19 April 2018
People power
Changing everything from gender pay to arms sales.
By Frank O’Nomics
It is as if everyone has taken up the mantra of the recently revived play (of a film) Network: “I’m mad as hell, and I’m not going to take this anymore!” Public rage against the power of big business to perpetuate ills, such as gender inequality and the sale of arms in the US, together with a frustration with the failure of ineffectual governments to introduce corrective legislation, grows by the day. While I share these frustrations, recent activity by some of the larger investment managers, who look after vast swathes of our pension investments, show a move to try to use our collective voice to force the corporate world to change.
In 1952 the renowned economist J K Galbraith introduced the concept of countervailing power, where the free rein of big business was opposed by the collective actions of industry lobby groups and unions. In essence, markets that are left to their own devices ultimately provide socially optimal solutions. This week, Legal and General Investment Management, who manage over £1 trillion of our money, announced that they would vote against the chairs of FTSE 350 companies that did not have at least 25% female board representation, and it has already started to vote against all male boards in the US. Until recently asset managers have hidden behind arguments that they wanted the best directors regardless of gender, but recent economic evidence (discussed 15th March in the Shaw Sheet article: “Returns to Gender: The economic cost of misogyny.”) is overwhelmingly supportive of gender diversity – companies with more women on their boards on average deliver a 36% better return on equity. LGIM have a duty to their investors to vote for polices that will help produce the best return and arguably a duty to make sure that their investments are made responsibly, in line with the moral code of their investors. Ultimately they can vote with their feet, by selling their holdings if votes at AGMs do not prove satisfactory. The prospect of poor share price performance, as a result of disgruntled investors selling, is a very compelling driver of corporate behaviour.
LGIM will not usually have the voting power to force out a chairman, but if others adopt their stance changes can be made. The pressure on other investment managers to review their voting policies will develop quickly; if investors see the merits of such an approach they will shift their money between fund managers accordingly. In the case of boardroom gender there are a lot of companies that will have to change, with 27 of the FTSE 100 (including Barclays and Prudential) and 130 FTSE 250 companies having fewer than 25% women directors. If M&G adopt LGIM’s policy there is the interesting prospect of them voting against their parent company’s chairman.
An obvious rejoinder to all of this is “is it enough?” 25% should be regarded as a start and fits well with the “30%” club who have long argued for more women in senior management. 27 investors, with £10.5 trillion in assets, already support the club, which gives some hope that the LGIM voting initiative will easily find other adopters.
The power of investors does not stop at the redress of gender issues. All aspects of environmental, social and governance areas can be addressed. The world’s biggest owner of global equities, Blackrock, is looking at switching its clients into funds that screen out firearms manufacturers and retailers. They currently own almost 17% of Sturm Ruger, a large manufacturer of firearms, and, while some of their indexed funds will need to keep a holding, they are looking to introduce indices that exclude it. In addition, Blackrock is asking companies what steps they are taking to support the safe use of products and how they monitor sales. For those incensed by the wave of shootings in the US this is a way in which their collective voice can have an effect.
Shareholder activism may traditionally have been the province of those trying to ensure that the companies they invest in maximize profits but there has been a shift in the tide of activism towards focusing on the long-term, rather that instant returns, and measurements of social impact. ShareAction was set up to create a world where ordinary savers and institutional investors work together to ensure a safe and sustainable environment. They will attend the Persimmon AGM this month to challenge the board on paying their CEO a £75 million bonus while their workers are not guaranteed the Living Wage. The Charities Responsible Investment Network was established in 2013 to help charities further their mission through their investment. They have members with a combined £2.8 billion of assets that engage with investment managers and investee companies on ESG issues.
These pressure groups, together with the likes of LGIM, Blackrock and the 30% club can do a lot to address the damage that, unfettered, big business might do. Chairman and senior directors, who fear being voted out of a job, are likely to act to address shareholder concerns before it comes to a vote, and they all have an interest in not undermining their share price. We should all review our investment managers to check their voting record on key issues. Taken together our collective voice is very powerful.
