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The market is full of noise about ESG, MiFID II, alternative data, responsible investment, corporate access and shareholder engagement. In the world of annual meetings, it’s topics such as say on pay, diversity, climate change and shareholder activism. Yet, Aaron Bertinetti, head of research and engagement at Glass Lewis, recently stated,
“That as important or concerning as these things are, I would argue they are all symptoms of a much larger cause. There is no more important trend in today’s capital markets than investment stewardship. Capital is the center of gravity around which our markets operate. The broad adoption of investment stewardship is a paradigm shift in the very nature of that capital. This is impacting all participants in the market whether they like it or not. And some will really not like it.” At companies, that puts investor relations and corporate secretaries on the frontlines of a sea change in investor behavior.
What is Investment Stewardship? As Vanguard puts succinctly, investment stewardship is “the ways that asset managers/asset owners care for the assets entrusted to them by investors/beneficiaries.”
This is not a new concept, but one that was strongly asserted as part of an investor’s ownership rights within the UK’s Cadbury Report in 1992. It then became more explicit over time until a formal stewardship section appeared in the UK’s Combined Code in 1998. However, it wasn’t until the UK’s Stewardship Code of 2010 that investment stewardship began to go mainstream and in the last five years it has swept across every major market in the Americas, Europe and Asia with a flurry of stewardship codes, principles and marketing... lots of “fearless” and “purpose”-ful marketing.
The broadening of “the ways” in which investors are managing capital is no better personified than by CEO of BlackRock, Larry Fink. In his annual letters to CEOs, he’s called for a new model in which companies address the fact that “society is demanding that companies, both public and private, serve a social purpose... without a sense of purpose, no company, either public or private, can achieve its full potential... And ultimately, that company will provide subpar returns to the investors”. This seismic shift towards investment stewardship is even harder to miss on Wall Street, thanks to State Street’s Fearless Girl statue.
How is Investment Stewardship changing markets? Quarterly results and annual returns are no longer enough for the long-term interests of investors. That’s where ESG, engagement, a sense of purpose and fearless girls are coming from. It’s a perfect storm that started brewing with expanded proxy voting. Dodd-Frank and the growing influence and size of passive and index-based investors followed. Asset managers and asset owners are vastly expanding “the ways” they exercise their fiduciary duties. In short, capital now comes burdened with more expectations than at any time in history.
Passive investors, in particular, will continue to grow in size and influence. Paradoxically, they will continue to become more active as owners. They will seek to maximize their stewardship with more non-financial data, extensive engagement, tougher ESG and proxy voting policies, louder public policy work, and, if all else fails, activism. Given these passive investors do not have the option of selling a stock by definition, they also have a strong commercial interest for meeting their clients’ and beneficiaries’ expectations on investment stewardship throughout the life of the investment. Failing to meet these expectations risks the loss of their investment mandates to asset managers and owners that do meet them. That is why we’re seeing a global expansion of dedicated stewardship teams. BlackRock is likely the largest, having grown to over 30 members and committing to double it. Vanguard and Aberdeen Asset Management are close behind at approximately 20 each. U.S. public pensions are also expanding their teams, with 29 currently at CalPERS and 12 at CalSTRS. For investor relations professionals more familiar with corporate access, these stewardship teams are also working alongside or even integrating with the buy side. Hiring for these teams is also starting to lean towards buy side and sell side backgrounds. In BlackRock’s case, this has extended to hiring leaders in corporate access such as Ray Cameron, former head of global corporate access at Stifel.
Reading between the lines, it seems inevitable that the investor relations world of corporate access will be consumed by investment stewardship on the buy side. Fink has already made clear that “the time has come for a new model of shareholder engagement – one that strengthens and deepens communication between shareholders and the companies that they own.” Bertinetti, also former CEO of corporate access firm Meetyl, confirms some are taking this concept a step further, “We’re keeping Meetyl’s technology, but we’ve decided to go all in on stewardship.”
