Two stories have been dominating corporate governance news over the last couple of weeks. The first, obviously, is the collapse of Carillion. The second is Larry Fink of BlackRock’s annual letter to CEOs, exhorting them to not only deliver financial performance but to act in a way that benefits all of their stakeholders and makes a positive contribution to society as a whole.
A brief summary of the reviews would read: Carillion bad, Larry Fink good.
So it is a little unfortunate that it should emerge that BlackRock was shorting Carillion stock while at the same time managing its pension scheme.
There is no suggestion that BlackRock has done anything wrong or that their actions are untypical; nor should it detract from the force of what Larry Fink says in his letter. But it perhaps illustrates that the challenge of balancing the interests of different stakeholders is no easier for institutional investors than it is for the companies in which they invest, and no less important.
If the collapse of Carillion begs the question of whether delegating responsibility for the delivery of public infrastructure to the private sector is always a good idea, then BlackRock’s cameo role perhaps raises a similar question about delegating to investors the responsibility for delivering public policy or protecting the public interest.
That is not to say that investors should not take account of the broader impact of their investment decisions, or that their interests cannot be aligned with public interest or the interests of companies’ other stakeholders – very often they will be. But (as I argued in ‘Untangling Corporate Governance’, published by ICSA: The Governance Institute last year) sometimes they are simply not the right people to ask to deliver public policy objectives.
Directors’ remuneration is a case in point. As a means of tackling income inequality and promoting fairness, reporting to and voting by shareholders has been tried and found wanting.
The debate about what are, and are not, the responsibilities of institutional investors is part of the backdrop to the Financial Reporting Council’s current consideration of what to do with the Stewardship Code.
I need to declare an interest here, as I was at the FRC at the time the Stewardship Code was introduced. My obviously unbiased view is that the code has achieved some but not all of the objectives we originally set for it, but that the time has come for it to be beefed up.
When we first introduced the code we deliberately set the ‘entry requirements’ at a fairly low level, as the priority at that time was to get stewardship and engagement on the agenda in the boardrooms of investors and investee companies alike. My own view is that it has succeeded in doing that. The down side, however, is that it is not possible, just by looking at the list of signatories, to distinguish between investors who are seriously committed to stewardship and those that simply say they are.
The FRC carried out an exercise last year to ‘tier’ signatories by the quality of their disclosures, which was a good first step. The next step should be to raise the bar in terms of the policies and practices to which signatories are expected to commit, in order both to improve the general standard of stewardship and weed out the free riders.
Care needs to be taken when deciding what form the beefing up should take. The FRC needs to guard against the review of the Stewardship Code being treated by politicians and others as an opportunity to create a sort of public interest wish list, dumping onto investors public policy objectives that they are not equipped to meet and for which the responsibility rightly rests elsewhere, such as with government.
On the other hand, the BlackRock/Carillion example highlights that Larry Fink’s comments about the obligation on organisations to be responsive to societal concerns and to consider their impact on their own stakeholders is as relevant to institutional investors as it is to the companies in which they invest. What is sauce for the goose is sauce for the gander.
For large companies, the government intends to introduce a requirement for large companies to explain how the directors carry out their duties to various stakeholders. One idea might be for the FRC to set out a similar set of duties in the Stewardship Code and ask signatories to report how the potential impact on their own key stakeholders has informed their investment strategy and stewardship approach.
If such an obligation prompted institutional investors to place the impact on their own stakeholders – most notably their clients, beneficiaries and investee companies – more explicitly at the heart of their investment approach, then it may also indirectly help to bridge the perceived gap between shareholder and stakeholder interest.
Chris Hodge is policy advisor at ICSA: The Governance Institute