In March, the Investor Forum released a white paper – Shaping Tomorrow’s Dialogues – which presented findings from a six-month programme attempting to identify and promote best practice dialogues between corporates and investors.
PA Future spoke to Sallie Pilot, senior adviser at the Investor Forum and lead author of the report, as well as Tim Shanagher, senior adviser at the Investor Forum, about their findings, common misconceptions around stewardship and engagement, and whether the amount of reporting regulations that companies must adhere to is a help or a hinderance.
Could you introduce the paper and explain why you decided to undertake the research, as well as the methodology behind it?
SP: Over the last 10 years, there has been a sense there was a real need to examine the marketplace and the relationship between companies and investors. Tulchan produced a report on the state of stewardship, which came out a couple of years ago, but the problem with that report, for our members, was they didn’t feel like it mirrored their experience of engagement with companies. So, we wanted to tease out those issues and see what actually made practical sense, rather than focus on the big headlines.
We took a practical approach and conducted a comprehensive assessment of what the state of those relationships between companies and investors are really like, looking at the specific dialogues that we thought characterise those key relationships. So, that was the investor relations, sustainability, governance and voting, audit and assurance. Our rationale was if we can uncover and address some of the frictions in those underlying dialogues, hopefully we can open up the opportunity to talk about long-term value creation with boards and investors.
And, just to touch on the methodology, we formed a steering group of members, which was made up of nine or 10 of our members, and they fed into our approach and thinking about what the key issues were in the marketplace. Then, for each of the four key dialogues, we found a strategic partner for each of them to reach the corporate audience, and you’ll see in the report our partnerships with the Investor Relations Society, Accounting for Sustainability, the Audit Committee Chairs Independent Forum and representatives from the GC100 executive committee, which was so important to get key stakeholders involved.
How did you narrow down to those four key dialogues, and what are the most pertinent points about each one?
SP: The roles and responsibilities of both companies and investors are undergoing a huge shift, and they’re becoming really overwhelmed because the system was not designed to deal with such multifaceted demands. So, we need to rethink how to work together, because the old way of working is not effective or efficient moving forward.
One of the key challenges we found is reporting is crowding out the critical dialogue and is distracting both companies and investors. These systems are being created only for the biggest companies, and, speaking to companies and investors alike, there’s a huge frustration with the fact that we have more people focused on disclosure and reporting than we do on action and actual, proper engagement.
Also, language, particularly around ESG and sustainability, is so important. It’s fine when everyone is talking the same language, but when you add the extra dimension of trying to talk about these things with an external stakeholder, then it can get very complex and frustrating.
This is not to say that there aren’t positives to take forward. The relationship between companies and their investors are robust, there are no problems with access to the board or management team in the UK market specifically, and we have very transparent disclosure policies and governance mechanisms and shareholder protections. So, those are aspects we don’t want to lose.
What we wanted to get across in narrowing down to those four key dialogues – exchanging information, understanding impact, ensuring accountability and building confidence in assurance – is that we’ve listened to both companies and investors, capturing what each would like the other party to do. I come from a background of working with corporates, and they would forever be being told what they should do, what best practice looks like, etc. But actually, I think investors have to step up to that too because it can’t always be companies all the time.
The paper mentioned some common misconceptions about stewardship and engagement. Why do you think people have those misconceptions in the first place?
SP: The market has changed so substantially for both companies and investors, and everybody’s so busy running to catch up that we’re not having very fruitful conversations about one another on an individual or a collective basis. When we did the roundtable with the Investor Relations Society, their chair said it was the first time he could remember being in a room with a group of investors and company representatives talking about these issues. So, I just think we’re not creating a space for these conversations to take place.
Part of the solution is stepping outside of one’s own role, so that companies actually listen to investors and understand their role, and vice-versa. We found that a lot of people benefitted from that form of engagement. Some myths just build up over time, and are not always built on facts but on anecdote.
TS: The other thing from an investor’s point of view is everyone is so time-poor. And, while it’s true that no two companies are alike, no one has time to devote to anything but a very generic approach to engagement, and unfortunately, we need a more tailored approach to make engagement effective. Merely exchanging information isn’t enough, there has to be a dialogue involved around the input.
There’s also a pressure to report on their engagement, which inevitably leads to questions around the quality of engagement simply in order to be able to tick that box that says it’s being done. Again, you have to be in the room at the right time, talking about the right issues, and be able to distinguish between that and purely doing engagement and stewardship for their own sake.
Do you think, then, that all these new regulations coming in, and the amount of regulation, is a help or a hindrance?
SP: The ISSB recently announced they were endorsed by nearly 55% of global GDP, and I thought that was quite interesting. But then, on the other side, the argument is what Europe is doing and what the ISSB is doing was designed for different things. Fundamentally, we talk about interoperability, but is all this truly interoperable if the starting point and the objectives are completely different? So, I think that’s still a problem politically, and investors and companies are stuck in the middle of it, frankly.
From our discussions with companies, they’re just getting their head down and doing it because they’ve got to. But I worry it’s then not strategic, and they’re just doing it as a disclosure exercise. In my opinion, more data is not the answer – data is important for insights, but not a solution to drive change.
TS: One of the challenges is organisations that are using that data to give ratings are sometimes not engaging in the conversation with the company; they’re not looking at the data in the round, and not testing the assumptions they’re making. We’ve had some great new regulations coming through, but we’ve also had some come in that are more challenging, and it’s about how the data is used by some of the agencies that I think both companies and investors sometimes find frustrating because their methodologies aren’t always transparent. They’re scraping lots of third-party data for their modelling, so a company has little control or understanding about what’s going on, so it’s super difficult.
How do you see the relationships between investors and companies evolving?
TS: There’s more that brings companies and investors together than divides them. So, it’s about finding the areas of commonality and building on them, and I think that’s important. No investor wants a company to fail, and no companies want to fail. Everybody wants companies and investors to succeed. It’s about finding out ways in which they can help one another.
In the case of sustainability and audit, these are new relationships, they’re not very well established at this stage, but they’re likely going to become increasingly important. At the moment, investors and companies are struggling with how best to deal with those issues. But the market is evolving so quickly, and we want to build on our findings, and that’s what we’re in the process of doing now.
