Executive pay and and short-term results are dominating conversations between investors and company boards, instead of discussions focused on long-term strategic issues, according to the head of an investors group representing members with assets of £18.5trn under management.
The Investor Forum’s executive director Andy Griffiths made the statements when discussing the group’s annual review of activity last year. He wrote that company chairs find the conversations frustrating.
According to the report, many chairs say they would prefer to be working in private companies because of the “constraints” imposed by the public markets.
Griffiths told Board Agenda: “If you were to ask a company, ‘Of all the meetings in a year, how do you spend your time?’ overwhelmingly those meetings are on short-term financial progress and remuneration.
“And those two things are crowding out real conversation about long-term strategic value and broader stakeholder perspectives.”
Griffiths added that along with investors voting against the reappointment of individual directors in greater numbers than ever before, the conversation are creating tension between boards and investors, and have been for some time.
“All of it just creates friction around much more transactional issues… rather than around the long-term value of the company.”
The views come at a time when the focus of governance has shifted to discuss how companies are run in the long term. Indeed, Priniciple A of the UK Corporate Governance Code, refreshed in 2018, says a successful company board is one “whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wide society”.
This is matched by Principle 1 of the newly minted UK Stewardship Code. This says the purpose of those signed up to the code is one that “creates long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society”.
The stewardship code also switched its emphasis from investors having policies in harmony with the principles of the code to measuring outcomes from those policies.
The Investor Forum has 50 members—including investment managers such as BlackRock, Aviva and HSBC Global Wealth Management—and helps them present a united front on key engagement topics.
Its report presented a call to investors to change.
According to the Forum’s chairman, Simon Fraser, most investment firms are making progress on integrating stewardship into their work.
“However, it is apparent that there is further to go to create meaningful long-term value through the stewardship process. This is likely to require further evolution in the style of stewardship and in particular a focus not just on activity by outcomes.”
Carum Basra, governance policy advisor at the Institute of Directors, said the low point in board-investor relations was “concerning”.
But he worries that fund managers lack the right incentives in place to aim for long-term benefits, while boards find themselves confronted with conflicting needs.
“An observation often expressed by directors,” said Basra, “is that many asset managers win or retain mandates by generating investment outperformance over relatively short periods of time. They often have little incentive to devote significant resources to anything more than superficial engagement with boards particularly when their portfolios continue to grow to unwieldy proportions.
“Boards can also find the seemingly contradictory demands of some shareholders difficult to meet, experiencing a disconnect between portfolio managers and responsible investment teams, with the former often myopically focussed on short-term returns.”