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Investors on both sides of the Atlantic face a new era in corporate governance. In the US, the financial regulation bill, which President Barack Obama will sign into law this week, gives the Securities and Exchange Commission the authority to grant shareholders proxy access to nominate directors and provides investors with a non-binding vote on executive pay and golden parachutes. In the UK, the new Stewardship Code sets out the responsibilities for investors to increase their engagement with management and boards.
Investors hope these changes will create a value chain that starts with improving corporate governance and risk management and ends in better financial returns. But the real question is: can any of the players really afford the time or resources required to make engagement a reality?
Institutional investors meeting at the International Corporate Governance Network in Toronto ahead of last month’s G20 meeting were in two minds about the likely impact of regulatory change. Scott Evans, executive vice-president of asset management for TIAA-Cref, the US pension fund, warned: “Ticking the box is not good corporate stewardship.” Others, like Anne Kvam, head of corporate governance of Norges Bank, Norway’s central bank, were concerned about the amount of work involved: “How much time do you spend on individual companies relative to absolute returns?”
In a series of advisory votes taken at the annual meeting, 59 per cent of participants said that the current lack of engagement between investors and companies was the fault of all the major players: shareholders, boards and management. But, it is not clear that legislation or best practice codes will help with the fundamental economics of engagement.
For example, Calpers, the California Public Employees Retirement System, has 12 people in its corporate governance department who must read the proxies of thousands of public companies and determine where to engage and how to vote. In contrast, global institutional asset managers often have just one or two people in their corporate governance department.
There was broad support among investors for the UK’s Stewardship Code based on what one participant described as a “comply or explain regulatory touch”. However, some were concerned that the growth in index funds and exchange-traded funds would undermine any code since their fund management teams have little incentive to increase overheads to implement the code.
From the corporate perspective, David Frick, who runs Nestlé’s corporate governance department, said he visits investors prior to the annual meeting and reports to the board on his findings. But how can a meeting of corporate governance experts really be a surrogate for discussions between portfolio managers who make investment decisions, and the board directors who are nominally their representatives on the board?
Some investors have proposed a less expensive way to engage with boards – a “fifth analyst call” during the proxy season and before the AGM. It would include board directors answering questions on corporate governance. While still in its embryonic stage, it may not make it out of the cocoon. Only 5 per cent of ICGN participants said they preferred this to other methods of communication.
The new corporate governance era is likely to get off to a slow start. Investors argued for more disclosure but can’t afford the time to read the enlarged proxies. They pressed for votes on compensation that they can’t effectively research. They proposed more opportunities for engagement with companies and boards which they don’t have the financial incentives to execute.
The explanations for this situation that investors may choose to disclose
will be fascinating to read – if
you have the time.
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