The heads of some of the UK’s largest listed companies have warned that relations with their institutional investors have deteriorated markedly, with “box-ticking” exercises over stewardship now risking company growth.
The State of Stewardship report, compiled by PR and lobbying group Tulchan, highlights a number of problem areas, including what many chairs saw as a blurring of responsibilities between the two sides that is creating unnecessary distractions for boards.
Some chairs said this, compounded by an “ever-increasing thicket of government regulation”, was contributing to the decline in the number of listed companies in the UK.
Interviews with 35 named chairs of FTSE companies — including 26 from the FTSE 100 — revealed deep frustration with their institutional shareholder relationship, with the heads of the UK’s leading companies calling for a reappraisal of how they work together.
Those interviewed included Abrdn’s Sir Douglas Flint, Paul Manduca of St James’s Place, The Sage Group’s Andrew Duff, HSBC’s Mark Tucker, Sir Donald Brydon of Tide Holdings and Annette Court of Admiral Group.
Other chairs who participated in the report were Anglo American’s Stuart Chambers, Cressida Hogg of Land Securities and Don Robert at the London Stock Exchange.
The report also warned that engagement with shareholders about strategy and performance was being eclipsed by a mechanical “box-ticking” process, where investors vote on board resolutions “based on detailed, prescriptive rules on matters not always central to companies’ long-term success”.
Chairs argued investors should instead delegate responsibility to boards as the stewards of companies’ long-term success.
Some pointed to the discretion in board decision-making set out in UK corporate governance codes under the “comply or explain” regime having been eclipsed by a “narrow and sometimes adversarial focus on compliance”.
The chairs of a number of FTSE 100 companies initiated the survey given their sense of frustration at what they saw as a decline in the quality of engagement with their key shareholders in recent years. Many emphasised that they saw a range of quality in engagement with their shareholder base from outstanding to deeply frustrating.
Many also complained about the tendency for shareholders to use third-party proxy voting agencies to “outsource” voting decisions on board resolutions. Chairs called for proxy voting agencies to fall under an officially supervised code of conduct.
There was also a common confusion over the proliferation of ESG standards and scorecards against which companies have to report, and a desire for greater investor consistency in this area.
A number of institutional investors were also interviewed to respond to these concerns, including Richard Buxton at Jupiter Fund Management and Schroders’ Andy Simpson.
Investors did not agree with many of the specific criticisms voiced by chairs, but recognised there were issues to discuss, and agreed that shareholder interactions with UK companies had changed in recent years.
This was in part owing to the declining share of investment portfolios allocated to UK equities, the report found, and the resulting decline in resources and time devoted to engaging with portfolio companies.
The report calls for a dialogue between a representative group of plc chairs and a similar group of institutional investors, “with a view to clarifying points of contention and seeking common ground”.
Mark Burgess, partner at Tulchan Communications, said: “With ever greater governance requirements being placed on fewer and fewer institutional resources, it is not surprising that engagement is no longer working effectively. A reappraisal — along with a greater pension fund allocation to UK equities — is needed.”
