Latest / Two in Twenty / Size does truly not matter when it comes to systems stewardship

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Size does truly not matter when it comes to systems stewardship · Two in Twenty

• 0:07
  SPEAKER_03: Welcome to Two Intelli, the newest podcast from the team at White Marble Consulting.
• 0:13
  SPEAKER_03: I'm your host, Justin Hastings, head of content at White Marble.
• 0:17
  SPEAKER_03: In each episode, I am joined by two industry experts to live on investment marketing issues, challenges, and industry trends.
• 0:26
  SPEAKER_03: Featuring in this episode are Rick Alexander, CEO of the Shareholder Commons, and Becca Logal, marketing consultant at White Marble.
• 0:34
  SPEAKER_03: Over the next 20 or so minutes, we will dive into the topic of stewardship and the responsibility of investment companies to look at the entire market in addition to their own immediate concerns.
• 0:50
  SPEAKER_03: Rick, could you start by telling us a little bit about yourself and the shareholder commons?
• 0:55
  SPEAKER_00: Sure, Kirsten.
• 0:56
  SPEAKER_00: Thanks for having me.
• 0:57
  SPEAKER_00: I wanted to talk a little bit about my career biography because that traces the thought patterns that sort of got us to the work we're doing at the Shareholder Commons.
• 1:09
  SPEAKER_00: I started my career and spent the first 25 plus years as a corporate lawyer in private practice in Delaware.
• 1:16
  SPEAKER_00: I think your listeners may know that Delaware is, even though it's a very small state in the US, most of the big corporations are incorporated there and they use Delaware as corporate law.
• 1:27
  SPEAKER_00: As a Delaware corporate lawyer, my job was to give advice about the relationship between shareholders and companies, and company directors, and company executives, and how that all worked.
• 1:40
  SPEAKER_00: And honestly, the key to that advice was shareholders elected directors, and directors' job was to oversee the management of the company for the benefit of those shareholders and understanding of everybody involved in the system, the lawyers, the executives who heard cases about fiduciary duties, everyone's understanding was that the director's job was basically to make the company as valuable as possible, because that would benefit its shareholders.
• 2:08
  SPEAKER_00: Even if you had a progressive political leaning, the idea was well, governments would regulate and make sure companies protected the environment and workers were taken care of and things like that.
• 2:18
  SPEAKER_00: But the job of company law was to make sure that assets were allocated efficiently.
• 2:23
  SPEAKER_00: And sort of toward the end of that 25 or 26 years, I started to question that, just observing what was happening in the world.
• 2:30
  SPEAKER_00: And I became aware of a nonprofit, an NGO called B Lab.
• 2:35
  SPEAKER_00: And B Lab had a system where they thought companies should have a triple bottom line: people, planet, and profits.
• 2:42
  SPEAKER_00: And they had an assessment to do that, but they also importantly had a legal idea, which was that companies should be incorporated as what they called benefit corporations.
• 2:53
  SPEAKER_00: And the idea was that in a benefit corporation, yes, you worked for the shareholders, but part of that job was maintaining the planet and society on behalf of those shareholders.
• 3:03
  SPEAKER_00: I ended up going to work for B Lab and helping them implement this idea.
• 3:07
  SPEAKER_00: And so Delaware, 30 plus other states in the US adopted a benefit corporation alternative.
• 3:14
  SPEAKER_00: And they started trying to get people to sort of become benefit corporations.
• 3:18
  SPEAKER_00: I really enjoyed that work, but what I found was that once companies scaled and they did an IPO or they took in private equity money, that the pressure from shareholders just went right back to the old traditional maximized value.
• 3:33
  SPEAKER_00: What I began to see was that if you were concerned about that maximization, the key wasn't to fix companies, it was to fix shareholders because shareholders control companies.
• 3:44
  SPEAKER_00: And so out of that, I formed the shareholder commons with the idea of bringing the idea to institutional shareholders that their interests were better served if the companies in their portfolios were more worried about systems than maximizing value at individual companies.
• 4:15
  SPEAKER_03: So what were the particular issues that they raised?
• 4:18
  SPEAKER_02: One of the topics that we were researching was the stewardship and engagement requirements of the UK FRC on signatories to the UK Stewardship Code in terms of how they think about their engagement and their role at this system's level that sits within principle four of the UK Stewardship Code specifically.
• 4:39
  SPEAKER_02: And it's these requirements and expectations around how firms think about how they engage with the system as a whole, how they contribute to well-functioning markets, how they think about what the sort of better version of our system going forward is and how they contribute to that.
