Stewardship – With Great Power Comes Great Responsibility

Traditionally investors in a business may not have been able to influence how a given firm was managed, nor had there been any reason to think this might be necessary. However, over recent years the idea of corporate responsibility has become more prominent, with many external forces – and shareholders themselves – keen to make sure that a business is run the ‘right’ way. The issue of responsible stewardship has entered the public consciousness.

As an investor you may now ask yourself, are you ‘in for the ride’ or do you have the ability to shape the future of the business in which you invest?  Intuitively, the answer to this depends on how much of a company you own and therefore how much influence you are able to exert.

What is clear is that an awareness of our wider environment is not going away.  A movement that was building anyway has been brought back to the forefront by the Coronavirus pandemic.  The way in which a business engages with its stakeholder groups will, in future, be the differentiator in investment returns and in some cases between success and failure.

For many businesses this is not a new awakening – some have long made a point of treating employees well, offering recycling programmes for waste products or operating charitable trusts, and for many the protection of the environment or improvement of society is integral to the business model.  However, as somebody who regularly speaks to fund managers and researches investment strategy it is clear that those not actively engaged with their broader environment will soon be forced to catch up.  Businesses that focus solely on their shareholders at the expense of the environment, social responsibilities and sound governance are coming under increasing scrutiny.

Capitalism has developed a conscience and in the future companies and their shareholders will be rewarded for ‘doing the right thing’ through greater returns.  The degree to which we (and therefore investors) value a business will depend on this corporate personal awareness. It is increasingly clear the pressure to bring about change will not come solely from groups such as Greenpeace and Extinction Rebellion but by established conventional institutions such as fund managers, corporate banks and pension funds.

Imagine a situation where a fund manager is able to apply pressure on a business to produce and disclose emissions reports, or to improve gender or racial equality at boardroom level.  This is responsible stewardship and although more common in the US and Europe there are numerous examples from around the globe.  We know this because voting records are often public and because fund managers produce reports detailing their actions as shareholders.  The actions themselves may seem like small wins but in changing the behaviour of a business investors can, over time, change its culture.

In a recent Insights piece, I discussed how and why we believed it was important to invest into sustainable businesses.  However, this is not always as we wish and requires the filtering or narrowing of the investment universe when building your portfolio.  Stewardship is essentially the act of engaging with a business in which you invest in order to change and improve behaviour. It promotes corporate governance practices that are consistent with encouraging long-term value creation for shareholders.  Whereas sustainable investing focuses on filtering an investment selection to only invest in companies that meet a narrower criteria, taking a wider ‘stewardship’ approach allows an investor to consider the entire universe of funds and then engage with that business in order to improve behaviour.  This is why the actions of the world’s largest fund managers and their approach to investment stewardship is becoming more and more important.

The largest fund managers in the world are also the largest shareholders in the world. Shareholders have an opportunity as the ultimate owners of a company to engage with management, to share and advocate best practice and ultimately to vote at meetings.  When your shares are bought by an index tracking fund or a passive fund manager they may conceivably be held forever (and if the current trend continues passive managers will own more and more of the market) so it’s important to find the basis for a working relationship.

Progressive Fund managers have stewardship and ESG built into their corporate culture so when they engage with other businesses about stewardship and corporate governance, they are practicing what they preach.  They may employ specialist Corporate Governance teams who vote on matters such as board composition, executive compensation, shareholder rights and strategy oversight and risk (including climate change and diversity). This general approach to embracing responsible governance is become increasingly more prevalent.

At FC Financial Planning we are building sustainability and stewardship into all our investment planning portfolios.  We see responsible stewardship as an important element of improving long term corporate performance and investor returns.  Improved corporate governance and behaviour should also benefit all of society.

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