How did I get involved?
Truth be told, it was a leap of faith – on my part and by Standard Life.
In 1992, at the time of the Cadbury Committee, David Simpson, who headed Standard Life’s Investment Division, was the chairman of the now-defunct but then very powerful ABI Investment Committee. At that time, Standard Life was Europe’s largest mutual assurance company and, as such, was a hugely influential institutional investor. In that role, although David was not a member of the Cadbury Committee, he and Dick Barfield, Standard Life’s Chief Investment Officer, who sadly died unexpectedly last month and to whose memory I dedicate this talk, recognised that there was an emerging corporate governance role for institutional shareholders.
I had been with Standard Life for six years, and I had set up and led its private equity and smaller company investment teams. That was great fun. We tended to have large shareholdings in companies and, without realising it, I had been engaging in corporate governance - appointing directors, holding boards to account, challenging strategy, and coordinating with other shareholders to deliver long-term returns. Therefore, David and Dick told me to put down my cheque-book and take a conscience and develop Standard Life’s approach to corporate governance. It was a leap into the unknown for all concerned.
With hindsight, it turned out to be a brilliant opportunity to play a unique and privileged role in shaping the direction of travel - for not only Standard Life but also the wider investment community. I was given a clean sheet of paper and back in 1992 there were very few institutional investors who took an interest – the other notable exceptions being Norwich Union, which is now Aviva, and Postel, which is now Hermes.
That said, there was recognition by the Cadbury Committee that shareholders and boards of directors should have conversations to ensure that there was a mutual understanding on the corporate governance. It said:
‘If long-term relationships are to be developed, it is important that companies should communicate their strategies to their major shareholders and that their shareholders should understand them. It is equally important that shareholders should play their part in the communication process by informing companies if there are aspects of the business which give them cause for concern. Both shareholders and directors have to contribute to the building of a sound working relationship between them.’
But the Cadbury Committee didn’t give us a toolkit to get us started – we had to start from scratch.
The focus of the Cadbury Committee was on the financial aspects of corporate governance and, in particular, on the role and responsibilities of the audit committee. In those days, many companies had no audit committee and even if they did, it was unlikely that they would measure up - in terms of composition, independence, and responsibilities - to the audit committees of today.
Importantly, the Cadbury Committee did, of course, introduce ‘comply or explain’, which has been the bedrock of corporate governance in the UK and, arguably, has contributed greatly to the global reputation that it enjoys. When it comes to corporate governance, one size does not fit all. It is vital that we use and do not abuse ‘comply or explain’.
It was clear to me that we had to get behind the figures and get under the veil of the annual report. That meant we had to establish channels of communication to make that happen. We developed board approved guidelines, which were applied with flexibility and professional care. In doing so, we had to be very, very careful to ensure that this flexibility was not a fig-leaf to avoid the difficult and awkward conversations.
In the foothills of corporate governance, we didn’t talk about engagement. Rather, we wrote letters and had meetings - though the latter were few and far between in those early days. Initially, I asked our fund managers and analysts to raise corporate governance questions in the post results meetings with the executives of companies. But more often than not they would forget or would claim that they ran out of time. Alternatively, they would tell the company that I would be writing, which was actually fine. It gave me control over the conversation yet to come.
In those days, it wasn’t the chairman with whom shareholders one engaged, unless it was very, very important. Even if they did get involved, they wouldn’t get out of bed to talk to the lowly corporate governance manager. Rather the chief investment officer or above would be wheeled into the fray.
Therefore, for many years my usual port of call would be the company secretary. But I had few regrets about this. He or she often provided more candid descriptions of how the board operated and the governance issues they were grappling with than a chairman ever would. In my experience, he or she could be an invaluable ally when difficult messages had to be delivered. The power of a company secretary’s wise counsel, within and without the boardroom, should never be underestimated, especially at times of stress.
It was while still in the foothills of corporate governance that we began to explore collective engagement. Norwich Union, Postel and Standard Life were soon joined by Railpen. Together, we were the founder members of the UK Corporate Governance Forum. It was – and probably still is - an informal gathering of members of the corporate governance teams of leading investors to compare notes in a compliant manner on issues and companies of mutual interest.
