Investors in equities get not just returns, but a valuable vote that can influence the behaviour of the world's largest companies for the better, writes Royal London Asset Management's Ashley Hamilton Claxton.
Unlike hedge funds, which tend to focus on short term corporate actions, asset managers should be focused on activity that can deliver long-term, meaningful change for the pension savers whose money we manage.
One topic that has developed from outraged headlines into concrete action has been executive pay.
Whether you are active, passive, activist, short-term or long-term, your vote and your voice can make a difference
While improvements have by no means been universal, there has been a definitive sea-change for many companies.
Executive pay dominates the headlines
Oil giant BP faced a rocky annual general meeting in 2016, after deciding to award its chief executive a 20 per cent pay rise in the year the company announced a record loss.
More than half the firm’s shareholders voted against this motion, leading to a slew of headlines and a promise from the chairman to go back to the drawing board on pay.
The following year the company implemented a new policy for how it paid its executives, having meaningfully consulted shareholders on how to strike a better balance between pay and performance going forward. This included providing the committee that sets this pay with more clear discretion.
BP was by no means alone in experiencing revolts at annual general meetings in 2016, and thankfully was by no means alone in responding constructively to stakeholders.
Over the past year we (and other asset managers) have seen a significant increase in the number of letters from FTSE listed firms asking for feedback on their pay proposals.
Failure to adapt has consequences
Companies stuck in their ways can suffer as a result. At house builder Persimmon, the pay structure for executives was tied to a share price that had been boosted by a number of government schemes.
While shareholders had done well from this, the formulaic design of the scheme meant that the company ended up paying out over £500m in bonuses in 2017, including more than £100m to its chief executive.
Following this bonus award, Persimmon’s chairman later resigned. In his parting statement, he recognised that a cap on bonuses could have been implemented, highlighting the poor design of the scheme.
Although executive pay grabs the lion’s share of the headlines, investors have begun to flex their muscles to push for change in other areas.
At WPP, the media and advertising conglomerate built by Sir Martin Sorrell, we teamed up with Standard Life Investments and others in 2017 to push the company to focus more on succession planning for when Sir Martin retires.
Elsewhere, demands for change have put directors’ jobs on the line.
This year, Sports Direct held a vote of confidence on its chair. The retailer has a colourful relationship with the City and has been beset by governance woes for several years; the chairman only just survived the vote with a slim majority.
The unsung virtues of equities
As Sports Direct shows, not every investor campaign succeeds, but even when unsuccessful, shareholder activism sends a signal to management.
When a number of fund managers are willing to engage and share their views, this effect is amplified.
This is why pension funds should not lose sight of what their equity investments offer, an opportunity not just for returns but, as the part-owners of these companies, to push for change when they deem it necessary.
A stake in a company confers the same voting rights, regardless of why the investor chooses to hold it. Whether you are active, passive, activist, short-term or long-term, your vote and your voice can make a difference.
Govt 'minded' to introduce mandatory trustee ESG statements
The government is to consult on whether trustees should be required to state their policies on sustainability, member concerns and stewardship, and will clarify current legislation as part of a wider push to increase pension investment in social and illiquid assets.
The evidence shows that meaningful change is possible; investors have delivered reforms through private meetings, public votes and even through media debate.
Fund managers should remember the power they have to effect positive change. They have a duty to the pension savers whose money they are ultimately investing, to use this power, and use it wisely.
Ashley Hamilton Claxton is head of responsible investment at Royal London Asset Management
