On 25th April 2019 Richard Davies, Managing Director of RD:IR, curated and moderated the first of two IR Masterclasses for 2019, organised by the IR Society and hosted at the offices of Instinctif Partners. This Masterclass looked at topics relating to governance.
Richard opened the morning with a broad overview of the current investment and IR landscape, as well as introducing the various speakers. Richard commented that the environmental, social & governance (ESG) industry is growing at notable pace, with portfolio managers becoming more aware of these issues, as well as the governance teams. This has led to a culture for 2019 in which every AGM is potentially contentious.
Following the introduction, Richard gave way to Tom Nolan of Fidelity Management & Research Company, who spoke in-depth about the macroeconomic environment and how this could develop in the short- to mid- term. His research had concluded that there are three points that stand out the most within macroeconomics:
- The economic cycle is mature yet still has legs;
- Consensus expectations are finally reflecting some caution;
- Risk assets are typically exhibiting more volatility, but returns are still strong.
With these points in mind, it was noted that the global economy is in late cycle and about to go into a cyclical pickup. Tom took the view that a recession is not likely soon, which is contrary to a lot of market commentators. To bolster this thinking, Tom presented evidence of interest rates not having risen, as these rates have risen directly prior to previous recessions. Tom proceeded to dig into a great deal of economic data, discussing everything from Brexit to Trump, UK politics to trade wars.
The first panel came to the stage after Tom, consisting of Will Pomroy of Hermes Investment Management, Leighton Barnish of Emperor, and Simon Gleadhill of Howden Joinery Group. Their topic of discussion was the increasing challenges of ESG reporting. An eye-watering $30tn is now flowing into ESG matters one way or another, making this a very pertinent topic. It was noted that ESG topics have been considered by investors for quite a few decades, under the different guises of more specific terms like ‘governance’, ‘CSR’, and ‘sustainability’. While in the past, companies focused heavily on health & safety, modern times have seen a shift towards environmental and equality issues at company level, and this will become more relevant as Generation Z replaces Millennials and Generation Y as investors, consumers and employees.
Simon Gleadhill took the view that getting investor feedback is crucial to understanding how to report on the company – what do investors want to hear about, and what are their main concerns? The panel agreed that it is possible to give too much ESG information to investors, flooding annual reports with every case study and detail. Websites can be used to showcase most data and case studies, but annual reports should be thought through and targeted to specific audiences. To demonstrate this shift over time, a fact was offered that ten years ago a CFA study found that almost no CFA members were paying attention to ESG matters, compared to a notable 73% today.
An important point to take away from the first panel session was that the ESG marketplace is very crowded with various metrics. There are myriad indices in existence. Will Pomroy stated that Hermes, for example, conducts its own research into companies to understand a company’s ESG standing. The crowded marketplace is a sign of good, however. Leighton Barnish said that Moody’s conducted a retrospective analysis and found that there was an almost perfect correlation between companies they downgraded and those companies’ poor sustainability record. This added evidence to the idea that ESG-focused investing does not affect returns, and in fact having a strong sustainability record could benefit a company.
The second panel was made up of Andrew Ninian of The Investment Association (IA), Trelawny Williams of Brunswick, and Rob Beale of Capital Group, looking at the AGM season for 2019 and investor concerns for the meetings. Broadly speaking, these concerns were around governance, with the primary focus being on boards and board members. A list of the top five issues for 2019 was read out and summarised, with those issues being:
- Board diversity
- Directors’ pensions
- Directors’ tenure
- Proxy advisory agency (PAA) transparency
Andrew Ninian told the audience that the IA’s view is that diversity is positive for sustainability and long-term growth. He referenced the aim to have one-third of all board members to be female, established by the Hampton-Alexander Review, and how the IA has been contacting companies to ask them to change the make up of their boards. An approach of ‘one and done’ has been adopted by a lot of companies apparently, meaning they have appointed one female board member and then considered their work on diversity done. This is something the IA has been battling against, believing that diversity should be something constantly addressed and with a full commitment to and belief in the end goal. The view was taken that pay gap analyses based on other aspects than gender are also on the way.
With regard to the broader topic of boards acting in the best interests of all stakeholders, Trelawny Williams noted that there is no enforcer of section 172, Companies Act 2006. This causes a potentially confusing interpretation of the law and an inconsistent approach between companies. The question was asked as to whether the successor to the current Financial Reporting Council (FRC) will have some enforcement capabilities to bring understanding and discipline to the market.
The power that PAAs have over the outcome of companies’ general meetings was acknowledged as an issue, along with the view that those same PAAs also provided a very useful and important function. Steps have been taken to address the one-way nature of the information that PAAs give to investors, with Glass Lewis now allowing companies to comment on its recommendations. Andrew Ninian praised the incoming Shareholder Rights Directive II (SRD II) that the EU has instigated, and which will become law later this year. This legislation places requirements on PAAs for them to be more transparent in what they are recommending and how they have come to their conclusions. We have published a piece on SRD II, which is available to read here.
The top tip from the speakers at the end of the second panel session was for companies to keep communicating with stakeholders and the wider market. If a board has chosen to do something, it should be open and explicit as to why, explaining itself with clarity.
The third and final panel session for the morning included Adrienne Monley of Vanguard and Simon Bailey of JLC Investor Relations. With Vanguard having recently opened up an office in London, and with $350-400bn invested in the UK, it was interesting to hear from such a major fund manager. The topic of discussion for Adrienne and Simon was the impact on IR from the rise of passive investing. Simon Bailey kicked off by noting that around a third of the investment market is now passive, but that it is never a case of simply active versus passive. Both approaches to investing coexist, and passive could not exist without active managers pricing and providing liquidity to the market. With this in mind, Adrienne noted that Vanguard actively manages around $1tn of investments in the USA, despite the fact that Vanguard is most well known for its passive investing.
Adrienne Monley made it clear that passive investors like engaging with companies just as much as active investors. This is particularly relevant during times of down markets, as investors tend to seek more engagement with companies, and so more resources are focused on stewardship.
With Vanguard being an US-based manager and Adrienne Monley’s experience being heavily US-focused in the past, her experience has been that governance and wider ESG issues are spoken about more openly in the UK than the USA. In addition, she noted that boards are more open over here and are happier to engage with large shareholders. It is very common in the US for the top three holders of a company to own most of the shares; in the UK, share registers are more dispersed.
SRD II was brought up as an important next step in market clarity, and the point was made that this will impact PAAs. The speakers agreed that PAAs have an important role to play, especially with fund managers having to research so many companies, so they should still occupy an important place in the market, but the new legislation will place greater emphasis on their transparency.
Engagement was the key point of the final session. Both Adrienne Monley and Simon Bailey were of the view that engaging with passive investors is what companies should be doing. The message was that passive is going to be considered the new normal, so companies may as well get used to it.
As ever, the IR Masterclass was a very insightful event and we thank the IR Society for organising the event.
RD:IR works in the governance area with companies to assist their communication with the market, either on a one-off or retained basis. Please get in touch to discuss this or any of our other services further.