I think it’s a really natural part of being an active shareholder actually, and I think we see the benefits in a number of different ways. Firstly, we get to know more about the companies that we engage with and that’s important. Secondly, there is good evidence to show that, at least on some occasions, engagement can help drive financial performance and, lastly, and still very importantly, we think we can help companies improve their environmental, social or governance structures and outputs and that’s a benefit to the companies in the long term as well.
What work has been done to prove that active engagement works?
There’s a really fascinating and I think important paper that’s out of Cambridge University and the London School of economics, which looks at this specifically. They look at a decade's worth of engagement based in the US. They come up with a really fascinating conclusion which is in the approximately 20% of cases where engagement was successful, you saw a substantial abnormal return after that successful engagement, over 7% in the period afterwards, and interestingly no negative abnormal return for those companies where engagement wasn't successful, so their conclusion is that engagement seems to be an activity with only upside and I think that's really interesting and we’re taking that on board with our work.
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.
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 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 for the companies we invest in.
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1 Active Ownership’, Elroy Dimson, Oğuzhan Karakaş, Xi Li https://academic.oup.com/rfs/article/28/12/3225/1573572
2 Dimson, Li and Karakaş, 2018
These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those countries or sectors. Please note that holdings and positioning are subject to change without notice.