• 4:57
  SPEAKER_02: Whilst plenty of people had positive things to say about it and about the process, almost all the smaller firms we spoke to identified real sort of intellectual challenges at this level, almost more than intellectual, just kind of structural roadblocks in terms of how they were trying to think about this.
• 5:15
  SPEAKER_02: And we we moved very quickly away from the premise of the research project, which is one of the challenges in doing the actual reporting, and into conversations around how are we meant to do this?
• 5:28
  SPEAKER_02: We heard a lot of small boutique, micro-boutique firms saying, we're not BlackRock, we're not JP Morgan.
• 5:35
  SPEAKER_02: How are we meant to even think about contributing at a system level when our resources are such that we just about get by running our single portfolio?
• 5:48
  SPEAKER_03: Rick, can you talk a little bit about what it you mean by market-wide and systemic risks?
• 5:54
  SPEAKER_03: Are there particular topics that are the big ones that we should be paying attention to?
• 5:59
  SPEAKER_00: Absolutely.
• 6:00
  SPEAKER_00: I just want to pause.
• 6:02
  SPEAKER_00: Rebecca alluded to principle four of the UK stewardship principles.
• 6:06
  SPEAKER_00: I just want people to understand how, in some ways, radical that principle is compared to traditional investing.
• 6:15
  SPEAKER_00: Everything in the investing world is sort of focused on how your returns as a manager or as an allocator compare to your peers.
• 6:24
  SPEAKER_00: And principle four says, you know, there's something else important going on here.
• 6:29
  SPEAKER_00: There's these market-wide ideas that you're asking me about, Pearson.
• 6:33
  SPEAKER_00: That's a new thing.
• 6:34
  SPEAKER_00: And the reason that we're having this conversation and why it's hard is because it is a new thing that the system isn't fully adapted to.
• 6:41
  SPEAKER_00: And we're all trying to work our way through it, but it's very important because when you ask, what are these things we're talking about?
• 6:48
  SPEAKER_00: Companies, when they make decisions, when they allocate resources, when they decide to pay their employees a certain amount, when they decide to have a certain level of emissions that come out of their production facilities, when they decide to have a supply chain that has human rights elements in it, those all affect not just the price of the goods sold and the profits that the company has, but they affect the systems that undergird our entire economy.
• 7:16
  SPEAKER_00: So they can affect whether or not we have a stable climate.
• 7:20
  SPEAKER_00: They continue to supply us with fresh water, they can affect whether the population is well fed and well educated and therefore productive.
• 7:28
  SPEAKER_00: And those things, they're important from a human perspective because we all want to live on a good planet and treat people fairly.
• 7:36
  SPEAKER_00: But also from an investor perspective, they're very important to investors because company profitability is all dependent on having natural resources and social resources.
• 7:49
  SPEAKER_00: And so when we talk about market wide and systemic risk, we're talking about things that undergird the entire economy on which shareholders go up.
• 8:02
  SPEAKER_03: So businesses often think of stewardship in isolation, focus on the characteristics of companies that they're either already invested in or they're considering investing in.
• 8:12
  SPEAKER_03: So how do they look beyond those genuine issues, if we're fair, and start identifying addressing those systemic risks that you talked about there at so at the share of commons, we start with the with a very simple idea, which is that everybody votes.
• 8:27
  SPEAKER_00: If you have a portfolio, one of the opportunities slash responsibility you have is to vote shares.
• 8:36
  SPEAKER_00: Stepping back, a lot of people when they think about ESG and responsible investing or sustainable investing, they think about security selection.
• 8:44
  SPEAKER_00: They think, well, if I'm worried about climate from an investor perspective, then what I should do is buy the companies that have relatively low emissions compared to their peers.
• 8:54
  SPEAKER_00: And then I'll be somehow either contributing to market signals to lower carbon, or I'll be benefiting because I'll have the people who are ready for the new economy.
• 9:05
  SPEAKER_00: But that, as you say, gets into like picking securities and it's very complicated in terms of how is my portfolio going to stand up to other portfolios.
• 9:16
  SPEAKER_00: And you can have a little bit of a confusion between your performance and influencing outcomes.
• 9:23
  SPEAKER_00: But if you start with voting, if you just take the things that are in your portfolio, these are the things I've decided are best for the asset owners that I'm working for as an investment manager, and you say, okay, those are the things we've decided to own, but we want to make sure that they don't contribute to some of the negative externalities that we think bring the whole market down.
