Is investor activism a resource-intensive irritation that has to be suffered, or is there real value for companies in taking a measured and structured approach to dealing with ‘activist investors’ on corporate responsibility and governance (CRG) issues?
The groundswell of interest in the ‘extra-financial’ performance of companies is increasing, particularly in the UK where the government has promoted more active shareholder engagement on issues of management, strategy and performance. The key premise is that an active investor is a more informed investor and this principle is gaining increasing support in the institutional investment community.
While the most ‘active’ activists in the fund management industry tend to have some socially responsible investment (SRI) interests, the trend is moving from an SRI values agenda toward one of opportunities and risks. Evidence of this can be seen in the increasing number of research reports from global investment banks such as Goldman Sachs, Morgan Stanley, Citigroup and UBS regarding CRG issues, opportunities and risks. This change has been driven by one thing – investor interest. Without this, investment banks would not invest in CRG teams.
Investors usually become more informed about a company’s CRG performance by using one of the commercial rating agencies and incorporating this information with their own in-house research and engagement processes, or by simply outsourcing the activity to a third party. Meanwhile, the actual engagement with company managers can take many forms, ranging from a simple written request or questionnaire to structured meetings with company executives and investor relations managers.
Effective investor engagement requires informed consideration and judgment, and cannot be achieved through a box-ticking approach. However, due to the hundreds of companies that can be represented in a typical investor portfolio, investment managers and asset owners are applying a range of different approaches to engagement and have developed a range of different methodologies and strategies, with varying degrees of effectiveness. In addition, the number and level of resources, as well as the influence the information gathered has on the investment view of a company, varies greatly between fund managers.
Some see engagement as key to the creation and protection of shareholder value, while others just go through the motions of engagement to enable them to exhibit a basic level of competency in this area when pitching for pension fund mandates. Others use it as little more than an indicator of which way to vote their own and their clients’ proxies.
All of this can be confusing for company executives and IROs who have to deal with this increasing information demand because they do not have time to waste on superfluous activities. Effective communication with active investors requires IROs to be able to identify the motives and approaches employed by fund managers. It also allows them to develop strategies that ensure the information provided is both appropriate and of value to shareholders – rather than a waste of time, effort and energy.
