Report from the Eumedion Dutch investors’ governance symposium: “know more of less companies”

Meeting debates long-term business strategy and long-term investor involvement.

The strategic interests of both institutional investors and listed companies would benefit from a changing focus to “know more of less companies” instead of “know less of more companies,” speakers heard at the November 8th symposium in Utrecht of Eumedion, the Dutch corporate governance and sustainability forum, which includes most of the country’s biggest pension fund investors. The statement was strongly endorsed by the speakers, panelists and attendees. The theme of this year’s symposium was: “Long-term business strategy and long-term investors: it takes two to tango” One participant in the panel discussion, Hans Wijers, former CEO of Akzo Nobel, argued that Dutch institutional investors should invest more in Dutch listed companies, noting to his surprise that large Dutch listed companies have little or no Dutch institutional investors in their ‘top 20’ shareholders. Wijers calculated that if just a fraction of Dutch pension money was invested in domestic companies the holdings would be substantial. He said this strategy could be adopted individually or jointly by pension funds, but argued that the long-term involvement of local shareholders would enable them to better understand and endorse long-term corporate strategies, in turn leading to good long-term performance for investors. Co-Panelist, John van Markwijk, Chief Investment Officer at PME, the pension fund for Dutch metalworkers, endorsed Wijers’ call. He suggested that Dutch listed companies had such various and diversified activities that they could contribute to the necessary diversification of an investment portfolio. According to Van Markwijk, Dutch institutional investors are still overly focused on diversification by investing in many companies as possible. He said PME was experimenting with larger holdings in Dutch companies and encouraged other Dutch institutional investors to follow suit. Some of the panelists and audience said that companies should also do their share to promote long-termism by being more active in establishing which groups of their shareholders matched the implementation time-frame of long-term strategy, notably viabetter relations and communications with shareholders, especially on strategy explanation. To this end, Feike Sijbesma, Chief Executive Officer of DSM, the life and material sciences company, presented the company’s long-term strategy and explained how the company is being forced to change in order to ‘survive’. DSM has transformed itself from the old state mining company into a bulk chemical company and then to a life and materials sciences company with the majority of its sales and growth now obtained in emerging economies. Sijbesma said investor confidence in these strategic choices was important, but said it was important to have the confidence of all stakeholders. He said he often ignored the short-term primacy that some in the financial markets demand, noting that he would rather not “waste time” with investors who have a horizon of only two months. He said the support of long-term investors was crucial. DSM, he said, preferred investors looking for stable, rising dividends. Jan Louis Burggraaf, Partner and advisor on mergers and acquisitions at Allen & Overy, the law firm, said that to encourage ‘loyal’ shareholders he would be in favour of regulators rewarding them in some way such as extra voting rights or tax breaks.
BlackRock, the world’s largest fund manager ($ 3.67 trillion under management) has several stakes of around 5% in Dutch listed companies. A large part of the investments are ‘index-driven’, said Amra Balic, Corporate Governance director at the fund. Balic said that BlackRock’s approach was to get the support of the management of the companies in which it invests. However, if there are concerns about whether the board is acting in the long term interests of shareholders, BlackRock will initiate a company dialogue, and it does so about 1500 times per year across the globe. However, Hendrik Meesman, Director of Meesman Index Investments, said that for many index investors such specific knowledge would be difficult to follow and be too costly. He said he had serious concerns about the effectiveness of individual company analysis and suggested that investors would better focus on
investing in corporates that have the most cost-effective management of capital. But he said he believed shareholders, including index investors, could enter into more general dialogues with companies on issues such as directors’ remuneration. Meesman said asset manager costs were already too high because of turnover of shares that has risen sharply in recent decades and proven costly to customers. Frederik van Beuningen, Vice President of Eumedion, presented the first results of a study commissioned by Eumedion from the University of Tilburg. It showed that the average holding period of Dutch equities by Dutch institutional investors was on average more than five years for 80% of the portfolio. More than half of the equity portfolio is held for more than 10 years, while active trading accounted for just a limited part of the equity portfolio: 4% to be exact. He said the results bucked the impression that institutional investors are short-termist. The research found that the average holding period of Dutch shares had also not declined inrecent years. The results indicate, rather, that the average holding period of Dutch equities since the financial crisis has increased. According to Van Beuningen, this possibly reflects the trend towards more ‘passive investing’. Another conclusion from the study is that long-term investment faith may be indicative of a long-term investment horizon, but that a short holding period is not necessarily an indication of short-term horizon. The latter could, for example, he said, be the result of a rebalancing of the equity portfolio due to the inflow and outflow of pension fund participant money, or because of risk control by the fund manager. Another important source of change, he said was index rebalancing.
Symposium Chairman, Steven Schuit, a Professor at Nyenrode University, invited Eumedion to organize a future debate around the results of the study to examine why they were different from previous studies and contrary to the view of many directors of listed companies.

Rients Abma is Executive Director of Eumedion, the Dutch corporate governance forum: Link