Stewardship and stakeholders

'Where stewardship is effective, you would expect the board and shareholders to be in broad agreement about the direction of the company before the resolutions are sent to an AGM.'

Stakeholders broadly believe that investment managers can help management to avert poor decisions through engagement with the company. In theory, by aggregating the interests of shareholders, investment professions can have influence as stewards on behalf of their investors8. The stewardship work investment managers do is intended to protect their clients’ interests by helping the company to be well-governed, to employ its capital effectively and to monitor its risks.

In recent years, investment managers have encouraged the companies whose securities they hold to pay greater attention to issues relating to the environment and their working practices, as well as to their governance. There is a growing body of evidence to suggest that environmental, social and governance (ESG) issues are financially material and that companies that monitor and mitigate these risks deliver better returns over the long-term.

Increasingly, investment managers are integrating ESG analysis into their traditional analytical and valuation frameworks. 61% of the EMEA respondents to a recent CFA Institute survey indicated that they integrate ESG analysis into their investment decision-making framework.  There is general agreement that it is difficult to measure and assess the impact of stewardship.

Much stewardship goes on behind the scenes to influence the decisions boards make, and which investors may vote on at annual general meetings (AGMs). Some commentators have suggested that the balance of votes for and against company resolutions might be taken as a proxy for stewardship, but stakeholders report this is not a good measure. Where stewardship is effective, you would expect the board and shareholders to be in broad agreement about the direction of the company before the resolutions are sent to an AGM.

Company representatives spoken to for this report believe that they and their counterparts generally appreciate their relationships with the investment profession.  Investment management firms are sources of capital and can also provide feedback on a company’s strategic plans and their implementation. Nevertheless, there is a sense that while the views of long-term shareholders, with an in-depth knowledge of a company’s sector and past history, can be useful, the information obtained from short-term price movements are often too ‘noisy’ and random to contain much useful information about a company’s outlook. However, corporate stakeholders accept that the immediate market reaction to an announcement can provide significant information either in support of or against management’s plans.

Price makers and price takers

Stakeholders are quick to point out that markets are inhabited by participants with different views, objectives and time horizons, An issuer is obliged to disclose all financially material information to the market, but market participants have varied knowledge of other factors that may influence the outlook for a company, and they may interpret the same information differently. The decision to buy or sell a particular security may be completely unrelated to the actions of the issuer, driven instead by the changing needs or preferences of the individuals whose portfolio is being managed, or by a change in the relative valuation of another available asset. There are also participants in the market that are not interested in issues relating to fundamental valuation, preferring to extract information from prices alone. And some participants in the market are insensitive to relative valuations, simply offering investors an opportunity to own the market.

CFA UK believes that different investment approaches can add value to investors, but also believes that market efficiency depends on the presence of sufficient price makers alongside price takers. Stakeholders are confident that investment professionals contribute to the efficiency with which capital is allocated across the economy. They accept that this process is bound, with hindsight, to be imperfect, but they believe nevertheless that it contributes value to society by directing capital to where it can be most productively applied, by maintaining discipline in the use of that capital and by allowing clients to access opportunities to participate in economic growth.

Read more in our report.