A bird in the hand is worth two in the bush, according to the old adage. On a daily basis, professional investors find themselves facing different versions of this crude dilemma.
What’s worth more? Banking a fast buck? Or investing in a business for the long-term, against a broader set of considerations – which could, potentially, yield higher returns.
Edelman hosted a panel debate recently to discuss the findings from our Institutional Investor Trust report – based upon a survey of 500 top fund managers globally.
An interesting point of tension emerged among our panellists when the debate turned to the true motivations of professional investors.
FINANCIAL PERFORMANCE IS INEXTRICABLY LINKED TO HOW A BUSINESS ENGAGES WITH SOCIETY
Our survey concluded that a business’s commitment to Environmental Social and Governance (ESG) considerations is now, overwhelmingly, a key factor in deciding whether or not to invest. Some of our panellists were sceptical as to how deep this feeling runs, however.
Euan Stirling, global head of stewardship at Aberdeen Standard Investments, believes that responsible corporate behaviour is intrinsically linked to long-term profits.
“I don’t think there is a distinction between financial performance and ESG features,” said Stirling. “They are just looking at different timescales. If you get environmental, social and governance factors wrong then they become financial, they do bite, and it can be very very painful.”
Jayne-Anne Gadhia, former chief executive of Virgin Money, stressed that many executives historically have been devoutly, narrowly focussed solely on shareholder value – such as her erstwhile boss, the former RBS chief executive Fred Goodwin.
When RBS was making its first investment in China, Gadhia said, many voices in the business raised concerns about the Chinese position on human rights. Yet Goodwin had no interest in such arguments, according to Gadhia.
“A sustainable business is one that looks after all its stakeholders” she said. “As a consequence, in the end shareholders are better off”.
Living by these values can be hard, however. For this is not the means by which success and failure is defined for most investors.
INVESTORS ARE MEASURED ON FINANCIAL RETURNS
Baroness Wheatcroft – a non-executive director at Fiat Chrysler Automobiles and wealth manager St James’s Place – took issue with the idea that investors really paid much attention to anything other than cold, hard financial returns. The fund managers Edelman surveyed were simply “telling us what we wanted to hear, rather than the truth”, she posited.
“I don’t think most investors will accept a lower rate of return in [exchange for] thinking about a broader context,” she said. “Most investment organisations are measured by what they produce.”
Euan Stirling pointed out that Unilever had suffered a little in this regard. While the business had been rigidly focussed on building a sustainable, long-term business under Paul Polman, this had often been perceived as coming at the expense of short-term shareholder returns.
This broader point of measurement was taken up later by one of the audience members, Edward Bonham-Carter, the Executive Vice Chairman of Jupiter Asset Management. Faced with a large takeover premium, investors would typically sell out, suggested Bonham-Carter – a fact that is clearly a source of frustration for him personally.
Our panellist Leon Kamhi, head of responsibility at Hermes Investment, agreed. “The investor typically picks the 30% to 40% premium,” said Kamhi. “Is it the right thing to do? I think they should be looking at a longer-term view of the company. Yet sometimes a deal like that can be beneficial to employees and customers. It does not have to be non-beneficial.
“But we are going to have to change the way mandates work between pension funds and asset managers for people to take a longer-term view.”
TAKEOVERS CAN BE IN EVERYONE’S BEST INTERESTS
Euan Stirling endorsed the view that it can be dangerous to assume that all takeovers are destructive or short-term in nature. A cash bid from a foreign bidder is one thing. Yet most bids have at least some shares in the deal, which forces investors to think about longer-term prospects.
He alluded to the battle for control at the engineering giant GKN, which fell to a bid from the industrial turnaround group Melrose. Most UK institutions had shares in both businesses.
“They had to decide, based on a long-term view of who was going to successfully prosecute for the success of the business in the future,” said Stirling.
Stirling and his team took the view that Melrose would run the business better, and that this would therefore be in the better interests of employees, and broader stakeholders too. This is in spite of a public perception in some quarters that the Melrose team are financially-driven asset strippers.
Defining the heroes and villains of modern investment is not always simple. With shareholder activism on the rise, this is an increasingly relevant point.
Our panellists were clear that it is dangerous to assume that a company’s management is inherently operating with purer motives, or to longer-term objectives, than an outside investor that appears on the share register agitating to sack a chief executive or force a strategic overhaul. A prod from an activist is often welcomed by long-term investors.
SHAREHOLDER ACTIVISM IS GOING MAINSTREAM
Our survey found that 85% of fund managers would be willing to work alongside an activist investor in order to foment boardroom change.
Stirling, who has led multiple campaigns against companies over issues such as excessive executive pay, pointed out that what he engages in is active stewardship of a business. He is more than willing to work with activists, but only good ones.
