It is my opinion that the activities of asset owners are due for a fundamental change which will have a transformational impact on the capital markets.
As we know, ownership comes with certain rights depending on the financial instrument owned. Ownership also comes with responsibilities. These responsibilities should reflect each owner’s beliefs about the risks affecting their investments and their reputations, and should not end at the minimum standard of responsibility as set out by law. Furthermore, it is not enough that owners articulate their beliefs, they must have the will and the fortitude to act on them.
Ownership without action makes owners complicit in problems when they arise, as was the case with the recent financial crisis in 2008. While the boards of directors and managements of financial institutions failed to oversee the activities of their organizations, owners of financial institution instruments also failed to act as responsible owners. Coming out of the financial crisis, they should have asked themselves what they were doing in the lead-up to the financial crisis, and applied those lessons to ensure that they are doing things differently now. It is not enough to say that the capital markets in the US have recovered since 2008 and that there are stricter laws in place now than there were then, so there is nothing left for owners to do differently. Owners have a responsibility to take action.
Action may include making investment decisions in accordance with one’s beliefs, or divesting of certain companies or asset classes if they behave in ways or promote behaviors which are counter to one’s beliefs. These activities should apply across the spectrum of owners as everyone has beliefs that they feel strongly about, and the necessary work should be done to uncover and articulate these beliefs so that they may be acted upon. Other actions may include activities such as engagement, which should be aimed at changing the behavior of the organization the owner is engaging with. It is insufficient to engage for the sake of engaging without demonstrating the impact of this activity. As well, any engagement program must be well thought through, including the use of engagement escalation strategies, and what the consequences may be in the event that change is not forthcoming.
Furthermore, ownership responsibilities are not simply demonstrated by the policies outlining how, for example, an owner expects to vote its shares or deal with climate change, or about the number of staff in a responsible investment function. Rather, ownership responsibilities are demonstrated by the actions that an owner takes to hold others accountable to them, and themselves accountable to their beneficiaries or members.
Owners and Investment Managers
Owners must be active in overseeing their managers, and not rely on the quarterly or annual reports supplied to them by their managers as the most significant part of a compliance oversight process. Assuming that the due diligence selection process includes deep probing of how the owner’s beliefs will be reflected in the manager’s activities, there is much that should happen between the point that assets are given to the manager to invest, and the decision, should it happen, to leave the manager. This is precisely where the transformation of ownership activities can have a critical impact on the health and sustainability of capital markets.
A simple place for owners to begin would be to actively monitor how managers vote the shares entrusted to them. Should managers be found to be voting contrary to the owner’s beliefs, there is no reason why an owner shouldn’t undertake actions to understand why this is, and when they can expect this to change. While a manager’s proxy voting policies are insightful, it is how the policies are translated into action which is important and should be monitored on a regular and timely basis. It is equally important to fully understand which companies the manager engaged with on the owner’s behalf, what the reasons for the engagement were and what results were achieved. How engagement targets are selected, whether the process is proactive or reactive, can provide important insights to an owner. As well, the owner should ensure that they understand whether and how the manager is acting on the owner’s beliefs vis-a-vis investment decisions.
By definition, investment managers are themselves not owners, they are agents acting on behalf of owners just as boards of directors of corporations are agents acting on behalf of share owners. Therefore, like boards of directors, investment managers are unlikely to think and act exactly as owners think and act. If owners affect their ownership responsibilities by investing and acting in accordance with their beliefs, this will serve to mobilize a transformation that will benefit the long-term and sustainable heath of the capital markets.
Catherine Jackson is an independent consultant. She formerly held positions with Dutch pension fund manager PGGM, and with the Ontario Teachers’ Pension Plan.