The Investment Association – the body representing UK fund managers – recently published its Productivity Action Plan. The aim of the plan is to promote long-term investment and the provision of growth capital.
The analysis contained in the report is sound; for example, it rightly highlights that the current tax and solvency regimes deter investment in equities. Many of its recommendations, such as greater engagement with companies at the pre-IPO stage, could bring real benefits if they are implemented.
There seems to be an implicit argument running through the report that, left to their own devices, fund managers would always choose to pursue a long-term investment strategy and engage actively to achieve that strategy. But they are frustrated in their ability to do so by the actions of pesky regulators, companies, clients and so on.
One example of this is the recommendation that companies should be told to stop reporting on a quarterly basis as it leads the market to focus on short-term performance.
However, companies generally only churn out information if there is either a requirement or a demand for them to do so. The legal requirement for quarterly reports was removed in 2014, so if companies are still producing them they must perceive there is a demand, which presumably is driven by the market (i.e. investors). Forbidding companies from producing quarterly reports is one approach. Another might be for investors simply to stop reading them.
Another example is the statement that ‘asset managers were being required to spend most engagement time on executive remuneration at the expense of a focus on wider fundamental factors’. There are different views as to why so much engagement between companies and investors focuses on remuneration – each side tends to blame the other – but there is no ‘requirement’ to ignore other factors.
The root of the problem in this case is the limited amount of resource that the majority of fund managers are willing to commit to engagement. If they really want to discuss the company’s performance, strategy and culture – which the report identifies as the most important issues for investors – they are at liberty to put in more resource to ensure that those conversations happen. Many companies would welcome that as, I suspect, would many clients.
Implying in this report that fund managers’ hands are tied, if that was the intention, is disingenuous.
Many of the obstacles to long-term investment identified in the report are real and it will need concerted action to remove them. But the Investment Association’s members are not helpless bystanders – collectively they manage over £5.5 trillion of assets. They have huge resources and influence, and can have a significant impact when they choose to wield them.
Many asset managers take their long-term stewardship responsibilities seriously and are diligent in engaging with the companies in which they invest and reporting to their clients on the actions they are taking. Yet many others do not, as I expect the Financial Reporting Council’s current exercise to ‘tier’ signatories to the Stewardship Code will demonstrate.
The 19 institutional investors that have recently committed to fund the Investor Forum for the next three years are among those who are putting their money where their mouths are. Unfortunately, too many others are just paying lip service. That needs to change if the recommendations in this report are to have the desired effect.
|Before joining ICSA's policy team as a consultant, Chris Hodge was the FRC Director of Corporate Governance|