Board members of FTSE 100 companies have expressed concerns about the erosion of their relationship with institutional investors, predominantly due to the widespread use of what they define as ‘box-ticking’ communications that impact companies’ growth.
‘The public company model is broken,’ they warn, pointing out that this is compounded by ‘an ever-increasing thicket of government regulation’ that distracts boards from adequately overseeing companies in an ‘effective and entrepreneurial manner’.
This is according to the State of Stewardship report, published by PR company Tulchan, based on interviews with 36 chairs – 26 of whom are from FTSE 100 companies – and nine follow-up interviews with representatives of major institutional investors.
The list of chairs includes Sir David Higgins from United Utilities Group, Ruth Cairnie from Babcock International Group, Don Robert from the London Stock Exchange, HSBC’s Mark Tucker and Andrew Mackenzie of Shell, among others.
The research finds there is a high level of disappointment in the quality of the engagement between boards and investors over matters of company stewardship, and FTSE chairs are looking to reappraise that relationship sooner rather than later.
Chair interviewees lament that while companies’ strategies and performance should be at the top of the agenda when engaging with shareholders, these topics have been put in the background due to an increasing focus on several prescriptive rules.
‘You have a large group of very talented and dedicated executives and non-executives getting together 10 times a year and 70 percent of the agenda is typically governance and regulation,’ says one of the interviewees. ‘Directors have to worry about whether their gender pay gap has gone up or down and what that might mean, and what will be written about it in the Daily Express. That leaves little of the 35 days a year a non-executive normally devotes to a company to think about other things.’
Board members also say the increasing volume of corporate reporting required on a growing number of topics is not facilitating that dialogue but is instead muddying communications with shareholders.
One board member says: ‘That quality gets sacrificed for quantity and, instead of a productive dialogue, all we end up with is an inflated and deeply frustrating box-ticking exercise. The long-term consequences of this will not be negligible – notably, an increasing reluctance of companies to float on the stock market.’
Proxy voting agencies’ criticism
The report reveals that all interviewed board members at FTSE 100 companies criticize shareholders using third-party proxy voting agencies. Views range from frustration and irritation to hostility, according to the research.
While some chairs understand why investors use proxy agencies, all disagree with the way it works in practice. Their criticism addresses four points: a lack of flexibility on the part of proxy agencies with boards, being prone to conflicts of interest, delivering an inaccurate output and the fact that shareholders are heavily influenced by proxy agency guidance in their decision-making.
On the latter issue, the report refers to the UK Stewardship Code, whose latest version was published in 2020. The code calls for engagement between companies and investors to take place across asset classes. It reads: ‘Asset owners and asset managers cannot delegate their responsibility and are accountable for effective stewardship.’
But Tulchan’s research reveals that company chairs feel this is exactly what is happening: many institutional investors rely on proxy agencies’ advice rather than their own judgment. Because of these concerns, chairs are calling for a supervised code of conduct for proxy agencies.
After conducting interviews with board chairs, Tulchan spoke to nine institutional investors, including Andy Simpson from Schroders, Rob Hardy from Capital Group and Jupiter’s Richard Buxton, among others.
When shown the results of the survey, the majority of the institutional investors interviewed acknowledge the truth in at least some of the issues raised and express understanding for the boardroom frustrations. All the investors agree that tensions are born out of structural changes within the asset management business and the UK equity market in particular.
A majority of investors acknowledge the difficulties of their relationships with UK boards and say an open conversation might help in the future.
Responding to the criticism around use of proxy voting agencies, the report finds investors use them ‘merely to execute voting decisions’ and not to seek recommendations. Some investors think the call for a proxy adviser code of conduct isn’t such a bad idea.
‘I do think the proxy voting agencies need to be carefully scrutinized for quality,’ says one representative of a global fund management firm. ‘I think there is occasionally a lack of understanding of the broader picture.’