What’s the issue?
The value of investors engaging with the companies they hold is often a subject of debate. One side of the argument suggests that engagement can drive substantial improvements in performance and behaviour, but cynics suggest that it’s largely a talking shop, which leads to limited change and maintains a cosy relationship between institutional asset managers and large companies. Newton has firmly backed the view that it is an integral part of the capitalist process and that effective engagement can lead to better outcomes for shareholders and companies, though others are less convinced.
Active engagement is also often considered only as pushing for change – righting a wrong or improving a situation. In the world of passive investors, this may be true; however, we would argue that for active investors, using engagement as a means to exchange information is not only a legitimate exercise but can be crucial in gaining a fuller understanding of the risks and opportunities faced both prior to investing and once invested.
What work has been done?
It has been pleasing to see our partners at the Centre for Endowment Asset Management adding some academic rigour to this debate. Their 2015 research paper looked at the success of engagements from a single asset manager with 613 public US companies over a 10-year period.1 The study concluded that successful engagements lead to meaningfully improved financial and share-price performance, alongside better governance, over the 18 months following activity. They have followed this work up with a more global study in which the preliminary results indicate similar trends.2
We believe these findings provide compelling academic evidence that quantifies the impact of engagement. The studies back up what one might expect given the nature of share ownership and capitalism. The financial crisis highlighted several cases where both management and shareholders had been working on the basis that “while the music is still playing we’re still dancing”. While at Newton we are active investors, and obviously we may sell shares where we see deteriorating conditions, we do look to encourage positive long-term behaviour while we are owners, and our investment time frame is generally long. With average holding periods of over four years, it is in the interests of our clients for us to encourage long-term sustainable behaviour in the companies in which we invest on their behalves. Over time, we see these efforts result in better management, which can lead to better returns for clients and improved outcomes for society in general.
We therefore remain committed to continuing with active engagement and also to voting actively on the shares we hold for our clients as a core part of our investment process. We have seen a number of areas where we have been able to help drive corporate change, from better disclosure to pushing for corporate reform and engaging actively on the details of many corporate incentive packages. We think that all of these play a part in ensuring better outcomes both for the companies we invest in and for our clients.
Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.
1 ‘Active Ownership’, Elroy Dimson, Oğuzhan Karakaş, Xi Li, 12 August 2015 Li https://academic.oup.com/rfs/article/28/12/3225/1573572
2 ‘Coordinated Engagements’, Elroy Dimson, Oğuzhan Karakaş, Xi Li, 26 July 2018 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3209072
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