Quiet diplomacy in action
‘Shareholders can best bring about improvements in strategy and governance by private persuasion rather than through a megaphone’
John Kay, The Investor Forum Review 2015-2016
Despite a long heritage of good governance, the UK has had far too many situations where serious problems have emerged at companies, and shareholders as well as employees and customers have lost out. Rebuilding trust is a critical factor for the UK’s future business and investment success. Investor relations professionals, company secretaries and investors all have a key role to play in building trust with the wider stakeholder community.
The Investor Forum was set up at the end of 2014 as a community interest company to provide a new platform for major shareholders to work together and ‘collectively engage’ on strategic matters with company boards. Since that time, as John Kay comments in our recent 2015-2016 review: ‘It has engaged in quiet diplomacy to contribute to change at about a dozen large British companies.’
During 2015 and 2016 the forum began its activities and raised funding from members, which illustrated the willingness of institutional shareholders to invest in their stewardship efforts, to engage with companies and to build an effective escalation mechanism to exercise shareholder powers.
The forum has 34 members with approximately £12.5 tn ($15.3 tn) of global assets under management, of which more than £700 bn is invested in UK equities. This represents around 35 percent of the FTSE All Share market capitalization. Members include a range of firms from asset managers to asset owners, global firms to boutique houses, active managers to index-tracking strategies. One third of the members are international firms.
The forum has developed an iterative style of working that allows open, but confidential, discussions between members and the forum. Our collective engagement framework provides a professional mechanism to give international investors the confidence to engage collectively while respecting international laws and codes that relate to non-public information, group formation and acting in concert. We collate, distil and communicate the views of a wide range of shareholders directly to boards, removing barriers to effective communication.
In January we published our review, marking the first time the forum’s engagement activities were disclosed publicly. It is important that we are transparent about our activities as part of our efforts to rebuild trust, but discretion is a crucial element in our approach. Engagements remain confidential while in progress in all but exceptional circumstances.
Some engagements have been issue-specific, while others have been more complex cases where franchise value was more broadly impacted by a series of inter-connected issues and events. As the forum’s approach becomes more widely accepted, it is hoped we will be able to support investors where an earlier escalation and a more proactive approach can protect and enhance value.
Companies involved in engagements with the forum found themselves working with a new and untried mechanism. While this naturally generated some initial hesitation, the vast majority of chairs have been open-minded about the forum’s activities.
Many of the companies we have engaged with have been able to recognize value in the objective delivery of investor feedback and perspectives. In a number of cases, companies have confirmed that the forum’s engagement has helped clarify or confirm the importance of key messages, the need for action and a focus on comprehensive change.
A direct and comprehensive line of communication from key shareholders to company boards has been welcomed by many participants. Our framework and the investment experience of the Investor Forum team has allowed investors to gain confidence that boards do listen and that constructive solutions can be devised.
Domestically and internationally we expect an increasingly lively debate on governance and stewardship. Many parties have provided input into the debate on what policy or legal changes are required to improve practices, or to what extent existing tools can and should be used more effectively. Within this context, the forum represents a new practical tool to help asset managers and asset owners to exercise their stewardship responsibilities effectively.
Andy Griffiths is executive director of The Investor Forum