The changing face of stewardship over the past two decades



Two decades ago large Fund Management groups did not have teams of analysts looking into how to vote at forthcoming company AGMs.  It used to be solely the individual fund managers job to look into the issues and engage with the management of companies over contentious issues.  The result was often very little happened on the monitoring of things like executive pay and board composition.  The fund manager was then as now far more interested in whether the shares over the coming period were going up or down; it takes time and detailed work to fully understand the remuneration policy of a company.  The options and bonus schemes are complicated with targets being constantly changed.  Sometimes the change of target is entirely legitimate as circumstances may have fundamentally altered but at other times the target is abandoned because executives might want to change the benchmark to make it easier to hurdle.  The role of the corporate compliance activity within the investment management firm allows for a thorough examination of the proposed change.  The Portfolio Manager rarely in the past had the time or inclination to do this and abuses by companies were therefore much more widespread.

Successful corporate governance is not about acrimonious rows and votes at AGMs against the Board, although this needs sometimes to be the fall-back position.  It is usually a failure of communication and understanding on both sides if this happens.  It is better through active engagement that issues are quietly resolved before they come to an open fight.  The adoption of better corporate governance is leading to better practices and the addressing of difficult situations.  A company would launch a bid for another one claiming they would manage the business better.  The shareholders in both companies were often the same institutions, and money and time was consumed in the battle for control which cost the shareholder.  Better communication by companies and shareholders now means management shake-ups or changes to the direction of the company can be more easily altered without expensive, value destroying, takeover bids.  

Board composition was also cosier in the past.  Non-executive directors often came from a small self-selecting group.  This could lead to a blinkered view and the perpetuation of poor practices.  Policy direction and strategy was not always challenged by the non-executives on the board as it could mean "rocking the boat".  The new emphasis on better corporate governance has helped in revitalising the non-executive membership of boards.  The length of tenure of non-executives has fallen and the mix of people on them is slowly improving, seeing a significant pick-up in female membership.  But there is much further to go.

Shareholder engagement now needs to go further, particularly among smaller companies where there are misunderstandings between the company and the capital provider.  There are continual incidences of corporate frustration with investors, and vice versa.  The reason for much of it is the lack of communication leading to misunderstandings.  The timeframe that is required to build businesses and the patience of investors is often not matched.  Corporate governance needs to move forward from just policing corporate behaviour to a fuller understanding of the problems involved.  Fund managers and the corporate compliance departments need to work with companies to make this happen.  Companies need to be more open with investors who in return with greater transparency from the company need to take a longer view on the business.  All this is slowly happening and there has been good progress. Companies need to be open to real dialogue and investors need to understand more while UK quoted stocks strive towards becoming more responsive to rapid change.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Henderson Opportunities Trust plc

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