Shareholder engagement has become more urgent as a result of the financial crisis, but a cost-effective strategy to accomplish responsible ownership goals still proves elusive to many pension funds, according to speakers at the International Corporate Governance Network midyear conference.
Institutional investors “need to think of solutions rather than inhibitions that prevent them from doing so,” Paul Myners said in a keynote speech at the conference that was held in London March 24-25. “Good governance is fundamental for better decision-making.”
Mr. Myners — financial services secretary to the U.K. Treasury and former chairman of London-based Gartmore Investment Ltd. — said: “The most profound shortcoming which we need to address … is the hidden cost of public ownership that results in inadequate stewardship.”
Money managers are now rewarded for relative outperformance usually measured against a benchmark or peers on a short-term basis, so there's no incentive “to take governance seriously,” he said. Acting as owners requires pension fund officials to look beyond “a quick return in what too often is a zero-sum game,” Mr. Myners said.
“In this world, it is fine to be wrong or even lose money, as long as you do so in the company of others,” he added. “A lack of consideration for the long-term is evidenced in portfolios being churned for little evident benefit, erosion of return through non-value-adding trades and holding underweight positions in securities judged to be overvalued.
“This is at odds with the reality that people's pensions are not paid by relative performance but absolute performance, yet this industry is obsessed with relative performance.”
Mr. Myners among others at the conference suggested that institutional investors and their money managers devote more resources to add value to portfolio management through active engagement. For example, one contributor to the financial crisis was executive remuneration that failed to align interest with the long-term health of public companies. “Owners and shareholders are responsible for remuneration, not government,” Mr. Myners said.
Another topic for engagement is shareholders' right to have a say on issues such as board appointments. In the U.S., for example, shareholders have the ability to vote, but “the vote is meaningless” because it only takes one vote to elect a board member, rather than a majority, said Suzanne Hopgood, director of board advisory services at the National Association of Corporate Directors, Washington.