Sacha Sadan, director of investment stewardship at Legal and General Investment Management (LGIM), says boards are feeling a “seismic change”.
Speaking to Board Agenda for our latest podcast, Sadan reflects on the changing environment for boards as they come to terms with demands for action on climate change and sustainability, to be purposeful and to be accountable to not only to shareholders but all stakeholders.
Though it may look like a major shift in the way companies are run, Sadan believes good boards and good investors have always been concerned stewards. After all, section 172 of the Companies Act—the section that lays out directors’ duties—has been around since 2006, before the financial crisis and long before Covid-19.
However, some asset managers have been late to the issues that currently dominate debate about the conduct of business.
“When you’ve been in the sort of position I’m in, and my peers are in, boards have definitely been feeling this seismic change for quite a while.
“We are all in this; it’s starting to get much higher up the agenda,” says Sadan.
Beyond the buzzwords
Outside the big three US asset managers, LGIM, with around $1.5trn in assets under management, probably makes the most noise about governance issues. Sadan is the man leading that effort. He has been recognised by the Financial Times as one of the Top 30 most influential people in the City; when LGIM launches a governance campaign, it makes headlines.
The asset manager was one of the first to offer early support to companies struck by the pandemic. It has campaigned on splitting CEO and chair roles, women on boards and has lately turned its attention to ethnic diversity.
But what does he think of all the buzzwords—purposeful business, stakeholderism, long-term strategy—that pepper any considered commentary on governance at the moment?
“Let’s go back to basics. We are investors on behalf of, let’s say, pensioners who need to generate a return and an annuity or a dividend, to pay themselves for the future. We want companies to be long-term generators of capital and returns.
“To do that they need to think of the business model. So, let’s please stop worrying about buzzwords and just think about what is important around the boardroom, and what’s happening around the boardroom.”
Issues should be considered, and courses of action decided, because of this context, not because of buzzwords. “That’s much better than saying I’ve just spent a year writing a purpose statement,” says Sadan.
Responsible capitalism
That said, the buzzwords are everywhere. “There’s a lot of this about. And one of the things that we’ve found is good companies have always thought about these kinds of issues.” They just haven’t articulated their decisions in the way now being demanded, he says.
Of course, what got the sustainability started was a concern that some companies focus on the short term rather than time horizons further in the distance. And that’s a problem in a climate crisis. Capitalism has come in for much criticism since the financial crisis. Sadan, however, stands by it, asserting that profits are nothing to be ashamed of.
“We want capitalism. I certainly talk about capitalism a lot. But it’s just a slightly nuanced, responsible capitalism.
“What people have been annoyed about is not that companies have made money, it’s that they made money in the short term. And then we found out later it wasn’t very responsible or sustainable.”
He adds: “We want companies to do well because companies and equities … are the lifeblood of making returns for our investors.” Profits are “a good thing” as long as they’re earned in the way LGIM expects, Sadan says.
And that is already embodied in section 172. “It’s just needs to be shown, applied and actioned,” he says.
Driving diversity
Though LGIM has engaged with boards on many subjects, not least support for the suspension of dividends during the pandemic, its has recently campaigned on ethnic diversity in the boardroom. The asset manager is not asking for specific numbers, but it is are asking companies to reflect on the make up of their boards.
LGIM has already pushed on boardroom gender diversity and sees it as part of the larger ESG engagement discussion. The experience at the beginning was pushback from boards asking why it was important.
The response then, much as it is now for ethnicity, was to point out that workforces are diverse, so why is there less diversity at the very top of organisations?
Sadan says studies show that diverse boards perform better and offer better returns. But there is a political driver. The Black Lives Matter protests earlier this year will, he says, have pushed employees to ask their bosses about their policies. Even LGIM is facing those questions, says Sadan.
The questions for boards, especially those with diverse workforces at home and operations overseas, are stark. “Why is it that you can’t find someone from India or China or BAME [groups] good enough to be on your board in the next few years?” says Sadan. “You will be asked this by governments, you’ll be asked this by the media. And you’ll certainly be asked this by your employees and investors.”
And what are Sadan’s tips for boards as they face the array of current social, political and environmental issues? “Honesty and humility,” says Sadan. “Then just tell us what are the things that are troubling you in the boardroom, and the things you have done.” He also asks boards to tell investors what their decisions have changed.
“A good example is when people say they’ve engaged with employees. Well, what did you take from that? What did you do differently after listening to 500 of your employees… Meeting 500 employees is not important if you didn’t do anything differently.”
Actions speak louder than words? “Always do. In any industry,” Sadan says.