• 9:44
  SPEAKER_00: That's a matter of just simply, when you vote your shares, not only thinking about how the vote impacts the profitability of that particular company, how is it likely to impact the systems overall that affect the market?
• 9:57
  SPEAKER_00: And importantly, what I want to keep in mind here is that under modern investing principles, everybody's diversified.
• 10:05
  SPEAKER_00: It's often a requirement for fiduciaries that they diversify their portfolios.
• 10:09
  SPEAKER_00: But once you have a diversified portfolio, the single most important factor as to the absolute performance of that portfolio is going to be how the economy performs.
• 10:18
  SPEAKER_00: And so, as a fiduciary, you can keep your fiduciary promise and act on behalf of your shareholders and vote the shares in your portfolio in a way that's consistent with preserving the climate and aquifers and forests and social institutions because those two are very closely correlated.
• 10:36
  SPEAKER_00: What we think the simple idea is just like start with your vote.
• 10:42
  SPEAKER_03: One of the things that we've had fortunately quite a bit of success with White Marble is supporting companies through doing the FRC's UK stewardship code.
• 10:52
  SPEAKER_03: Becca, you've worked on a fair few of these projects.
• 10:55
  SPEAKER_03: Companies often find principle four and also the principle with which relates to voting, which unfortunately escapes me at the minute, quite difficult to complete.
• 11:05
  SPEAKER_03: Do you think that's fair to say?
• 11:07
  SPEAKER_02: Yes, it definitely is.
• 11:08
  SPEAKER_02: And it's definitely something that firms struggled with more in the first couple of years post the updated version of the stewardship code in 2020.
• 11:19
  SPEAKER_02: We talked about earlier and the challenges that that presents, particularly for smaller firms who just trying to get their head around this and find the resource requirements and maybe being slightly scared off from it.
• 11:30
  SPEAKER_02: And I think a lot of what Rick has shared hopefully gives some food for thought to those sorts of firms in terms of how these issues of system level challenges can be addressed kind of more in the day-to-day of the business, rather than feeling like they need to have a big additional resource allocation to address them.
• 11:47
  SPEAKER_02: A lot of small firms, as you alluded to, also challenge with some of the voting reporting.
• 11:53
  SPEAKER_02: I think the FRC would, in an ideal world, like full transparency on how firms vote on every one of their holdings.
• 12:00
  SPEAKER_02: Again, we heard a lot of small and boutique firms saying, and I'm paraphrasing, but pretty much, well, if you're BlackRock and you disclose all of your votes, that's fine because you're so big that you're probably holding most of the investment universe across your range of products.
• 12:17
  SPEAKER_02: So you can share that information without kind of giving away what they might see as their intellectual capital.
• 12:23
  SPEAKER_02: When we're talking to firms who run a single strategy, some of them have actually decided, taken the decision not to disclose their voting record because if they want run one strategy, they disclose every single vote they've made.
• 12:36
  SPEAKER_02: They're effectively disclosing their portfolio.
• 12:39
  SPEAKER_02: And for them, they take the view that actually it's in our clients' better interest that we don't share our full portfolio breakdown.
• 12:46
  SPEAKER_02: That's essentially our investment approach.
• 12:47
  SPEAKER_02: If we share that, then we haven't got much that we're holding back that's only available to our clients who pay us fees to manage the portfolios on their behalf.
• 12:57
  SPEAKER_02: The other area that has continued to be a challenge and definitely was a challenge in the first couple of years under the new code was the expectations around reporting on specific engagements.
• 13:08
  SPEAKER_02: And I'm straying more into those kind of what you might think as more traditional engagement, one-on-one grouping, uh collective engagements with individual holdings on particular issues.
• 13:19
  SPEAKER_02: And the for those familiar with the new version of the code, they'll they'll know that the big difference there was the shift of focus on outcomes.
• 13:26
  SPEAKER_02: That just saying our intention is XYZ, we want to engage on X to achieve Y is now absolutely not good enough in the FRC's eyes.
• 13:37
  SPEAKER_02: And the expectation, the requirement is that firms very much show what they have achieved.
• 13:44
  SPEAKER_02: Time frames can sometimes be tricky from that perspective because reporting is annual and some of these engagements are very long term, particularly because if you are a debt investor, for example, and you're engaged at corporate or sovereign level debt, you're not going to move the dial in a 12-month period.
• 14:02
  SPEAKER_02: It's very unrealistic.
• 14:04
  SPEAKER_02: One of the key things I think to take away, particularly for anyone who's kind of starting out and maybe they're reporting for the first time this year, or this is their second year, is that the FRC really value continuity.