It enabled like-minded shareholders to connect and thereby engage collectively with the company on the issue concerned. More recently, in line with the recommendation of John Kay, the Investor Forum was set up to provide a more formal mechanism for collective engagement. Thus far, I sense that the Investor Forum has not yet realised its full potential but it was encouraging to read reports of its recent intervention on succession planning at Rio Tinto, where it successfully put out a very clear marker that if Mick Davis, the controversial former CEO of Xstrata, was appointed as Rio Tinto’s new chairman then the board should expect a rough ride. As you may have seen, the message was heeded and the board of Rio Tinto announced last week that Simon Thompson, currently the Chair of Rio’s Remuneration Committee will be its next chairman.
Let me know fast forward through the Greenbury, Hampel, and Higgs reports, and the establishment of the UK Corporate Governance Code. But before coming totally up-to-date I should like to say a few words about the UK Stewardship Code. It had its genesis in the recommendations of Sir David Walker, who in the wake of the financial crisis, was commissioned by the Government to address the corporate governance of banks and other financial institutions.
Sir David, who was formerly a Deputy Governor of the Bank of England, had long been a champion of good corporate governance and of responsible shareholder engagement. But he rightly recognised that shareholders did not cover themselves in glory in the run up to the financial crisis. They failed to challenge bank boards. They failed to communicate their concerns effectively. In essence, they failed to be good stewards. Sir David tasked the FRC and the investment community to establish a stewardship code to provide a framework for not only engaging with companies but also for strengthening the accountability of asset managers and asset owners to their clients and beneficiaries.
As a consequence, the FRC published the UK Stewardship Code in 2012. The Code contains seven comply or explain principles covering matters such as corporate engagement, conflicts of interest, and transparency and accountability. It provides a platform for responsible engagement and a mechanism for ensuring that all major investing institutions in the UK take a thoughtful and considered approach to corporate governance and stewardship. It now has around 300 signatories, which is a significant achievement. But it’s not really about numbers, it’s more about the quality – the quality of investor stewardship. In recent times the FRC graded the signatories to the UK Stewardship Code. Whilst this was an important step in the right direction, I believe that the FRC could and should do more to sort out the wheat from the chaff when it comes to investor stewardship. In any event, if you haven’t done so already, I recommend strongly that you read the UK Stewardship Code – you can find it easily on the FRC website - from cover to cover. It isn’t a heavy read and it will enlighten you.
The Art of Influential Engagement
Let me now offer a few tips and pointers about the art of engagement. And be in no doubt that in stewardship space, engagement is very much an art and not a science.
First, is to pick your battles. One cannot and should not engage on every corporate governance misdemeanour. In deciding which battles to pick take into account: – the nature of the misdemeanour. Obviously, the egregious, public interest ones should not go unchallenged and, if you are a large investor, your own reputation could come under attack if you do nothing. Bob Diamond’s pay at Barclays is an excellent example of this.
– the company involved. Generally speaking, larger the company the greater the likelihood that your engagement will attract attention and influence the behaviour of other companies, especially if you go public.
– the mood of your clients and beneficiaries, as well as society at large. The chances of success are far greater if you go with the grain.
However, one should not turn a blind eye to significant issues of principle that may not capture newspaper headlines or the attention of other investors. Many, many times I ploughed a lonely furrow and engaged as a lonely voice, only to be joined in years to come by others who’ve come to realise, albeit belatedly, the significance of the issue. Remuneration at BP is a good example of where we were initially a lone voice. Another relates to total shareholder return as the sole performance measure for a executive incentives. For years and years, on behalf of Standard Life, I engaged companies about the problems and pitfalls of TSR. But in those days maximising TSR was king. It was like banging my head against a brick wall - and there were a very few other investors who were head banging alongside me. But little by little, as the years went by, more and more investors, commentators and, indeed companies, came around. Nowadays, it is very unusual to see TSR being used as the sole performance measure. Choosing the right metrics and performance periods can be critical to delivering alpha
Second, is to do your homework very thoroughly. This is a must. Before I went to see a company, I would read the annual report – often cover to cover and back to front. I would read broker’s notes – sell side as well as buy side. I consulted with my fund managers and analysts. I read newspaper comment about the company – and the person who I was going to meet. And, of course, one has to have a good grasp of the issue being addressed. If you don’t do your homework you will be exposed and you will not gain the respect of those with whom you engage.
