On Tuesday next week we will hold the third and final day of our ESG conference and the main focus will be on governance. The importance of this area to investors cannot be understated. Just think of the damage done at BHS, Carilion, Wirecard, Patisserie Valerie, Boohoo and Volkswagen. It wasn’t just investors taking the pain but staff, customers, pensioners and suppliers too.
Investors in emerging markets have to put an assessment of governance front and centre when evaluating investments. On Tuesday, the manager of Vietnam Holding will explain how that trust approaches this problem. However, ensuring that management are aligned with shareholders and not running a company purely for their own benefit is an assessment that investment managers have to make the world over.
For example, Herald’s investment manager Katie Potts has long bemoaned the US Silicon Valley practice of issuing staff with vast numbers of share options – diluting and distorting returns. Investors also battle to rein in excessive salary packages – was it right that FTSE 100 CEOs only needed to work until just before 17.00 on Monday 6 January 2020 in order to make the same amount of money that the typical full-time employee will do over the entire year (source CIPD and the High Pay Centre)?
Boards, and especially non-executive directors on boards, have a significant role to play in setting corporate culture. It is possible for investors to influence this. Alliance Trust is a large fund and that gives it some muscle when talking to the companies that it invests in, but it has leveraged this many times over by using EOS from Federated Hermes to engage with companies on its behalf.
We always think that one of the great attractions of investment companies relative to open-ended funds is a board of independent directors working on your behalf to hold the investment manager to account, keep expenses under control and get the best from the various service providers.
Ask questions
You have a job as shareholders too, to make sure the board is doing its job. Don’t be afraid to ask questions.
This week that, at the AGM of Target Healthcare REIT, shareholders were being asked, amongst other things, whether it would be OK to hold shareholder meetings virtually (online) in future. There are obvious reasons why this has been a necessity this year. However, a sizeable group of shareholders, representing 56.6m votes or 21.4% of those voting, opposed the move. They were worried about losing face-to-face contact with the managers and directors, fearing that this would be a way for boards to dodge difficult questions from investors in future.
The Target board reassured investors that they intend to revert to physical meetings as soon as the restrictions on physical gatherings are lifted and it is safe to do so.
However, a number of investors just aren’t able to travel to AGMs. Across the sector, we would like to see investment companies organise events that combine both a physical meeting and the ability to interact with the meeting online, if possible. We feel that this is particularly necessary for the many funds based in the Channel Islands.
Make your voice heard
One other point we wanted to stress is the importance of voting. This year, the proportion of shares voted at some AGMs has been woefully low. This runs the risk that a maverick investor will force through a policy that would otherwise be voted down by a sizeable majority. We know that many investment platforms make it hard or expensive to vote your shares. Moan to them about it. It is wrong that many of the individual investors who make up an increasingly significant proportion of share registers are essentially disenfranchised.
Do you have what it takes to be a director?
Lastly, we want to highlight the work that the AIC is doing to improve board diversity. Great strides have been made in this area over the past decade but there is more to do. If you feel that you could help, it has set up a dedicated area within its website where individuals can find out more about becoming a director. You can access this here.