voice to tackle issues at big listed companies where conventional individual and collective engagement is not sufficient.

In recent years, two issues have become the lightening rod for media and political attention.  First, the ability of a Board to provide positive oversight of management on behalf of shareholders and secondly, the size and alignment of incentive packages with shareholders’ interests. But these are not the only or necessarily even the most important drivers of a company’s long-term, sustainable performance.

It would be great if one outcome of the investment industry’s response to the Kay review was a broader understanding of the reasons for asset managers to engage with companies:

  • Firstly, to understand the company’s strategy for long-term sustainable returns and to believe that it is the best strategy.
  • Secondly, to gain belief that the management team has the capability to execute the strategy.
  • And thirdly, to understand the company’s financing model and believe it will deliver the resources that management need to succeed.

These criteria are essential for asset managers who use engagement as a part of their buy/sell decision-making process.  Proper recognition of the importance of these factors by commentators would help drive longer term investment horizons for asset managers and give Boards and executive management the encouragement to set long-term strategies.

Over the past few months the IMA has been speaking to a broad range of investors and investee companies.  We have found a wide spectrum of enthusiasm for a new investor forum along the lines suggested by Professor Kay.  Many ideas have been expressed but potential impediments have also been flagged.  It is also clear that there are already channels for collective engagement and action and that these channels work well.  

However the question we have to ask ourselves is could anything further be done to make collective engagement broader in its scope?  Could it happen more often and be more effective in helping to secure good long-term outcomes?

We have identified a high level of support in principle for a formal mechanism, with a thin layer of executive resource, both to facilitate collective engagement and to do the heavy lifting to help investors see issue through to a good outcome when necessary.

And although enthusiasm is by no means unanimous, there is almost unanimous recognition that if we could identify ways of making collective engagement broader and more effective, it would benefit companies, their employees, the economy and investors – what better incentive could there be for us to do everything we can to try and raise the bar?

There are many different views on the potential for an investor forum and many hurdles to overcome along the way.  This makes for a daunting task, but the Working Group announced today will ensure that the most effective ways for investors to work together are identified and implemented.

Daniel Godfrey
Chief Executive, IMA

If you have any comments or thoughts on the above blog, please feel free to email Daniel Godfrey.

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Daniel Godfrey
Chief Executive, IMA

Investment management association

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