Thursday, 1 February 2018

Can we expect better from investors?

In a move that should surprise no-one, the two parliamentary committees looking into the Carillion collapse have written to some of the companies major shareholders. Among the things that MPs want to know are the extent to which shareholders engaged with Carillion before its implosion, and whether they complied with the Stewardship Code.

I personally think this is a good thing, and would only add that it would make sense to ask the Investor Forum for any information on engagement with Carillion, whether it got off the ground or not. And perhaps they should also ask institutions who it is within their organisation that engages with a company, and with what objectives, when they are simultaneously short and long on the same stock.

But, snarks aside, I am a bit worried that we roughly know the answers that will come back already. There will have been some engagement with the company, some concerns will have been raised, and investors will argue that they are very committed to the Code. I think it is unlikely that any major investor is going to put their hands up and say they could have done better, or that they need to look at how they apply the Code in practice. There are no lessons to learn, no need to improve.

We can see this a bit in the responses to the news that a certain large asset manager was shorting Carillion whilst also managing money for the company's pension schemes. You can draw a line down the middle and broadly those on the side working in the industry said "huh? so what?" The response of people I have spoken to who are on the other side and not in the industry was... unprintable.

This points to a gulf in expectations between the two groups. For many us, if you contract with a firm you think you have, broadly speaking, bought their loyalty. Therefore to subsequently find out that the firm you contract with is also betting on your demise is.... somewhat aggravating, and... does not serve to build trust (I have put this more politely than others have).

But for people within the industry, there is clear sense that those criticising such practices simply "don't get it". Or, as someone snootily tweeted to a colleague of mine, "trade unions don't understand fund management". There is general incomprehension that anyone could have a problem with a manager betting against a client. Some managers are so big they are bound to have conflicts like this, and they have Chinese walls, and, hey, no-one is doing anything illegal.

Yeah, well, maybe.

In my experience, when anyone starts saying "it's not illegal" in defence of an activity, it is usually also a sign that the sands are shifting under their feet. "You can't charge us with an offence" for a certain activity is a pretty low bar to clear. It's not illegal to not engage with companies in difficulty, it's not illegal to not vote your shares, it's not illegal not comply with the Stewardship Code. But we have moved to an expectation of how big investors ought to behave. And expectations continue to shift. That is what this is really about - what can we reasonably expect from asset managers? Can we expect loyalty to clients?

To be honest, I could accept it if it what comes out of Carillion is that actually, no, we can't expect asset managers to act solely in their clients' interest. They want to be able to both take money from an organisation and bet on its demise at the same time and won't give that up. Many people I speak to have very little trust in the finance sector in general or the asset management industry specifically. So if it's made clear that this lack of trust is warranted, at least this is all out in the open.

But then let's also stop pretending that investors can really play an effective oversight role - they are ultimately going to pursue their own interests. And let's end the fiction that there is a reasonable basis for shareholder pre-eminence in corporate governance. Rather it's just history, habit and the shared interest of corporates and finance in shutting other voices out.

So by all means continue to bet against your own clients, or whatever other activity is required to keep the blood funnel satiated, if that is your wish. But do not be surprised if the recipients of letters from investors telling them they need to start behaving more responsibility think "you first".

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