Articles - Stewardship - a solution to “quarterly capitalism”?

 By Will Oulton, Mercer’s Head of Responsible Investment in EMEA

 The financial crisis and global recession have left champions of free-market capitalism facing an increasingly sceptical global audience. The current debate regarding “fair” or “responsible” capitalism often highlights the finance industry as having a transaction-based, short-termist culture focused on the next quarter's earnings, rather than an ownership culture focused on long-term sustainable growth underpinned by a system of strong corporate governance. In June, Professor John Kay will report the results of his review of short-termism commissioned by UK Secretary of State for Business Innovation and Skills, Vince Cable. One key theme that has emerged in the interim report published at the end of February is that stewardship and engagement are central to long term investment practices.

 The issue of ownership and the practices of shareholders in overseeing corporate boards and their activities is a key part of the UK and European focus on stewardship, a term thrust into the spotlight in 2010 when the FRC published the UK Stewardship Code. The Code was launched as a result of the Walker Review into the banking crisis and is designed to enhance the quality of engagement between shareholders and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.


 Fanning the flames of interest in the role and activities of shareholders is the politically topical issue of executive remuneration. Executive remuneration typically generates some newspaper headlines in the build up to the UK voting season as companies publish their AGM notices and remuneration reports. However this year is different. The issue has rarely been out of the press since another of Vince Cable’s consultations, on executive compensation, was launched in September last year.

 This consultation set out to address four main areas in relation to the setting and monitoring of executive pay which included once again the role of shareholders as well as the role of remuneration committees, the structure of remuneration and promoting good practice.

 This consistent focus on the responsibilities and role of shareholders and their stewardship responsibilities is beginning to be recognised by increasing numbers of UK pension scheme trustees who, when reviewing and updating their Statements of Investment Principles, are adding language supporting the Stewardship Code and, committing to monitoring their asset managers compliance with it. As at mid March, over 50 asset owners had provided statements of support to the FRC.

 One of the key challenges for pension scheme trustees is not how to develop a stewardship policy position but how to monitor that the policy is being implemented. The success of a stronger approach to stewardship will not lie in the Code per se but how it influences a change in behaviour from investors to act like owners of enterprises and take a greater interest in the performance of that enterprise.

 Lord Myners, the former Financial Services Secretary to the UK Treasury noted that “fund managers should be questioned more rigorously on stewardship issues at trustee meetings instead of being left to talk about short-term issues like quarterly performance updates”. Although many proponents of corporate governance would applaud this, the reality is that many trustees feel burdened by the challenges of increasing regulation, addressing underfunding, managing liabilities and risks as well as the strength of the sponsor covenant. Mercer, however, is actively promoting the adoption of the Code with its UK clients to ensure that trustees understand what it is and what it means for them. Our view is that higher standards of stewardship practices by asset managers are in the long term interests of the scheme’s beneficiaries and to assist them we have also developed a stewardship service with a focus on the assessment and monitoring of investment managers with the Code.


 The financial crisis has in part been a crisis of ownership. The western system of capitalism is facing serious challenges from civil society and questions are being raised as to whether shareholders should continue to enjoy the rights of ownership without due regard to the obligations that come with it. Investors have demanded higher standards of transparency, disclosure and accountability from the boards of companies they invest in often lobbying for regulation to this end. Stronger regulation is only part of the answer, what is really needed is a move from a culture of entitlement to a culture of responsible ownership and this is something that the trustees of pension schemes cannot be expected to achieve alone.

 As Bob Monks, the US based activist investor noted recently, “[shareholding] institutions must take the initiative to protect their relevance as a wealth preserving energy in a free society. They cannot wait for others, nor can they decline to act. Institutions must take the lead, because all other courses have failed.”

 Shareholders and owners have a role to play in strengthening the integrity and efficiency of capital markets. This includes lobbying regulators to address the bias towards “quarterly capitalism” and showing leadership by adopting good practice themselves, supporting higher standards of stewardship and demanding the same of their agents.

 For UK pension schemes, supporting the UK Stewardship Code is a good place to start.

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