Are we engaged enough?

Shareholders are part owners of a business. The capital they provide – and the risks they take by doing so – entitle them to a share of any profits and growth in the company.

Ownership also confers rights, including the right to approve or remove directors – by voting for or against their election to the board – and the ability to put questions, or engage, with the people running the show: the executives and non-executives.

‘Activism’ has confrontational connotations; ‘stewardship’ is wonderfully vague and more noble-sounding. Whichever description or approach you use, the bottom line is that engagement should be focused on protecting or even enhancing value for all stakeholders, but in particular shareholders.

Unfortunately, in reality, engagement between pension fund investors and the portfolio companies they own is patchy and inconsistent. In many cases it doesn’t happen at all.

Engagement benefits

Recent studies by London Business School and Harvard Law School have found benefits that are worth pursuing. This includes that engagement has at worst no downside on returns, and at best leads to an uplift of 2-4 per cent in returns in the year following engagement activity.

Proactive engagement also helps underperforming companies find their way again, with sustained share price gains and operating performance improvements. Well-known devotees of active engagement – CalPERS in the US and Hermes in the UK – have shown similar effects, ie persistent, outsized returns in the wake of targeted engagement.  

I have heard engagement and voting described as “low premium insurance” and I tend to agree. Try looking at this as if you are running a world class cycling team. Team Sky’s incredible success in recent years is attributed to the “aggregation of marginal gains” – in other words, doing that little bit extra in every area you can control, so that overall you edge it over the competition.

If we applied this perspective to investment strategy implementation, then failing to take engagement and its long-term benefits seriously is like throwing money away.

Sure, not every equity strategy will be suited to incorporating proactive and ongoing engagement – you won’t get far with your quant manager on this one (although the good ones are starting to join engagements on data disclosure) – but many pension schemes will have a passive equity manager and an active, fundamental manager as well. If these managers are not conducting engagement on your behalf then you should be raising it with them directly.

It’s simple – this is, or at least should be, part of what good managers do. I am starting to see this in practice, among both active and (encouragingly) passive equity managers, but I would like to see a lot more of it.

Pass it on

As someone who spends a lot of time reviewing manager activities in this area, it is frustrating to see the paucity of communication by managers to their pension fund clients on what they are doing on engagement, and why.

“Available on request” is a phrase heard too often in client reporting. Managers, if you are spending time doing this – engagement, stewardship, active ownership – why are you not telling your clients by default? In my experience most of them will be interested in what is happening, why it is happening and what the benefits are.

And trustees, next time you receive a quarterly report, look for the section on voting and engagement. Not there? Ask why. If it is there, ask what it means, and specifically what it means for your scheme and its members.

Ultimately, pass this information on, in some form, to your members. Many will find company stories interesting, and in a world of increasing attention on member engagement, it could help make pensions more tangible.

It is time to engage with engagement and build up those marginal gains. 

Aled Jones is principal, responsible investment at Mercer