Publication Better Stewardship – An agenda for concerted action

Executive Summary

There is a troubling disconnect between our system of wealth creation, and the society which it serves. The symptoms include public anger about corporate failure and excessive executive pay; the continuing impacts on living standards from the global financial crisis; low investment; poor returns for savers, pressure on pensions, and high levels of debt, especially for graduates. Public trust in the whole system – including governments, universities and the media, not just business and investment – is low. Too often the attempt to tackle these problems deals only with individual symptoms. Effective solutions will only flow from a better diagnosis of the underlying problem, and combined actions by all involved. The wellbeing of savers and investors can only be promoted if the underlying performance of investee companies is improved. Competition between asset managers on relative performance is ultimately a zero-sum game. This is where stewardship comes in. Stewardship means the responsible management of inherited resources so that they are passed on in better condition. Stewardship is the golden thread that can connect, and guide the actions of, all those who play their part in the flow of money from the savings of citizens through wealth creation and back to those citizens.

Better stewardship is about a linked set of actions and accountabilities by asset owners, asset managers, and companies, facilitated by the actions of regulators and advisors. Companies need a critical mass of shareholders to hold them to account. Citizens need stewardship by both boards and owners to deliver long-term returns and keep an eye on how companies behave. The test of its success is more effective and more responsible wealth creation in companies. A stewardship code can support and underpin this but the most effective change comes from industry and market leaders.

Overall quality of investor stewardship has improved since the introduction of the Stewardship Code in 2010 but a ‘critical mass’ of stewardship investors has not yet materialised. According to a 2016 survey only 68% of asset owners have a stated policy for exercising their stewardship responsibilities. However only 37% set out their stewardship expectations in all their mandates. Asset managers reported that engagement was excellent with nearly a quarter of all companies and good with 44%. They also reported that they are spending the most time on remuneration at the expense of more important issues.1 Progress is often stalled by the complexity of the investment chain and a tendency to blame others.

A pincer movement of leadership and regulation is needed. Each participant in the system can lead by asking ‘how are my actions helping improve the performance of the underlying assets over the longer term?’ Small actions can reinforce each other to form the habits, values and culture of stewardship across the investment chain. In earlier decades a focus on total quality and lean management transformed the working methods of many industries. Success for stewardship will be assured when a similar common language has been developed and adopted for describing and ranking and celebrating investment institutions, advisors and companies on the basis of their stewardship. Drawing on the pioneering work of the Stewardship Alliance of institutional investors, and the work of Tomorrow’s Company on good governance, this report sets out for discussion the concrete actions for each link in the chain.

In the UK, leadership by government and regulation is also needed. Government needs to set out its overall policy for long-term wealth creation. Stewardship needs to be central to the terms of reference of the Financial Conduct Authority. The Stewardship Code should start by linking stewardship to promoting the long-term success of a company. It should apply to asset owners, asset managers, investment consultants, research analysts and all relevant service providers and advisors. It should require each investment entity to state its purpose and report against it, and report resources invested in stewardship.