An alternative model is emerging that casts engagement in a wholly different and arguably more constructive framework, with potentially better outcomes for its participants. Here engagement is relationship based, which is an exemplar based on the mutual understanding of objectives by the companies, their owners and the money managers.
Such a model is non-adversarial yet still purposeful and allows company management to manage while keeping the owners abreast of changes to the risk profile of the business. It aims to restore the proper character and purpose of a company, whether quoted or not; namely, a joint enterprise between the company directors (the agents) and the providers of the perpetuity capital (the owners or shareholders).
At the heart of this relationship is the application of the principles of good stewardship. As each company is different, the source of good governance and stewardship is not to be found in unyielding rules but in principles that can be flexibly applied. This permits understanding while minimizing the potential sources of friction.
For the owners of companies, the key stewardship principle is the accountability of the agents that they employ on their behalf to run the company. For the latter, the key principle is the persuasive articulation and delivery of the purposes of the company. For both, good governance and stewardship are those business practices that contribute to the delivery of value on a sustainable basis and contribute to the company's competitive position.
Of course, all this is easier said than done, and it requires a far better understanding and appreciation of the costs of agency by key participants in the investment chain between asset owners and companies — as the experiences of the banks demonstrate. The observable improvements in the governance and stewardship practices of U.S. corporations has arguably been the function of regulatory intervention and law enforcement vigilance post crisis; but that there has been an improvement is not in doubt. A broader base of asset managers and owners now need to examine how it can contribute to the further evolution of best practice. We should all be activists now.
Jonathan Cobb is governance and stewardship director of Standard Life Investments Ltd., Edinburgh.
*Regulation S-K lays out the reporting requirements for the Securities and Exchange Commission filings used by publicly listed corporations.
**Regulation FD for fair disclosure requires publicly listed corporations to disclose material information to all investors at the same time.