I keep chickens. Three gorgeous ladies, called Teapot, Marmalade and Sugarlump. They provide copious eggs for my breakfast table, assuming the conditions are right. I am a diligent feeder and talk to them regularly, but am shamefully remiss when assessing the safety and integrity of their coop and checking for beasties in their ears, unless something is obviously wrong, and by then it is usually too late.
Chicken management is like portfolio management. Companies tend to perform well when they are healthy, well-managed and there is a healthy and robust environment in which they can operate. For this reason, investors must be mindful of the health of the wider global economic and financial system in which they operate. At Hermes EOS, our engagement programme does just that. We work to promote good stewardship of clients’ assets, but also the health of the wider system in which they operate. We want a system that acts in the interest of its principals rather than its agents. To do this, we:
- Encourage reliable legal and regulatory frameworks: By intensifying dialogue with legislators and regulators, we encourage reliable legal and regulatory frameworks which provide transparency, afford equal rights for investors and protect minority interests, for example through controls on related party transactions.
- Support continued improvement in corporate governance: The development, review and continuous improvement of Corporate Governance Codes in various markets are essential as our economies develop. Key aspects of such codes should be guidance on constructive dialogue between investors and directors to enhance accountability and information exchange and the investor role in the director appointment process. We also seek innovation in the development of best practice in enhanced audit committee and auditor reporting in the UK and elsewhere.
- Promote active investor stewardship: We engage with regulatory authorities and standard setters globally to develop country specific Stewardship Codes, which encourage investors to be engaged owners of the investee companies, for example, in Singapore, Denmark, Sweden and Taiwan.
- Advocate high quality and holistic reporting: We push company reporting that provides investors with a clear articulation of the performance of the underlying business and communicates the factors that materially affect the ability of an organisation to create value over time, for example, by promoting integrated reporting with key regulators and companies we engage with around the world. We will continue to support initiatives, such as the International Integrated Reporting Council, which promote company reporting on material sustainability issues.
- Focus on the long term: We continue the dialogue on long-termism and the efficiency of the financial system with key regulators and legislators, for example, the European Commission and the ongoing clarification of fiduciary duty by constituents of the investment chain – led by asset owners – to include the identification and management of long-term risks, including those related to environmental, social and governance issues.
- Encourage greater alignment of interests: We encourage better alignment of the terms in fund manager contracts with the needs of asset owners and their beneficiaries, including on performance measurement, use of benchmarks and compensation, for example, by promoting the key messages of the Model Mandate Initiative of the International Corporate Governance Network. We also seek to bring about innovation through the way we work with clients.
Back to my breakfast table and to Teapot, Marmalade and Sugarlump. I start the year knowing that their chicken coop is clean and intact, the vet has given the all clear and the ladies are healthy and safe, for now. This year will no doubt bring plenty of surprises and it is important that we remain vigilant so that we are well-placed to respond to them as they arise. This is especially true given the dynamic, complex and inter-connected nature of today’s global economic and financial system.