Everyone seems to agree that there is a problem in the UK plc meeting room. A One City luminary fears that London’s non-prescriptive approach to corporate governance is being undermined by “self-proclaimed guardians with a box-ticking mentality who seek to compel companies to comply with all the provisions of the codes – regardless of the company’s situation”.
My mistake. It was Martin Broughton, then of British American Tobacco and the CBI, in 1996. The last version (and there have been remarkably similar comments many times since) came in a mildly cantankerous report last year by public relations group Tulchan: In that report, the chairmen of some of the world’s biggest listed companies UK have lamented the state of their investor relations, citing spiraling governance requirements, conflicting ESG standards, the role of proxy voting agencies and, yes, a check mark attitude.
The implication was that, in recent years, the souring of this relationship has contributed to London’s diminishing market position as a global location. In fact, the reverse is more obviously the case.
The Investors Forum, which represents shareholders holding more than £800bn of UK shares, wrote to the chairmen of the FTSE this week in response to Tulchan’s report. He argued that the majority of his members did not believe the report was “a true reflection of their relationships with the companies”. There are, he concedes, fundamental points of disagreement, particularly around remuneration and what is called the overboard. (And presidents and investors privately lament an obsession around votes that means such areas of contention dominate all conversations to the detriment of everything else.)
Behind the recriminations and the discord lies a sense of consensus: this new friction stems, in large part, from changes in the investment industry and in particular in the UK market. The number of companies listed in the UK has fallen by 40% compared to 2008, according to the 2021 report review by Lord Hill, and its share of global listings has plummeted. Performance, thanks in part to an overheated US market for tech stocks, has lagged international rivals until recently. UK defined benefit pension schemes that held 50% of their assets in UK equities in the late 1990s now hold perhaps 2%. Asset managers’ and insurance companies’ allocations to UK equities halved between 2002 and 2020, according to New Financial.
The result on the asset management side is that, just as the rise in passive investing is compressing the sector and clients are dramatically increasing their decision-making scrutiny, their UK equities teams are smaller, the resources available to them have diminished and the power of the “star” UK manager has faded. The growth of ESG or governance teams – which some asset managers say may not always have been brilliant coordinated with investment decision makers – partly a matter of stewardship, but partly of business necessity given the money flowing in these areas. For companies, that means a few conversations with key investors in the city no longer span the waterfront in an increasingly disparate global investor base.
Proxy advisors, which issue analyzes and recommendations on shareholder voting, have in a way filled the void. The councils, on Tulchan’s evidence, find them infuriating. But what evidence is there to suggest that their statements have less sway over votes than is commonly imagined, according to PwC, and certainly less than in the American market. In any case, the UK management code – where the Financial Reporting Council tries to recognize good and effective engagement – opposes such outsourcing of analysis and is itself criticized. All parties want to streamline and simplify non-financial reporting.
The Investor Forum, which wants working groups on topics such as compensation, voting and strategic engagement, is right to suggest a more collaborative approach than yet another chance to “rehash strong opinions”. It will also be necessary if renewed efforts led by the London Stock Exchange to revitalize the fortunes of the city are to make a lot of progress. Dreaming of a bygone era of shareholder engagement will not help, even if some CEOs and fund managers lack it.