Stewardship in Focus
One of the key tools many investors have to drive value creation at their investments is through stewardship, but how this is implemented is critical for success.
William Bryant, Head of Advisory
Stewardship has been in the headlines a lot recently. Two weeks ago, we saw JP Morgan Asset Management, State Street Global Advisors and BlackRock’s US business step back from Climate Action 100+, an “investor led initiative” to drive corporate action on climate change. Last week an updated list of signatories of the UK Stewardship Code was published, which for the first time since the code was updated saw a decline in the total number of signatories.
As with many things in the responsible investment space, firms have responded to a growing focus from investors by looking to enhance their practices in various areas. Stewardship is an area where many investors have scrutinised asset managers on their approach as they see this as a powerful tool to effect corporate action, whilst also being one avenue of responsible investment where its efficacy in driving positive financial and non-financial outcomes is strongly supported by academic evidence.
What does stewardship actually mean? In the investment world stewardship is viewed as the use of influence by investors to maximise the value of an investment – this can be done via many channels – voting at shareholder meetings, engaging with company management, filing shareholder resolutions, collaborating with other investors or groups, even taking up board positions. The manner in which stewardship is conducted can also differ, with some managers choosing to be constructive when working with company management, whilst others may take on a more activist approach that aims to directly challenge management. An asset manager’s stewardship approach will vary depending on security types traded and the investment style.
However, living up to stewardship commitments made can be more difficult than investors initially think, particularly when the topics they have committed to support become increasingly politicised. The idea of collaborative engagement, which underpins many asset owner groups, such as CA100+ has come under increasing scrutiny in the US with investors concerned that they may fall foul of anti-trust legislation and open themselves up to litigation. These concerns decimated the signatories of the Net Zero Insurance Alliance in 2023. It is worthwhile noting that the German regulator, Bafin, has provided their guidance around situations where collaborative engagement may be classified as acting in concert.
The UK Stewardship Code, which was refreshed in 2020 by the Financial Reporting Council (“FRC”), sets a high bar for firms to become signatories. Groups must demonstrate how they meet the code’s 12 principles of Stewardship, with tangible examples, whilst incumbent signatories must also demonstrate continued improvement in subsequent reporting. The principles range from Purpose and Culture, to Conflicts, to Collaboration, along with a number of other topics. In feedback that the FRC had provided to signatories on submission of initial Stewardship Reports, they stated that there was too much emphasis on policies rather than tangible outcomes. Producing a stewardship report that meets the expectations of the FRC is a significant undertaking, and signatories of the code should consider themselves to be at the forefront of the responsible investment space.
Elements of stewardship are not activities to be undertaken lightly. Engagement with company management takes a significant amount of resources, with the timeframe for achieving tangible outcomes likely to be longer than expected, whilst also having appropriate escalatory mechanisms where objectives are not being met. It is no wonder why many investors rely on proxy voting services such as ISS and Glass Lewis to advise on voting decisions across such a range of corporate actions. In his recent book Will Martindale, former head of policy at the PRI, stated that “investors go through the motions on stewardship, much of current practice is ineffective”, with others bemoaning the fact that investors often under-resource the engagement activity. Asset managers that are under pressure to demonstrate that they are engaging in stewardship activities are often stating how many entities they are engaging with, however the quality of each of those engagements can be highly variable.
To be successful through constructive engagement, investment managers need to bring something to the table that can help the underlying company manage their business better, whether that be mitigating and managing risks or helping identify and take advantage of opportunities. What can be helpful for a company will vary significantly based on their own circumstances, notably their maturity levels. For smaller private companies being supported in activities that will help them meet future regulatory obligations or enable them to access future financing can be of huge benefit. For larger companies engagement may need to be across a group of investors in a collaborative manner to articulate the direction those investors, who ultimately own that business (while they hold those securities), want that business to go in the future, whilst remaining cognisant of the potential challenges with anti-trust and acting in concert.
However, stewardship for stewardships sake is not something that will help build stronger companies, lead to the maximisation of portfolio value, satisfy investor expectations or help investment managers become signatories of the Stewardship Code.
At NorthPeak Advisory we have advised clients across a variety of investment strategies and differing underlying portfolio company maturity levels with implementing outcomes driven stewardship approaches. We have also supported one client with their initial Stewardship Report, and are thrilled that they were successful and have remained a signatory for the second year.
For further information on how NorthPeak Advisory can help you implement appropriate stewardship activity for your firm, please reach out to info@northpeakadvisory.com.