The reputation of the investment management industry has been damaged by several high profile failures over the past 18 months, further eroding public trust in its value — and values. Investors have been hurt and, for the sector collectively, it is now our duty to rebuild confidence.
Last week, the Financial Reporting Council launched the revised UK Stewardship Code, a landmark moment that provides a significant opportunity for asset managers to make their engagement practices more meaningful, improve the companies in which they invest and, in turn, help reshape perception.
We have long advocated that active stewardship should be at the core of all investment activity, applied across all geographies and asset classes.
Investors holding companies to account is not a new concept. Back in the 1800s, Quakers and Methodists established investing guidelines for their followers and sought to purge their portfolios from the ills of tobacco and alcohol.
Fast forward to 1983 and Ralph Quartano, the first chief executive of Hermes, picked up the stewardship mantle for the modern era. Frustrated by UK corporates’ executive pay arrangements, Ralph stood up at the M&S AGM and declared that he expected the company to be “on the side of the angels”. Yet despite its historic origins, the concept of stewardship seems to have taken a back seat of late.
Investors have, for the most part, reached a consensus that traditionally non-financial, ESG factors now comprise an essential part of a successful investment process. However, for a large portion of the industry, this still relates to the decision-making process as to whether to invest or not. While this is valuable, the responsibilities of investors must continue throughout the lifecycle of a holding.
This issue is inextricably linked to asset managers’ raison d’être. We are here to create wealth sustainably. A key tenet of this purpose is ensuring that we incentivise and engage with companies to act responsibly and ensure long-term value creation beyond the next quarter or the current chief executive’s tenure. When companies fail in this duty, we must stand ready to hold them to account.
Successful stewardship needs to be at the heart of business purpose and inextricably linked to investment decision-making. In order for this to happen, we need a “new normal” in the relationship between asset manager and the companies in which they invest.
The future of stewardship goes beyond holding companies to account and involves empowering them through collaborative support. Robust systems of measurement need to become recognised across the industry so that the success of this collaboration can be tracked and benchmarked. The skills required within investment teams will need to be overhauled to ensure long term sustainability goals are achieved. To maximise the levers that a responsible owner can pull, investors will need to become more interventionist, without becoming “activists” per se.
Asset owners entrust us with their capital to create wealth sustainably and too often investors are asleep at the wheel once investment decisions are made.
The argument for strong stewardship is not merely based on altruism, nor is it to the detriment of sustainable wealth creation. Quite the opposite — it improves returns. Studies have shown that engagement can generate higher annualised returns of up to 7.1% a year while also lowering the downside risks.
While stewardship has transformed significantly over the past 30 years, the aspiration that market forces will drive behavioural change remains a hope rather than a reality. For this reason, the overhaul of the UK Stewardship Code and implementation of regulations such as the updated Shareholder Rights Directive, which took effect in June, are important steps in pushing the industry to rethink its approach to stewardship and deliver substantive changes.
Investment managers must continue to work and behave in a way that is consistent with solving the global challenges rather than compounding them.
At AGMs companies used to fear the appearance of Ralph Quartano, who had a vision for how our industry could use its influence and powers of ownership to change businesses for the better. He set the wheels in motion, enabling stewardship to evolve into what it has become today. It is now our duty to continue this legacy and pave the way for a new vision for stewardship for the next generation of investors.
Saker Nusseibeh is chief executive of Hermes Investment Management
