Codes, ownership and control

I've said this before, but in one sense I find the development of the Stewardship Code (and equivalents elsewhere) a bit odd. Because what they are trying to do is make behaviour that is assumed/argued to be in shareholders' financial self-interest into best practice. Get that? It's a bit like having a best practice code for going shopping, because there is a public policy concern that poor consumer choices are distorting the market. (Incidentally, I would make a similar point about trying to redraw fidicuary duty, which is effectively to answer the question 'why should we do this?' with 'because you must').

The other peculiar feature of this approach is that it's going to be done under a 'comply or explain' regime. So an institutional investor could say 'we don't think that stewardship adds value, and thus don't seek to apply the Code'. In practice I think we're going to see a mixture of a small number of very positive disclosures (F&C, Hermes etc), a large block of investors saying 'we do this but it's not central' and a small number of non-compliant investors.

My gut feeling (and it is just that) is that we are probably going to see a reaction like that after the July 2000 amendment to the Pensions Act. It will principally be asset managers, rather than asset owners, who increase resource, and the mood music will become much more supportive of shareholder engagement (probably on the company side too).

What actual changes in behaviour result is impossible to tell. In the period I've been involved in this stuff (almost 9 years) the numbers of people involved on the investor side have grown, as has the level of activity. The UNPRI has had a really significant impact too, especially since the introduction of its clearinghouse (a topic for many a future dissertation no doubt). But you can't escape the feeling that a lot of this activity doesn't achieve a lot.

A couple of examples. In my corner of the world, corporate governance, which really ought to be quite a political concern, has become a numbers game (% of independent of NEDs, years on the board etc). While the formalisation of the process has probably increased the professionalism involved, it has also led to an abstraction of the ideas behind it. The level of abstraction is sometimes truly overwhelming, as again we try to institute best practice into organisations for their own good, because they're too stupid to see ut for themselves...

And what about pay? I am, as is obvious, hugely sceptical about the value of performance-related pay, yet discussions over performance linkage are probably the dominant issues in engagement over remuneration, which is itself the dominant engagement issue. As I've posted many times, I think this is built on challengeable ideas about the effcets of incentives on complex decisions, yet these assumptions are not only taken 100% for granted, but form the basis on which so much 'ownership' activity is based.

Turning back to the Code, there is also a danger with 'comply or explain' that 'engagement' or 'stewardship' becomes defined as a niche activity, or service. It will be very interesting in this regard to see how the big asset managers, and their representative bodies, respond to this agenda. If they don't get onboard, the impact will be limited and it will open up the argument further about whether shareholders are really best placed to deal with these issues.

Which brings me to Will's post here, which has really set me thinking. When I first started working in this field, I saw shareholder engagement as an alternative way for the labour movement to exercise influence within (rather than control over) public companies. I thought, and still do to a lesser extent, that this had merit in a situation where the opportunity for a more fundamental shift in governance - towards a more stakeholder model, co-determination, whatever - was not open.

Again, since I've been involved I've seen a wave of people from civil society, and bright young folks who want to do something worthwhile, drawn into this area. So a significant degree of human capital has been committed that could have been deployed elsewhere. This has, arguably, therefore cemented the shift away from a stakeholder model. Put it this way, if we had taken Hutton's advice in 1997 the unions would have had to think about how to respond, and, if involved some sort of formal role in corporate governance, train people up to be effective in those roles. And by now we'd have a decade's worth of experience of the system, how to work it and how to take it forward.

Instead a lot of effort (more from NGOs than unions, maybe, in the UK) has gone into trying to make a market-based conception of governance and onwership both fucntion properly and have a more socially responsible (bleurgh..) tinge. The alternative is much, much further away now. What's more, by shoe-horning ourselves into the shareholder-owner model we also sought to ape the language emplyed there. Thankfully tortuous attempts to make 'business case' arguments for social responsibility (usually linked very loosely to share price) are for less common these days. But damage has been done.

(Another aside - the very limited interest in employment issues amongst even SRI teams is particularly interesting in this regard. Union issues are almost always seen as 'political' in way that environmental ones are not. It comes across sometimes as almost a subconscious recognition that TU issues are about power and conflict. But that's a thought for another day.)

Where this all leaves us is a bit unclear as now. On the one hand there will surely be some sort of upsurge 'ownerhship' activity as a result of the Stewardship Code, but its force may well be pushed down existing channels, which may not be a great step forward. More consultations over performance criteria for incentive schemes wouldn't be a big win for me, but perhaps I'm being too cynical about what will actually occur.

But I think the possibility of a turn to a more regulated approach to governance is there, perhaps even in the UK. Stakeholder is off the table. Market-driven governance changes take time to work through (even 'say on pay' has had to be put in place by the state in the two most shareholder-oriented markets). And many asset managers may not want to do the ownership stuff. Where would you turn?