Montagnon defines investor engagement

There is scope for European legislation directing asset owners who issue mandates to service providers in Europe to say that they have “thought through” what they want their asset managers to engage with companies on, ICGN conference delegates heard.

Peter Montagnon, senior investment adviser of corporate governance at the UK Financial Reporting Council, says there needs to be improvement on the integration of investor engagement with corporate governance and corporate decision-making. He says the stewardship code is a vehicle for empowering asset owners to tell their managers what to focus on with regard to corporate governance, but there was scope for European legislation to this effect.

Montagnon was part of a panel discussing whether there is a “return on engagement”.

“Investors need good long-term sustainable returns and there is a better chance of doing that if you engage,” he says. However he did point out the reputation of institutional investors with regard to engagement was hindered by the recent vote in favour by investors of the Royal Bank of Scotland’s takeover of ABN Amro.

Speaking from the floor, chairman of GMI Ratings, Rick Bennett, asked whether the question of a return on engagement should be more on the expense side rather than return side. “The question is not whether there is a return on engagement, but is it a sufficient return for those doing the engagement? The question should be on the expense side, who’s paying for it? The return goes to everyone, so there is a free rider problem.”

Montagnon says this was an excuse that asset managers use and that it “makes me upset”.

“Your duty is to act in your clients’ interest and if that costs you then that’s part of it. Managers spend a fortune on dealing commissions without ever questioning it. When asset owners issue mandates, maybe they should outline how much they are willing to spend on dealing commissions and some of that money could go to corporate engagement.”

Montagnon says generally there is an overemphasis on executive remuneration with regard to corporate governance issues and there should be more time spent on issues of strategy, audit committees and risk.

“Stewardship is not about big rows about remuneration. It’s a pity the focus is so strongly on remuneration. You don’t get good long-term quality relationships with a company if all you talk about is remuneration,” he says.

Neither is stewardship about ESG, according to Montagnon.

“Stewardship is not about opening a door to a social policy. ESG is important but the primary purpose of stewardship is to get a deeper understanding with and between companies about risk management and decision-making, and a relationship with board and management,” he says. “We have loss sight of this, with too much emphasis on deal making, trading and short-term profits.”

Asked to vote on the most important engagement issue between companies and investors, 65 per cent of the audience said strategy, 30 per cent said risk management, and 5 per cent said remuneration.