A few random thoughts about capital stewardship

I thought I'd splurge a few thought about capital stewardship that have been swilling around in the 'mind tank' (copyright: The Mighty Boosh).

Following on from Paul Myners' comments last week, I have to admit I'm a bit of a sceptic myself about what the mini industry around corporate governance and responsible investment has achieved. But fundamentally I think capital stewardship activity is worthwhile and needs more input from lefties.

At present if often seems there's a pretty unappealing choice between investing your assets the 'traditional' way and just seeking to maximise returns, and signing up with a governance or SRI product of questionable value. I say 'questionable value' not to belittle the work that goes into these things, as there are many many good people involved, bur rather because it's difficult to see what the punter gets out of it, apart from a feeling of vaguely doing the right thing.

In the institutional world (ie pension funds and other large investors) this is partly a problem of lack of clarity about objectives. Are we trying to create value, improve the system, change the world, or a mixture? It really isn't as simple as saying 'a bit of all of them' because at some point you always end up asking 'why?' and 'what have we achieved'? If you are unclear about your objectives it becomes hard to measure progress, so it maybe preferable to not really try.

The commodification of capital stewardship through product offerings is an alternative. You can pick out a product and that enables you to tick the box of 'doing SRI' or 'doing governance'. The act of appointing a provider, who then goes off and does the 'ownership' bit for you, is the 'doing something' bit sorted for you. But then the provider sets the objectives and, in turn, decides what results are and what performance' against the objectives looks like. That isn't necessarily about enfranchising the ultimate owners is it?

This is why I continue to think that the unions have a major role to play, because they are not (or shouldn't be) willing to simply hand over the money and say 'do SRI for us'. They have a clear set of objectives and standards. I think they could also play a significant role - if they choose to play it - in representing ordinary savers. They could be a countervailing force to the atomisation of ownership power resulting from the shift to defined contribution pension provision, and the associated accrual of the power by service providers.

It strikes me that there is loads of unexplored territory between simply handing over your money to service providers and letting they try and generate a return no questions asked, and the alternative of bunging a few quid (or a small % of assets in the case of a pension fund) in an SRI/activist offering. But it requires some thinking about, and specifically clarity of of objectives.

What does the existing system do that we don't like? A few examples might include an excessive focus on short-term results that can damage long-term prospects, a failure to fairly distribute the fruits of labour (why do directors get paid an ever large slice?), failure of investee companies to adhere to baseline standards and so on. If we are clearer about what we want it will be easier to see which products and service meet the needs of the labour movement and, more likely, where the gaps are that need to be filled.