Since I started in the corporate governance advisory field to institutional investors, I have met fund managers, compliance officers and the many C-suites within asset management companies in Europe. All of them are totally distinct from one another, with their different investment strategies, different ties and different hobbies. Apparently, no special pattern could describe them as a group. None?
Not really. One paradigm I have been able to identify: to which tribe those institutional investors belonged to when it comes to their relationship with Corporate Governance.
In these days, most professionals in the sector tend to neglect that quoted companies are mainly in the hands of institutional investors. As shown in the chart provided by ProxyPulse, the institutional ownership represents more than 62% of the total ownership in those companies where they invest. However, when we speak about their responsibility as shareholders most of them tend to look the other way. Not always, though. To me, this is the moment when asset managers start to reveal their tribal features.
Indeed, as I like to say and inspired by Schumpeter, there are 5 tribes of institutional investors when it comes to corporate governance, each with its own interpretation of what being a shareholder is. The 5 tribes are following:
- Governance Deniers,
- Governance Soft-Tickers,
- Governance Hard-Tickers,
- Governance Ambassadors, and
- Governance Sharks.
Governance Deniers, as the name unveils, deny everything. First, they deny their will of being shareholders. They are prone to being known as speculators and generally tend to manage small portfolios. They do not make special distinction between a company, a commodity or an index. For them, a company is just a means to get a gain for their funds. Just a price blinking in a screen, a candle in a chart. Moreover, they surprisingly deny the existence of a legislation when it comes to voting rights despite being regulated! Indeed, they are sure that they have no obligation at all and sleep soundly thinking that it is a responsibility of the custodian to manage “these things”. Fortunately, they are only a few.
The next tribe is an illustrated version of the previous one. Governance Soft-Tickers still consider companies only as an instrument to make their profit. But in this case, they know there are a set of rules for asset managers that mention something about the exercise of voting rights of the companies in which they are investing. For them, these matters are a mere tick in a check list of the auditor. Nevertheless, as the auditor has never asked them about it, they are not interested in corporate governance matters, so far.
Governance Hard-Tickers are generally old Soft-Tickers with either enthusiastic compliance officers or detail-oriented auditors. Most European asset managers place themselves in this group. Hard-tickers know their legislation well. They have prepared their Voting Policy and Voting Guidelines. They publish in their websites information to their investors with regard to the exercise of the voting rights, and vote in some of the main companies they hold their funds in. Of course, they do it just for the record, for the tick in the audit check list. Notwithstanding, in this case, they do comply with the current legislation.
The first tribe that feels comfortable with the shareholder status are the Governance Ambassadors. They know current legislation well and push for improving future legislation. In some cases, like Warren Buffet or Capital Group among others, they are extremely big players, and selling their position (or voting with the feet as known in the governance jargon) wouldn’t be possible, argue naysayers. In other cases, they are forced to invest in certain companies, which is the case of passive indexing managers like Vanguard or BlackRock. However, all of them understand that “the health of public companies and financial markets is critical to economic growth and a better financial future for workers, retirees and investors”, as they claim in the letter where they introduce their “Commonsense Corporate Governance Principles”. Another group of institutional investors within this Governance Ambassadors tribe is comprised of asset managers that have found a gold mine being active and sensitive to ESG, ISR and corporate governance issues because it has been a positive driver for their business in terms of investment strategy and brand positioning, like the Dutch Robeco. Governance ambassadors are in a privileged position. Their size grants them a more direct return in their efforts of acting as active shareholders; but some small and middle sized asset managers are also benefiting from their diligent ownership activity in a social context where investors a more demanding.
Finally, we find the Governance Sharks tribe of institutional Investors. Commonly known as activist hedge funds. They find themselves in their natural habitat when it comes to corporate governance aspects. Their large-size and low-diversified portfolios allow them to gain significant weight in their targeted companies. In this manner, they typically reach to appoint directors or mobilize other shareholders towards the goals they promote within the companies (check this interesting link). In some cases, they have left some skeletons in the way and this explains part of their bad reputation, but in other cases they have improved the results of mismanaged companies where sleepy shareholders didn’t act.
The corporate governance aspects are generally forgotten by institutional investors because the liquidity of the stocks where they invest in allows them to vote with the feet easily. Moreover, the costs of following the governance matters is thought to be too high for the benefits.
However, history has taught us a different lesson many times. The price of not caring about the governance of companies has allowed and encouraged fraud from managers, costing huge amounts of money to investment funds and investors. However hard we analyse the accounts and statements of a company, if the management is not aligned with the shareholders, these accounts could be utterly manipulated, like the Toshiba scandal in 2015, and all our efforts would make no sense.
That’s why, from an institutional investor point of view, caring about corporate governance is not a complement but an important pillar for the safety and growth of the asset management industry.
Alex Bardaji is Director at Alembeeks Group.
Alembeeks VotingLab it is the division within Alembeeks Group that helps institutional investors to participate and track their activity with regard to the voting rights of the companies they hold in portfolio.
Moreover, Alembeeks VotingLab analysts generate ad-hoc reports for each Shareholders' Meeting according to voting guidelines of each client. These reports are the perfect guide to face a Shareholders' Meeting with all the necessary information.
This research service and the consulting services of drafting the Voting Guidelines and Voting Policies are the perfect complements of the VotingCloud platform provided at Alembeeks.
The VotingCloud platform is the platform that allow institutional investors to keep track of their voting activity, one of the currently demands by the internal and external auditors.