How does this change the IR & CoSec world? Regardless of one’s personal or professional beliefs, investors are increasingly demanding that companies seriously consider, disclose and address what they are doing around ESG and these broader stewardship concerns, and how this is aligned with corporate strategy and long-term returns. Investors will be more assertive with their ownership rights on all fronts than in the past. This will be on behalf of their clients and beneficiaries, and SEC Chairman Jay Clayton’s “Mr. and Mrs. 401(k)”.
Management and boards are likely to find themselves having less control and much more accountability. Investors will more starkly define them as the employees and representatives working on behalf of the company’s owners (i.e. investors). The roles of investor relations teams and corporate secretaries are already evolving substantially with governance roadshows and ESG days. But what used to be proxy voting matters, are now influencing the long-term investor demand on company stock.
As any investor relations professional will tell you, “no two investors are alike”. The emphasis on stewardship is making this more difficult to manage, because:
Investors keep shifting the goal posts on what they will support. This changes with their stewardship expectations, policies and advisors;
Investors are demanding companies spend much more time engaging on all these issues. And it’s not just asset managers, it’s asset owners too; and
Investors have increased the complexity of their own decision making. This is making it really difficult to identify and directly communicate with the right individual, who is actually making the voting or investment decisions.
Worst of all, whilst it would be a lot easier, ignoring these investor concerns would be at your company’s peril.
Why engaging with the “enemy” might help you? “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.” - Sun Tzu
Enemy or not, proxy advisors are a frequent target of corporate angst. But on closer inspection they do share one important thing in common with the companies they cover. They are being held to account by their clients, the very same investors that each IRO and corporate secretary has to contend with. Proxy advisors are very familiar with the same stewardship headaches from investors. Yet they also have the benefit of being able to talk to and look at all companies and all shareholders, all the time. This level of insight into your company’s shareholders and corporate peers should not be discounted, particularly if some are willing to give it away to you for free. At one firm, any company that simply asks can spend an hour with the very analysts that cover them, scrutinize all the data in any company report before it’s published, and provide feedback on any concern they may have throughout the year. There is no cost for this access. Thousands of stewardship-savvy IR professionals and corporate secretaries have made this part of their yearly routine. Bertinetti says “It’s an open door policy and we look at stewardship issues every day, why wouldn’t you take advantage of that?” In 2019, the same firm announced it was taking this idea into uncharted territory. Any company can now use this proxy advisor’s voting and research platforms to directly target and communicate with every individual investor that is a client. The views of investor relations and corporate secretaries now sit on the very same page that those client’s view proxy research and execute voting decisions on the same company. Called the report feedback service, the idea of putting opposing arguments in front of a proxy advisor’s own clients may seem unusual. But no one is safe from stewardship. Investors’ expectations have extended to their own advisors and “the ways” advisors can help meet those needs. The catch? It’s not free. But it costs a fraction of a single PRNewswire and engages all your shareholders simultaneously on every stewardship issue they vote on. It is the most targeted investor communication tool on the market today. As Bertinetti puts it “We’ve built this amazing infrastructure to communicate instantaneously and directly with over 1,300 investor clients about every company they own. I might disagree with what companies say, but we work for investors and they’ve made it crystal clear that they want to hear what companies have to say. If I was in investor relations or a corporate secretary and trying to find ways to address all these different investors at scale, I can’t think of a better way to do it.”
TALK TO GLASS LEWIS In the last year, more than 3,000 companies met with the research analysts that cover them, scrutinized the corporate data that we provide investors, got access to the research we publish, or used our investor platforms to communicate directly to the shareholders making stewardship decisions at their company. Over 1,300 institutional investors, with $35 trillion in assets under management, use Glass Lewis’ research and voting platforms to make stewardship decisions at more than 18,000 companies each year.
Keep your “enemies” close and get in touch!
Contact Kayla Missaggia +1 415 738 4117 kmissaggia@glasslewis.com