• 14:15
  SPEAKER_02: They really want to see the update on last year's report.
• 14:20
  SPEAKER_02: So if you start, you know, reporting on engagement for the first time last year, it's ongoing, but you've had more conversations and the DAL has moved a tiny bit.
• 14:28
  SPEAKER_02: They would like to see that update and see the progress that you've made.
• 14:32
  SPEAKER_02: The other thing is to not be afraid to include failed examples.
• 14:37
  SPEAKER_02: Stewardship reports are not just about look at where we've made a difference in the world.
• 14:42
  SPEAKER_02: It's an unrealistic expectation that every single engagement activity will have had a positive outcome.
• 14:48
  SPEAKER_02: Plenty will have gone nowhere, and some may have resulted in, well, they didn't do anything, we had to divest because we asked and we asked and we asked, and they were adamant that they weren't going to make a difference.
• 15:00
  SPEAKER_02: That is just as valuable and just as interesting and important, I think, to the FRC and to end clients, future clients.
• 15:09
  SPEAKER_02: A lot of the intention around the reporting requirements is all about transparency and understanding processes.
• 15:16
  SPEAKER_02: And we all know that no process has a hundred percent success rate, right?
• 15:19
  SPEAKER_02: So showcasing some of the more challenging areas is also very much under the remit of these reporting standards.
• 15:30
  SPEAKER_03: These organizations, these bodies that people can join, whether you become a UK Stewardship Code Signatory or you join up with the PRI, these are not small things for companies to commit to.
• 15:42
  SPEAKER_03: So, Rick, do you think you need to be a signatory to one of these organizations or a member of one of these bodies to be considered an official system steward?
• 15:52
  SPEAKER_01: And harping back to what I said earlier, everybody votes.
• 15:56
  SPEAKER_00: Everybody is a system steward, whether they want to be or not.
• 16:00
  SPEAKER_00: The real question is whether they're a good system steward.
• 16:03
  SPEAKER_00: Being conscious of the impact that you're voting and engagement and other tactics, being conscious of the impact those things have on systems as opposed to individual companies doesn't require belonging to any particular organization or meeting any particular code.
• 16:25
  SPEAKER_00: Of course, joining organizations and following codes may give you resources or accountabilities that make you better stewards.
• 16:33
  SPEAKER_00: And I think that's probably true of both of those examples, but not necessary.
• 16:39
  SPEAKER_00: One thing I want to kind of respond to, it's so interesting to think about what Rebecca said with respect to the UK stewardship code looking for instances of individual managers being successful.
• 16:57
  SPEAKER_00: We have to be careful in how we judge this kind of system stewardship.
• 17:01
  SPEAKER_00: Our whole system is set up to think about the individual success of players in the system, whether they are corporates or asset managers or asset owners, how do they do compared to their peers?
• 17:15
  SPEAKER_00: And what really makes system stewardship ultimately work is when people recognize that we're raising the tide.
• 17:23
  SPEAKER_00: So all boats are lifted.
• 17:25
  SPEAKER_02: I think that's a really interesting point.
• 17:28
  SPEAKER_02: And um, I was part of a conversation just before Christmas, actually, where Benji Elson, who's head of sustainability here at White Marble, described it in a way that I think is quite interesting, which is that there's a degree of humility that's needed for collective action that is actually at odds with the kind of traditional mindset of our industry.
• 17:50
  SPEAKER_02: We're moving from an era where performance has been king, the kind of star manager culture of the noughties, this whole atmosphere is a very different attitude to the kind of humbleness and humility that's needed to recognize that bigger picture challenge, as you say, Rick, and then kind of get past that tension.
• 18:10
  SPEAKER_02: Do you think that the asset management industry, you know, across the Atlantic, is it a mature enough industry to really tackle those issues?
• 18:17
  SPEAKER_02: Or do you see that there's still some challenges of kind of individual company level egos that are holding firms back from really engaging with those big issues?
• 18:26
  SPEAKER_01: I don't know the answer to that question, but I do know that we have no choice but to try.
• 18:42
  SPEAKER_03: Are there any resources that the Shareholder Commons could share that could help them on that journey?
• 18:47
  SPEAKER_00: Just so people know, and I don't think I really explained this at the beginning, the the Shareholder Commons, we're an NGO.
• 18:53
  SPEAKER_00: We're completely supported by philanthropy.
