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Code comfort

When you decide to invest your clients’ money in the shares of UK companies, I have no doubt that you (and your clients) want to make sure you are investing their money in well-run companies which have the prospect of offering an investment return.

But just how do you go about choosing those types of companies and how can you be sure they are operating in the best interests of their shareholders? When you invest in UK shares via funds, you, along with thousands of other investors, will be delegating that responsibility to the fund manager, whose primary aim is to grow his investors’ money. Part of that job includes making sure he invests in well-managed, profitable companies.

This is a hot issue at the moment, with some saying that shareholder activism has reached a peak and a few companies seeing their top executives “forced” out by a shareholder revolt over pay and performance – otherwise known as rewards for failure. It seems there is more to come as the round of spring (we can hardly call it summer) AGMs continue.

So much has been made of the recent round of votes against pay that you would think this is the only way fund managers exercise their influence over companies. Yes, an important part of their stewardship of companies is ensuring appropriate incentives for executive directors as those incentives can be an important driver of company behaviour but it is not the only thing fund managers do. And even where pay is concerned, many fund managers will engage with companies on their remuneration structures before any public vote to ensure there is a clear link between pay and long-term performance and investors’ interests. The extent to which companies achieve this will ultimately determine how the manager votes.

But back to my point – fund managers do a lot more behind the scenes than is perhaps appreciated. The reason for this? It is often more productive to engage in discussions with company management and boards and agree a way forward over contentious issues. Far better to engage and seek change than scaremonger in the press about a company’s performance. So what exactly is involved in engagement? Well, there is a code – of course, there is.

The UK Stewardship Code is designed to improve the quality of engagement between companies and their investors in the interests of achieving long-term returns to underlying investors. The code sets out a number of principles and guidance for investors which provide a solid basis for engagement.

Fund managers are expected to enter into dialogue with companies on issues such as long-term strategy, risk management and pay in addition to focusing on the more short-term issues which will be raised at general meetings.

The IMA conducts an annual survey to find out exactly what engagement means in practice and to assess its outcome. We are shortly due to publish the next one. What we have consistently found is that there is a real long-term commitment on behalf of institutional investors to achieving value for shareholders and that the engagement which does take place behind closed doors is productive and leads to improved governance in companies. Long may that continue.

Mona Patel is head of communications at the Investment Management Association


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