Everyone seems to agree that there is a problem in the boardroom of UK plc. One City luminary fears that London’s non-prescriptive approach to corporate governance is being undermined by “self-appointed guardians with a box-ticking mentality who seek to require companies to comply with every provision of the codes — regardless of a company’s circumstances”.
My mistake. That was Martin Broughton, then of British American Tobacco and the CBI, in 1996. The latest version (and there have been remarkably similar comments repeatedly ever since) came in a slightly cantankerous report last year by PR group Tulchan: in it the chairs of some of the UK’s largest listed companies bemoaned the state of relations with their investors, citing spiralling governance requirements, conflicting ESG standards, the role of proxy voting agencies and, yes, a box-ticking attitude.
The implication was that, in recent years, the souring of this relationship has contributed to the diminishing standing of the London market as a global venue. In fact, the reverse is more obviously the case.
The Investor Forum, which represents shareholders with more than £800bn in UK equities, has this week written to FTSE chairs in response to Tulchan’s report. It argued that the majority of its members did not believe that the report was “an accurate reflection of their relationships with companies”. There are, it concedes, areas of fundamental disagreement, particularly around remuneration and so-called overboarding. (And both chairs and investors privately bemoan an obsession around votes that means that such areas of discord dominate all conversations to the detriment of everything else.)
Behind the griping and discord is some sense of consensus: that this renewed friction arises, in large part, from changes in the investment industry and particularly the UK market. The number of listed companies in the UK has fallen by 40 per cent from 2008, according to the 2021 review by Lord Hill, and its share of global listings has dropped. Performance, thanks in part to an overheated US market for tech stocks, has trailed international rivals until recently. UK defined benefit pensions schemes that held 50 per cent of their assets in UK equities in the late 1990s now hold perhaps 2 per cent. Allocations from asset managers and insurance companies to UK equities halved from 2002 to 2020, according to New Financial.
The result from the asset management side is that just as rising passive investment squeezes the sector and as clients vastly increase their scrutiny of decision-making, their UK equities teams are smaller, the resources available to them have shrunk and the power of the “star” UK manager has dimmed. The growth of ESG or governance teams — which some asset managers concede may not always have been brilliantly co-ordinated with investment decision makers — is part stewardship but part commercial necessity given the money flooding into those areas. For companies, it means a few conversations with key City investors no longer cover the waterfront in an increasingly disparate, global investor base.
The proxy advisers, who issue analysis and recommendations on shareholder voting, have to some extent filled the gap. Boards, on the evidence of Tulchan, find them infuriating. But what evidence there is suggests that their pronouncements carry less voting sway than generally imagined, according to PwC, and certainly less than in the US market. In any case, the UK’s stewardship code — where the Financial Reporting Council tries to recognise good and effective engagement — pushes against such outsourcing of analysis and itself comes in for flak. There is appetite from all parties to rationalise and simplify non-financial reporting.
The Investor Forum, which wants working groups on areas such as remuneration, voting and strategic engagement, is right to suggest a more collaborative approach than yet another chance to “rehash strongly held opinions”. It will be needed, too, if renewed efforts led by the London Stock Exchange to revitalise the City’s fortunes are to make much progress. Hankering after a bygone era of shareholder engagement won’t help, no matter how much some chairs and fund managers might miss it.
