Welcome to our Corporate Governance Summer Series of posts, where we will aim to talk about some of the today’s ‘big picture’ developments that are shaping discussions around governance and engagement in today’s rather rapidly evolving capital market. Many of the initiatives we touch on such as the Investor Forum, the Kay Review, Integrated Reporting framework or the Stewardship Code converge the worlds of Corporate Governance and Investor Relations as we see it and therefore are worthy for us to examine in little more depth. Despite the fact that many of the developments we talk about are UK or US centric, we feel the implications, over time , will be global for both institutional investors and listed companies.
Today we look at the establishment of the UK’s “Investor Forum”, a group of global long-term investors seeking to promote greater strategic engagement with public companies listed in the UK.
The Investor Forum was created by the Collective Engagement Working Group. This Working Group was set up in London in April 2013 and supported by Insurance, Pension Fund and Investment Management trade bodies in the UK. It was formed in response to the Kay Review on equity markets and long-term decision making. Its objective was to identify how investors might be able to work together in their engagement with listed companies to improve both sustainable, long-term company performance and overall returns to end savers. The recommendation to create the Investor Forum, as well as proposed structure and mandate were outlined in their December 2013 report. Consequently, the Investor Forum was formally launched on 2nd of July, 2014.
What are they key conclusions of this working group?
- Cultural change is needed. Asset owners, asset managers and companies need to develop a shared sense of partnership, with the objective of promoting long-term strategies for prolonged competitive advantage at companies. This should lead to sustainable wealth creation for all stakeholders.
- For companies: Major listed companies will be asked to hold an annual strategy meeting for institutional investors, outside the results cycle, where investors and company executives can link governance to the company’s long-term strategy without the focus on short-term results.
- For investors: Engagement on governance issues should be integrated into the investment process.
What is purpose of the new Investor Forum?
Broadly speaking, the purposes of the Investor Forum are to improve long-term returns from investment in companies by :
- Promoting the value of long-term approaches to investment to match the long-term objectives of the individual savers who are ultimately the beneficiaries of the long-term returns delivered by investment management
- Promoting cultural change throughout the investment chain – encompassing asset owners and their advisers, as well as asset managers and investee companies.
- Forming Engagement Groups to drive constructive change when there is a critical mass of support among Forum participants that a company is failing in some way that might compromise long-term returns.
With the recent FCA legislation banning the use of dealing commission to pay for corporate access, the UK will be an interesting test case and if effective, may herald a cultural paradigm shift in the world of international investor relations. A shift which calls for strategic engagement, transparency and focus on the ‘long term’. The culture change may take a while to catch on, but it can only spell progress for both companies and investors.
Overall, closer collaborating and better engagement has been shown to be key in investor relations and good corporate governance. The long-term approach has to be understood as having a different meaning to each investor, however, with the new engagement framework being championed by the Investor Forum and others, this mutual understanding can be sought.
Sources: Investor Forum, Investment Management Association