Investor influence on the rise as business risks increase

27 February 2020: investor interest in corporate strategy is on the rise amid a growing range of business risks, but how influential is this engagement, and what implication does this have for accountancy? David Adams investigates.

The phrase "shareholder activism" can mean different things. Most prominent in the mainstream media is the type of forceful, uncompromising activism that can oppose a company’s core business activities or ethos. Then there’s the type of shareholder engagement conducted by active fund managers or institutional investors.

The latter aims to help businesses improve overall performance, in financial terms and concerning environmental, social and governance (ESG) issues. This includes diversity in senior management positions, or fair treatment of smaller businesses and workers within supply chains, as well as environmental impacts. 
 
Will Oulton is Global Head for Responsible Investment at First State Investments and a member of ICAEW’s Corporate Governance Committee. He and his colleagues engage regularly with the boards and executives of companies in which First State has invested or may invest.
 
“That conversation will often be about corporate strategy,” says Oulton. “It might touch on executive remuneration. For some companies we question their tax strategy – we tend not to like aggressive tax avoidance techniques. But we start from the point of view that 'our clients' money is invested with you, so it’s in our interests that you succeed".
 
Fund managers are increasing this stewardship activity in part to help attract more clients and also to ensure compliance with regulatory obligations and guidance, including the newly revised Financial Reporting Council UK Stewardship Code. But they are also motivated by the need to help businesses understand and mitigate a growing range of business risks related both to climate change and to the transition to a low carbon economy.
 
As Larry Fink, Chairman and CEO of investment company BlackRock, noted in a recent open letter to business CEOs, “Sustainability and climate-integrated portfolios can provide better risk-adjusted returns to investors”. In future, Fink suggested, “transparency on questions of sustainability will be a persistently important component of every company’s ability to attract capital”. 
 
All of this has implications for accountants, whether in practice or business, as does the fact that regulatory requirements designed to compel businesses to reduce carbon emissions and improve environmental performance are already increasing costs and risks for many businesses. 
 
“Accountants need to have the issues of sustainability and environmental investment at the forefront of their minds,” says Jeremy Taylor, CEO of Lazard Asset Management (UK). “They need to think about the energy transition in different industries. They need to think about the risk of stranded assets; and reinvestment risk.”
 
Shareholder engagement can certainly have a direct influence on corporate strategy, although this is more likely to take the form of subtle strategic adjustments than major boardroom upheaval, says Oulton. “We see changes after sustained engagement: around levels of disclosure, for example,” he explains. “We have seen companies exiting business lines that we have said we thought would not be viable in the long term.”
 
Some business leaders may find shareholder engagement irksome. Oulton contrasts European companies that regard some of it as “free consultancy” with some US companies much less keen to engage, but it can really be a positive force for all stakeholders in a business. 
 
We will surely continue to see more of this activity in the future.