• 18:55
  SPEAKER_00: We kind of consider ourselves a service provider that doesn't take fees, and we have a set of investment beliefs that are available on our website.
• 19:03
  SPEAKER_00: So people can look at those so that they can sort of think about making sure that they're aligning their portfolio voting or the mandates for portfolio voting with systemic and portfolio outcomes rather than just individual company outcomes and alpha.
• 19:17
  SPEAKER_00: This proxy season, the 2024 proxy season, we're gonna have a publication that'll come out early or mid-March called Portfolios on the Ballot, where we're gonna flag opportunities where proponents of either vote no campaigns or proposals, gonna be mostly US based this year, where the proponents of an initiative have specifically argued that one of the reasons they're asking shareholders to vote on a climate issue or on a human rights issue is to support the value of the systems that underlie diversified portfolios.
• 19:52
  SPEAKER_00: You can go to our website and sign up for that.
• 19:55
  SPEAKER_00: And you'll get the big one.
• 19:56
  SPEAKER_00: And then every two weeks we'll put out an update so you'll see the meetings that are coming up, and you'll also get our our newsletter.
• 20:02
  SPEAKER_00: We put out a newsletter every month that talks about ways to sort of shift to this way of doing stewardship.
• 20:13
  SPEAKER_03: And finally, are there any thoughts or tips that you'd like to share with our listeners, Rick, that we haven't had a chance to cover today?
• 20:21
  SPEAKER_00: I think the most important thing, and and I'm I'm sure your listeners have thought about this, is maintaining that relationship between allocators and investment managers and having a real understanding of what allows allocators to meet their needs.
• 20:38
  SPEAKER_00: So if you're a pension fund and you've got 40 or 50 years of liabilities ahead of you, what matters is going to be the absolute performance of your portfolio, not the relative performance.
• 20:50
  SPEAKER_00: The most important thing a manager can do is use some of their governance rights to maintain these systems so that we have an economy that over time delivers value.
• 21:00
  SPEAKER_00: I'll just give you one example.
• 21:01
  SPEAKER_00: So GIC, the Singapore Sovereign Wealth Fund, they released a study last summer and they sort of show that if we stay on the trajectory we're on with respect to carbon emissions rather than the Paris Aligned, then your average 60-40 diversified portfolio will have 30% less value 40 years from now.
• 21:23
  SPEAKER_00: And if you think about a 30-year-old worker, that's the difference between they're running out of money uh in retirement or Eca, what about you?
• 21:33
  SPEAKER_03: Any final thoughts or tips that you'd uh like to leave our listeners with?
• 21:37
  SPEAKER_02: I think on the kind of how do you then report on all this good work that you're all going to go off and do using Rick and the Shareholder Commons' resources to reiterate this point about what transparency in reporting actually means.
• 21:51
  SPEAKER_02: And it doesn't just mean here's the kind of best bits, the greatest hits.
• 21:56
  SPEAKER_02: It means showing what's worked and what hasn't worked, where we've tried an approach and it's not really got the results that we wanted, maybe.
• 22:04
  SPEAKER_02: And so we've gone and we've tried something else.
• 22:06
  SPEAKER_02: No one is expecting any given firm to have all the answers, particularly, you know, having the confidence to talk about what you've tried, what's been successful, and what you've learned from mistakes is really, really important.
• 22:19
  SPEAKER_02: And also, I think greatly valued by clients, prospects, investors across the board, because it's not just trying to pretend that everything's perfect and shiny.
• 22:30
  SPEAKER_02: We're kind of seeing this move towards honesty.
• 22:33
  SPEAKER_02: We're not just saying this is what we'd like this scenario to be.
• 22:37
  SPEAKER_02: We're saying this is what it is, this is maybe where we want to be, and this is what we're doing to get there.
• 22:41
  SPEAKER_02: And I think that's really, really important.
• 22:46
  SPEAKER_03: And that brings us to the end of our 20 minutes.
• 22:48
  SPEAKER_03: My thanks to Rick and Becca for sharing their insights and expertise.
• 22:53
  SPEAKER_03: If you have any questions about how companies can be system stewards or any other topic in this podcast, please do get in contact using the details in the description.
• 23:02
  SPEAKER_03: You can subscribe through Apple, Google, and Spotify.
• 23:06
  SPEAKER_03: If there are any topics for investment markets you would like to intend to cover, please do get in touch.
• 23:12
  SPEAKER_03: You can also find episodes from our earlier podcast in High on Google, Apple, and Spotify.
• 23:18
  SPEAKER_03: Thanks for listening, until next time.