“Going back a bit, there was an activist investor who had a tilt at HSBC,” said Stirling. “They came into present their case to us, and it was appalling. If they had been a sell-side analyst we would have sent them away with a flea in their ear.”
Kamhi pointed out that Hermes prefers to use the term “engagement” for its interactions with boards. And “engagement” comes in many forms, he added, with a raised eyebrow that suggested a forceful form of persuasion.
“When an activist comes to us, we will definitely hear them out,” said Kamhi. “But they need to have long-term objectives.”
NOT ALL ACTIVISTS ARE THE SAME
Both Baroness Wheatcroft and Dame Jayne Anne Gadhia raised questions about the motivations of Edward Bramson’s campaign against Barclays, asking whether his plan was really in the long-term interests of investors.
Yet Lord Myners, the chairman of Edelman UK, raised an interesting point. Not all activists are the same, he said. Cevian, the fund which he chairs, takes sizeable stakes for the long-term.
“I spend a lot of time going to lunches and dinners where company chairmen tell me ‘I wish our shareholders would take more of an interest, I wish they would take a large holding, I wish they would hang around for a while’,” said Myners. “Well this is what good activists do. Know your activist – that’s quite important. Activists are owners of the business. They care about the long-term future.”
Cevian, he added, has ten investments – and sits on the board of eight of those companies. Cevian’s average holding period for those stocks is measured in years, not quarters. Surely, this is what good governance looks like, Myners posited.
NEDS HAVE A BIG ROLE TO PLAY IN REBUILDING TRUST
Part of the issue, when it comes to engaging with activists, is that investors do not really trust what CEOs tell them. Our survey found that only 58% of investors consider a chief executive a reliable source of information about a business’s prospects. By contrast, 71% of investors consider the senior independent director or a non-executive chairman to be a trustworthy source.
In effect, investors see a CEO as the head of sales for the shares. The NEDs bring a reputation from elsewhere, built in a different career. Therefore, they are seen as likely to filter out any egregiously self-interested claims made by management.
Is there a case for non-executives to be more engaged with investors? Broadly speaking, our panellists concluded this would be helpful – although not without its challenges.
Yet Baroness Wheatcroft suggested an interesting addition to the roles and responsibilities of the non-executive director. “If a non-executive director resigns from a board, they should have to say why. And that would be of use to investors. Instead, they normally sneak out of the back door very quietly, probably having signed an NDA [non-disclosure agreement] en route. Investors should know when a non-exec resigns and why.”
Euan Stirling added that the late Richard Cousins, who had been chief executive of catering giant Compass, stood down from two boards in protest at executive decisions. In neither case was the reason disclosed until later – one being his decision to resign from Tesco over the merger with Booker. Nonetheless, the departure of Cousins was enough to alert attention among his long-standing fan club in the City.
When it comes to the challenge of rebuilding trust more broadly in business, Edelman’s survey data suggests the answer lies at least in part in treating employees well.
“I think we simply need to treat employees like human beings, and not like commodities – and that’s also true of customers,” said Leon Kamhi. “If you treat your employees well, you will also treat your customers well.”
CEOS NEED TO TAKE A STAND ON SOCIAL ISSUES – AND BREXIT
When thinking about how to boost trust in CEOs more specifically, is there a case for CEOs to be more visible? More engaged on social issues? Two of our panellists certainly thought so.
“Most CEOs have decided to keep their heads down on almost every issue,” said Baroness Wheatcroft. “There was a time when there lots of big beasts striding round the field saying interesting things. And now they have just vanished. If I can mention the B word – Brexit – they kept quiet about what was going on, and what the implications were.”
Not every CEO is comfortable in the limelight, especially in an era where the slightest mistake can be amplified on social media and ripple around the world. Yet all of Edelman’s studies on Trust show that employees increasingly want to work for businesses that take a position on the issues that are increasingly dividing society.
And in full-employment economies like our own, employees have more power to choose to work elsewhere if they disagree with their employer’s policies. Some 20,000 Google employees walked out last November in protest at the company’s treatment of alleged victims of sexual harassment.
The Edelman Earned Brand study also indicates that consumers are switching their buying patterns to only do business with companies that, in broad terms, “do the right thing”.
Gadhia agreed that business needs to find its voice, and that CEOs should take more responsibility for their role in society. She mentioned that Sir Richard Branson had regretted at one stage having been so vocal in supporting the remain campaign during the EU referendum. Now he wishes he had done more, got involved earlier and played an even more prominent role.
“I think business has a huge role to play in society,” said Gadhia. “Shame on people who don’t see that. We are privileged in every sense – in terms of the money we earn, the influence we have, the control that we have, the way in which we shape our country’s future. And it’s going to the dogs. And we are the leaders that can make a difference. We should stand up and speak about it.
“I am embarrassed to live in a country where business has been so successful, and people are not proud enough to stand up and make a difference. I think now is the time to do it.”