Unthinking stewardship: real influence takes more than ticking a box

Environmental, social and governance investment (ESG) has taken a kicking. It’s also become an important part of the wider conversation about UK financial market reforms and competitiveness.

London has a reputation for leadership in corporate governance, with the UK corporate governance code considered the “gold standard” of market practice. The Financial Reporting Council, through its recent revision to the code, acknowledges the importance of balancing these high standards with the need to ensure that businesses are managed effectively.

More broadly, questions have arisen about the unintended consequences of the stewardship regime. Could the UK’s approach in fact be hurting UK investors’ access to world-class companies? Could it be making life harder for businesses looking to secure the capital they need?

A 2022 survey of FTSE 100 chairs painted a dismal picture of the relationship between companies and institutional shareholders. The consensus was that engagement was “no longer working”. Asset managers were accused of taking a box-ticking approach to stewardship and voting.

First, it alleged a disconnect between how some asset managers are approaching stewardship and what boards want or need from shareholders. Asset managers are under increasing pressure to demonstrate to clients, NGOs, the media, and others that they are holding companies to account on issues such as the climate crisis. Being able to point to voting records which show a high number of votes against boards’ recommendations, or strong support for independent shareholder resolutions, has become seen in some quarters as a measure of good stewardship.

As a related trend, the growing importance of passive investment in the UK market (now close to one third of UK equity ownership) has created large shareholders who sometimes lack detailed understanding of the businesses they own. Too much emphasis on “proving” stewardship activity by means of voting has perhaps distracted some institutional shareholders from more material issues. It’s become for some a slippery slope of virtue-signalling — or what we call “unthinking stewardship”.

Real stewardship is different. As a large shareholder of many businesses, Schroders cannot treat every shareholder resolution on climate change, for example, as a statement of our general stance on that issue. We think about the resolution in the context of the company and our engagements with it. Is this resolution adding value and is it really the best way to address the issue for that company?

It is right that stewardship and voting activities are scrutinised, particularly as investment managers’ capabilities around ESG are increasingly treated as a competitive differentiator. But it is also important that the quality of stewardship is assessed in a way that encourages robust analysis of the issues and constructive relationships with companies.

It would often be easier for investment managers to keep their heads down and align their voting decisions with influential external organisations. Schroders has in the past taken stances in relation to individual resolutions which have been contrary to popular opinion. Voting records are public and increasingly scrutinised, so this can be uncomfortable. But the wider principle is so important we’re prepared to take the heat.

What about the ultimate owner of the shares, the investor?

The asset owner is key: managers invest their capital on their behalf. But managers are entrusted to deliver long-term and sustainable returns. At Schroders, we talk to clients about their voting and engagement priorities throughout the year and conduct yearly surveys of their views, and we incorporate their perspectives where possible.

The problem is with unthinking stewardship where shareholders are posturing rather than committed to delivering sustainable change. Thoughtful stewardship, practised by many long-term active investors, has a critical role to play in supporting companies to build businesses that can compete effectively. By extension, this form of stewardship supports the health of UK PLC and its investors.

This article first appeared in The Times on 30 January 2024