Third, is to give careful thought as to who you want to engage with. Whilst these days, the chairman is the usual point of call, it can often be far more influential to engage the chairman alongside other directors. This helps to ensure but your message does not get lost in translation. Also, on remuneration it is best to meet the remuneration committee chair without the chairman there. This keeps some of your powder dry in case you want to escalate your concerns further – to the chairman or to the board as a whole. Also, as I mentioned earlier, the company secretary can be an enormously valuable ally. With a few notable exceptions, and that the risk of causing offence to some here today, investor relations are generally not the best port of call. They often struggle to grasp the significance of the issue and, even if they do, they see it as their role to defend the status quo rather than being an agent for change. Last but not least, never underestimate the benefits of engaging with the SID – the senior independent director – especially when you have concerns about the chairman’s performance or succession.
Fourth, is the question as to where to engage. Should it be at your offices? At their offices? Over lunch? Or even dinner? In my experience, chairman generally appreciate your taking the trouble to go and see them rather than being summoned to your offices. This can provide some interesting insights to the company’s culture, as well. However, there are times, especially when you’re delivering difficult and important messages, that its best to have home advantage. It also means that it’s easier to have your fund managers or analysts present, which demonstrates a united front and adds conviction to the house view. The secret, is to mix and match, and to give careful thought as to where is best.
Fifth, is to take the trouble to build long-term relationships. Don’t wait until there is a crisis before engaging, especially if your holding in monetary terms or as a proportion of the equity owned is large. Rather, invite yourselves round for a cup of coffee to ‘make sure you are on the same page, if not, the same paragraph, and - hopefully - the same sentence’ on key issues. Such meetings also give great insights as to what the board might be thinking and thereby provided an opportunity to influence in a pre-emptive way the direction of travel.
Sixth, is the importance of escalation. Helpfully, the UK Stewardship Code sets out the steps that investors should consider in order to escalate their concerns if the company is not addressing them to their satisfaction. There are two escalation steps to which I should like emphasise. First, is writing a letter. I have been struck over the years at how few fund managers have mastered the art of letter writing. A punchy letter - we used to call them snottograms - written to the chairman and copied to the senior independent director and the company’s broker, with the request that it be shown to the board as a whole, was often decisive in getting traction. A letter is far more influential than an email.
The second is attending and speaking at AGMs. One has to be selective. If one attends and speaks at too many AGMs your messages will lose their potency. There is no magic number - Standard Life attended and spoke at three or four AGMs a year. When one does go to an AGM and deliver a sombre message in sombre tones, you get the whole board’s attention. It is powerful engagement – it is ‘speaking truth to power’. Boards do not like being criticised publicly - and sometimes the mere threat of pitching up at the AGM can get the desired outcome. However, despite the potency of AGM attendance very, very few mainstream UK institutional investors seem to have the appetite and courage to do so. The engagement escalator appears to have a glass ceiling but I am cautiously optimistic it will be broken.
Last, is media management. We used media management guidelines to help regulate and manage our interaction with the media world on corporate governance. The guidelines suggested, for example, that we should never comment publicly about personalities but rather about principles and issues. Also, the guidelines had well-defined approval arrangements, which ensured that attributed views reflected the house view and not just my own. Also, when engaging with companies, if they knew that we might go public, it would often make them think twice. That said, be judicious about going public. If one is seen to be megaphone-happy, ones messages lose their impact – and their influence. Conclusion
Engagement has come a long way from the conversations envisaged by the Cadbury Committee. Generally accepted channels of engagement have been established. The responsibility of asset owners and asset managers to engage on critical issues is no longer an optional extra. The public interest dimension to many engagement issues is now well understood.
Influential engagement is a skill – or should I say, an art - that takes years of practice and years of mistakes, as well as successes, to cultivate. No two engagements are the same. Success depends on being professionally innovative about who, when, and how to engage for impact and influence – doing your homework thoroughly.
In the final analysis, investors have a responsibility to hold boards to account, and to engage in the best interests of their clients and beneficiaries. Investors have a responsibility to uphold the principles of stewardship. They must do so – and be seen to do so – with unquestionable integrity, especially if they want to deliver the alpha edge over the long term.
Guy R Jubb
December, 2017
[1] This paper was presented at the CFA Society United Kingdom’s event ‘Mastering stewardship: The alpha edge’ in London on 12 December 2017.