Analysis: the concept of investor stewardship is starting to take off

Increasing momentum despite some sceptical voices

Could 2013 be the year when the concept of investor stewardship – as enshrined in the various codes that have developed over the last few years – really comes of age?

The idea kicked off with the launch of the Stewardship Code in the UK in 2010, with a similar European version launched by EFAMA, the European Fund and Asset Management Association, a year later. The Code for Responsible Investing in South Africa (CRISA) also aunched in 2011.
The latest addition is from Switzerland, where last month a voluntary set of five principles was launched by investor and business groups as a “pragmatic Swiss approach”. In November, the Borsa Italiana, the Italian stock exchange, said it was planning to draft a code of conduct for asset managers, asset owners and their advisors that is explicitly based on existing stewardship codes.
On top of all this is the European Commission’s corporate governance action plan – among whose provisions is improved disclosure of investors’ voting and engagement with companies.

So, there’s been a lot of activity, in the wake of the financial crisis, to remedy what Lord Myners so memorably termed the “ownerless corporation”.

But how much have investors genuinely ‘bought into’ the idea? Although it’s easy to see how many have signed up to stewardship (there are 250 signatories to the UK code), it’s a lot harder to get the data on how it’s being done.
The Financial Reporting Council says the Stewardship Code was a catalyst for greater engagement between companies and their shareholders in 2012 – with “both sides”, companies and investors, trying to raise their game.The UK’s National Association of Pension Funds (NAPF) released a survey in December showing that seven out of ten respondents had taken the stewardship activities and policies of asset managers into account when selecting them – up from 48% in 2011. And an overwhelming majority (90%) said they had reviewed their asset managers’ application of the stewardship policy.

Funds were beginning to “foster a market for stewardship”, although their investment consultants could do more to encourage the take-up of the Code.

Despite all this progress, there are some influential figures within the pensions ‘establishment’ who are sceptical about the notion of a stewardship code, if not stewardship per se.

Chief among them is Alan Pickering, the respected former chairman of the NAPF and the European Federation for Retirement Provision (EFRP).
Speaking at an NAPF trustee event late last year, Pickering, who now chairs independent trustee BESTrustees, said: “Society has lots of ideas about what we as trustees should be doing with peoples money.”

For him, stewardship means simply having better pensions for beneficiaries: “It’s not our duty to make the world a better place.”

Pickering, a trustee of eight schemes and the author of a 2002 government-backed report on pensions, is a former senior partner at investment consultants Watson Wyatt.

The Plumbing Industry Pension Scheme he chairs decided against hiring a voting provider, as it was too expensive – “money that could be used to pay pensions”.

The fund’s four investment managers are tasked with voting their shares and engaging with companies – the
term stewardship is a “smokescreen” Pickering reckons. “We expect them to be active engagers,” he adds.

But he says: “There are so many codes around – it’s quite counterproductive to sign up to a code and say you’ve done your duty.”

Instead there was a need for a sensible legislative and regulatory framework for stewardship and not a “straitjacket”.

Although a self-confessed “dinosaur”, Pickering’s views will probably be shared by many hard-pressed trustees who haven’t been presented with clear evidence that stewardship leads to better pensions.

Mark Hyde Harrison, Pickering’s successor as NAPF chairman, speaking on the same panel, acknowledged that the current level of Stewardship Code signatories “doesn’t give us a firm base” against the regulatory pressure that the code was designed to head off.

Indeed, the Code has yet to attract sovereign wealth funds and the only foreign asset owner to sign up is the Ontario Teachers’ Pension Plan. Norges Bank Investment Management, the manager of Norway’s giantGovernment Pension Fund, has in the past expressed its doubts over the code.

Financial Reporting Council Chair Lady Hogg acknowledged this in December saying a “critical mass of investors with a long-term perspective who are willing and able to engage with boards has to be established internationally, not just within the UK”.
Last year’s “shareholder spring” could hit genuine stewardship, Hogg reckons, if public confrontation becomes the default mode of engagement – which may “deter exactly those sorts of investors – particularly international investors – that should be encouraged to engage more”.

In November the NAPF went out of its way to urge pension funds to support the code when it launched its new policy to help them sign up.

The proponents of stewardship must be much more persuasive about its benefits so that it becomes an easier topic to introduce at the trustee meeting. How the long-term health of companies dovetails with long-term investments needs to be much better articulated.