Investors real influence on company governance sparks debate
Interactions with clients or activist non-governmental organisations have a greater impact on company action than these with investors. The influence of asset managers and owners seems quite limited according to an ESG study conducted at European level by research firm Indefi and presented by Emmanuel Parmentier, a partner at Indefi, on the Global Invest Forum held by L’Agefi last 10-11 October. And that, even if governance remains the number one topic discussed between investors and companies before environmental, climate or regulatory issues.
Indefi’s research shows that investors send ESG questionnaires but have few interactions with companies. Consequently, their action is not perceived as engagement. “Engagement and voting policies in several countries like the Netherlands, the Nordics, France are quite widespread. But what is the impact? Financial investors were not the most influential,” said Parmentier. “Engagement can be successful. We have examples like that of Shell adapting its climate policy. However, thousands of companies do not hear so much about ESG and sustainability from their investors. Much more can be done,” he added. Among others, Indefi’s partner highlighted the shyness of French asset owners upon ESG issues at annual general meetings but the situation, he said, is changing.
Nigel Stapleton, chair of the trustee board of the National Grid UK pension scheme - that of the British gas and electricity network operator managing €22bn in assets – berated asset management companies by assessing they were not doing enough on governance issues.
“Having been an ex-CEO of a FT 30 company and a non-executive member of the London Stock Exchange’s board, I have got a quite different stance on governance than a number of other pension schemes. When we pick asset managers to delegate the management of our assets, we closely look at governance credentials. Remunerations remain among their top three or four things to assess on the check-list but I do not believe they invest enough time in looking at all governance aspects. They do not really look at other governance criteria that have been the main cause for company failure in most cases. The list is much longer than what asset managers are looking at,” Stapleton explained.
Activism can help
At Aviva Investors France, a 20-strong team is dedicated to the engagement with companies. ESG chief Sophie Rahm expressed her surprise to see that companies had not noticed investor engagement, especially on the remuneration front, in which Aviva Investors France is “very active.” “You do not hear Greenpeace on remuneration packages or bonuses,” she said.
Rahm used a medical analogy to compare the influence of activist NGOs and that of asset managers on company governance. « It is the chronic effect versus the acute effect. When a NGO publishes its list of bad investors or bad companies, impact is immediate and powerful whereas our dialogue with companies lasts on the long run. We might speak to companies three or four times a year.” Aviva Investors France’s head of ESG said the two approaches should not be opposed. “It is not common that activists show up at Aviva’s AGM to ask us explanations upon our involvement with companies. Activists’ behaviour pushes us to do more. If short-sellers and hedge funds get into a stock we invested in, it is perhaps a testimony of our weakness to engage with companies on some governance issues. But we can use the shortcomings they identified for our discussion,” she developed.
According to Frederik Strange, executive advisor to the CEO of PFA, the largest pension fund in Denmark with €80.3bn in assets under management, “governance is about the balance of powers, accountability and viability of the company.” He stressed a huge shift of power from countries to companies and cities to a certain extent since the fall of the Berlin wall. Strange said companies have a responsibility to keep good governance.
More communication needed
In his view, it is evident that activists, including NGOs, hedge funds and other categories, make a broader impression than that of asset managers and owners. He said PFA encourages dialogue with non-profit organisations as they “sometimes see things we don’t.” “We are doing much more than what the public sees and we must improve our communication on the matter,” he said before branding “temporary fixes” short-selling and company immediate exclusion practices. “The dialogue and engagement with companies is a viable option. If they don’t want to change then we divest,” Strange asserted.
National Grid UK’s Stapleton mentioned his encounter with militants from the Extinction Rebellion movement that has blocked streets in various cities worldwide including Paris and London to protest against governments’ inaction on climate issues. “Most of them did not why they were protesting for. They ignored the extent of asset owners’ influence over companies to force them to improve the environment. Asset managers shall contribute to the debate upon what, us as investors, are doing for the next generations. They need to present a better public profile,” Stapleton concluded.