29 August 2019
Increasingly, investors are recognising the importance of engagement with the management of companies in which they invest and the positive outcomes that good engagement can bring. These include the development of a better understanding between investor and company, the opportunity to spread good practice through ongoing dialogue and, I believe, the consequent potential for improved business – and in time investment – performance.
While that should be incentive enough, if you’re a pension scheme trustee, it’s worth noting that recent regulations require you to include your policy on engagement in your SIP, to explain how you will incentivise your investment managers to engage and to report annually on the implementation of your engagement policy.
So as a trustee, you need to engage. Fine in theory, but what does that mean in practice?
In practice, few trustees undertake engagement themselves. Instead, given resource constraints, trustees typically rely on investment managers to implement their engagement policy. It’s important therefore that you review your managers’ engagement approaches and ensure that they are consistent with your views on the matter. When appointing a new manager, consider their approach carefully. And of course, you should monitor your managers’ engagement activity on an ongoing basis to ensure this duty is being discharged effectively on your behalf.
When people think of engagement, they traditionally think of equities – the press is full of articles describing the discussions that take place between company management and shareholders on a range of topics such as business strategy, proposed M&A activity and increasingly Environmental, Social and Governance issues. What differentiates equity from other asset classes is the right to vote – major company AGM votes against management on issues such as executive pay are often frontpage news – well, in the FT at least.
However, our view is that engagement is relevant to all asset classes. Others agree: the revised UK Stewardship Code (expected later this year) is likely to extend the scope of its requirements from UK listed equities to other asset classes.
Of course, across asset classes, there are differences in what engagement looks like, how it’s exercised, and the outcomes sought. Take for instance credit. Corporate bond holders are keen for companies to protect credit quality and financial strength. While the initial and any subsequent fund raisings are clearly good opportunities for lenders to engage with borrowers on factors affecting these matters, we believe that engagement should be viewed as a dynamic, ongoing process. First, so that bond holders gain insight into how companies are managing risks and, second, to encourage improvements in areas identified as sub-standard. As noted earlier, when done properly, this dialogue can enhance corporate business practices and hence business and investment performance, often through the reduction in downside, and therefore credit default, risk.
For example, one of the credit managers we deal with identified weaknesses in the cyber security reporting protocols of a large financial services organisation. The manager subsequently co-led a cybersecurity initiative which saw 53 institutional investors representing more than $12 trillion in assets under management engage with the company to address this shortcoming.
Despite not necessarily having a ‘seat at the table’ at AGMs, there are plenty of examples like this where fixed income investor engagement has led to an improved understanding of risk and greater management attention on issues identified as important.
I anticipate institutional investor engagement will grow in importance across all asset classes, both in response to the new regulations and also because it’s the right thing to do. Trustees have a key role in shaping how managers conduct that engagement with investee companies. And sponsoring employers may also want to take time to reflect on this topic – whether that’s simply to make sure that company and trustees are aligned or to understand how their own business may be impacted by the latest trends in engagement.
Whatever your role, we’re here to help you play your part.