Activist investment on corporate governance matters has long been a delicate subject. While some asset managers and other institutional investors have always taken the view that responsible shareholders engage with companies through on-going discussion and active voting policies, others have preferred to steer clear of such engagement and focus purely on performance.
In the end, however, asset managers have a responsibility to the investors who have entrusted them to look after their money. Part of that responsibility, it has become increasingly clear, is to take governance issues more seriously; asset managers that are unable to articulate to investors their policies and positions on these matters can expect to be held to account for this oversight.
This is for two reasons. First, the continued growth of the socially responsible investment sector – and related disciplines – tells us people are keen that their money has a positive impact. That may be as overt as taking a stake in an ethical investment fund, or demanding that a charity avoids investments in particular areas – cancer research charities, for example, routinely avoid tobacco companies – or something more subtle; some investors may simply want asset managers to confront the most egregious examples of perceived injustice or excess.
The second issue is monetaristic. Investors recognise that companies with poor governance structures and bad behaviours are unlikely to be good places to park their money. Such failings invariably damage value over time.
These two drivers have coalesced recently in the case of retailer Sports Direct, where asset managers such as Hermes Investment Management and Royal London played a crucial role in securing the company’s acceptance of an external review of its treatment of workers. Their interventions were a response both to mounting public concern about revelations over Sports Direct’s practices, and to the collapse in the company’s share price, which had more than halved over the previous 12 months.
In fact, a large chunk of those losses had come in the weeks following the publication of a critical report by Sports Direct’s own lawyers into the company’s behaviour. In other words, even had investors in Sports Direct not felt compelled to hold the company and its directors to account for ethical or moral reasons, they would have wanted an explanation – and a remedy – for the loss of value related to the problems.
One interesting question for asset managers going forward will be how to communicate their handling of these matters to investors. There will be many investors who welcome a more interventionist corporate governance policy from their asset managers; but even if that is the case, investors will not always agree on the most appropriate course of action. And there may also be those who feel it their asset management should be concerned only with performance.
These questions are rarely easy. The Sports Direct case stands out because so many people found it straightforward to take a view. With the company itself having admitted to certain failings, it wasn’t an especially nuanced decision for investors to demand more decisive action as the price of Sports Direct retaining the chairman who had previously failed to get to grips with the problem. However, corporate governance arguments are seldom so black and white. Asset managers may not always be confident that a majority of their investors will agree with the stance they decide to take.
The active versus passive debate is also worth considering. For active funds unimpressed by a company’s governance, or convinced that a loss of a value of a likely outcome, selling its shares is always an option. Rather than engaging with the company, an active fund can simply choose to withdraw its money and invest elsewhere. Passively-managed funds, by contrast, do not have this luxury – they must continue to invest in every company in the particular index they track. For them, the case for engagement and intervention may therefore be even more compelling.
None of which is to suggest asset managers should seek to be more confrontational simply for the sake of it. Indeed, a public row of the sort seen in Sports Direct is a sign of a long-term failure to engage, with fault on both sides, rather than a show of strength from asset managers. Most investors aren’t looking for these showdowns; rather they want constructive dialogue that delivers improved governance and performance.
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