Standard Life-Aberdeen merger could boost shareholder activism, experts say

Stewardship and ESG at heart of fund management mega-merger

The proposed merger of Standard Life and Aberdeen Asset Management will likely transform the UK corporate governance landscape by giving a bigger voice to what will be UK’s largest fund firm, and boosting activism through better shareholder engagement, according to leading industry figures.

Over the weekend, the two Edinburgh-based firms said they were in discussions to create an industry behemoth with assets totalling £660bn (€760.8bn). Following the merger, Standard life shareholders are expected to own around 66.7% of the combined group, while Aberdeen shareholders will own approximately 33.3%.

Standard Life’s CEO, Keith Skeoch, and Aberdeen’s CEO, Martin Gilbert, would become co-CEOs of the combined group.

The two predominantly active fund managers are expected to continue to focus on offering active investment products, but through lower costs following the merger, to take on larger lower cost indexed rivals such as BlackRock. Following completion of the merger, which is due in the third quarter of 2017, the combined firm is expected to make cost savings of £200m per annum.

“The combined group will have more clout for shareholder activism, which is fast becoming an important differentiator for active managers,” said Amin Rajan, chief executive of asset management consulting firm Create.

“Increasingly, buy and hold investors view activism as the alpha behind alpha,” he added.

Both fund managers are seen as “active” and responsible stewards, consistently using their shareholding for voting and engagement. In 2016, SLI said it voted against management recommendations on one or more resolutions in 430 shareholder meetings. Overall, shareholder meetings at which client shares were voted totalled 1,569.

Of the over 4,000 global company meetings for the year-ended September 2015, Aberdeen said it voted at least one resolution against management in 1,698 cases and voted with management in 2,338 cases.

Sarah Wilson, chief executive of governance research firm Manifest, said that alongside its focus on corporate governance and ESG issues, she expected a bigger commitment to “UK-style stewardship”.

“Both parties have a strong reputation for good governance and with increasing assets under management, that job isn’t going to go away,” said Wilson.

She added: “The UK governance model is principles-based and engagement focused. This will be one of the largest asset management firms in the world, approaching governance and engagement from a UK-perspective.”

Over the past year, Standard Life has been an outspoken critic of mining firm Vedanta, the emissions scandal at Volkswagen and has also spoken out against pay at communication services group WPP and the re-election of non-executive directors at Sports Direct.“Both Aberdeen and Standard Life take their corporate responsibilities very seriously,” an Aberdeen spokesman said. “We are stewards of other peoples’ money and in that role we need to ensure companies do the right thing by all their stakeholders – customer, employees, suppliers as well as shareholders. Investors around the world are increasingly focusing on ESG issues and the enlarged business will also continue to do so,” he added.

Standard Life added: “Our commitment to remain an active, responsible investor remains unchanged.”

Its funds arm Standard Life Investments employs 16 people on its ESG Investment team headed by Euan Stirling. It recently hired Deborah Gilshan as governance and stewardship director from RPMI Railpen.

Aberdeen said it did not have a separate team focused on corporate governance and ESG, but ESG was “fully incorporated into our investment process, so all fund managers are involved”.

Paul Lee is head of corporate governance at Aberdeen; he joined at the start of 2015 having previously had senior roles at the National Association of Pension Funds (NAPF) and Hermes.

With the two companies together employing 9000 people, analysts expect some job cuts, in areas such as IT, back office and sales.

One industry source said: “While a merger like this will deliver economies of scale there are bound to be some issues – for example, even though both firms integrate ESG across their investments, the way they go about may be vastly different.

“One firm’s fund manager may have far more discretion on ESG, while for the other ESG may be applied completely differently – so these are some of the areas that may appear complimentary in theory, but differ in practice.”

The combined firm will overtake Schroders, which has £397bn in assets under management, to become UK’s largest fund firm.

“The implied industry consolidation puts pressure on other managers either to merge or have a credible strategy based on organic growth,” Create’s Rajan said.

Research firm Morningstar said that it did not expect much rationalisation in the firms’ product offering, given Aberdeen’s strength in emerging market equities and Standard Life’s more diversified stable of products dominated by their multi-asset range.
Ashis Dash, associate director at Morningstar, however noted that biggest may not necessarily be the best, citing BlackRock which is rated ‘neutral’ by the research firm.

He said: “A large asset manager doesn’t necessarily lead to good risk-adjusted returns for fund holders. They may be able to offer a wider or more diversified range of products but to perform well across each of those sectors or markets is still difficult.

“Where size may help is operational efficiency. It can help reduce costs due to economies of scale but it’s also important that these should be shared with fund investors in the form of lower fees,” he added.