Connecting stakeholders with (their) capital
- Charlotte Black
“The market is a good servant – but a bad master” Lord John Eatwell
Introduction
Capitalism is a vital and positive force and the future of nations and citizens depend on its continuing success. However, trust and confidence in corporate governance has been eroded and a chasm opened up between business and its wider stakeholder base. The failings of corporate governors and the long complex supply chain between savers and their underlying shareholdings both contribute to this burgeoning discontent.
The disaffection with UK plc and globalisation more generally, stems from too little corporate engagement with investors, employees, suppliers and customers. The ever-widening pay gap and the apparent one rule for the boss and another for everyone else deepens the fault line. The only shareholders who have the opportunity to take any action are institutional, but they are under short term pressures and often in the same pay band as the bosses they are meant to police, while savers in the ISAs and Pensions they manage have no direct relationship with UK plc – so there is a need to reconnect.
These grievances add fuel to an ominous anti-capitalist insurgency. How do we make business and bosses more accountable and the rest of us aware that we are all stakeholders and that it is in all our interests for business both to safeguard the planet and to flourish?
Today three quarters of all households in the UK have some form of invested savings and now through auto-enrolment, one of the most promising Government policy achievements in recent times, all working people have a stake in UK plc and should be able to give a view on how it behaves. With fast developing technology and the modern mobile labour market, auto-enrolment should enable a pension pot to follow workers from job to job with a single valuation on their phone, showing the principal shareholdings in their pot. Savers could then be aware and shop accordingly, e.g., Vodafone not Sky, Tesco instead of Morrisons – or vice versa – as well as responding to polls on ‘their’ CEOs’ pay, their company’s policy towards net zero emissions or other matters of corporate behaviour.
Such facilities could be a short time away with new smart technologies and will not require complex legislation or regulatory box ticking or even the massive Pensions Dashboard that Government and industry is trying to build; but just postponed again to 2023 having promised it in 2019. Technology could enable us all to put up or shut up on corporate governance matters and dent the arguments for more coercive and restrictive practices – the antithesis of the free market. Encouraging such engagement and transparency will motivate saving and support the fundamental freedoms that allow business to develop, while influencing its social and environmental policies.
Shareholder power and executive pay
Following political and media pressure the message on executive pay is getting through to its relatively small audience of interested professional investors. BlackRock, one of the world’s largest investors, does not support the re-election of board directors who fail to rein in outsized pay packets unless workers’ wages increase by a similar quantum. This and similar stands taken by Standard Life Aberdeen and other institutions, are arguably more powerful than any rules or regulations.
Nonetheless, there is a need to broaden engagement beyond the narrow cohort of institutional shareholders.
We have for some time been experiencing reduced confidence in the institutions and corporations that shape our society and COVID-19 has exacerbated this – so government must re-contract with citizens and business engage with stakeholders to deliver solutions for these concerns.
Existing rules and new opportunities
Setting aside the complex and flimsy corporate governance obligations of institutional investors under the FRC Code. It is only when significant numbers of savers and investors are given a role in governance that the tide will turn and fund managers have to take more account of the views of their customers, while the media will have an incentive to express opinions to a large and receptive audience at last.
There is no wish to undermine the existing nominee custodial arrangements which is the only cost-efficient method of share ownership for small savers and investors. Equally, there is no point in enhancing the rarely used proxy arrangements introduced in 2006 – for which there is little appetite as they are cumbersome and expensive.
Now a new form for stakeholder engagement and communication needs to be developed and is possible using smart technology.
It could work like this: savers’ annual ISA or pension statement includes a free offer to register to ‘vote in a poll’ or ‘to have your say’. Savers sign up for alerts on their PC or phone from the FTSE 100 and 250 companies held within their pension or investment product. They then receive a simple polling card ahead of the AGM – e.g., to approve Directors’ pay awards, dividends and ESG policies and vote For or Against in a ‘one man one vote’ advisory poll and press send.
The facility could be extended by companies to their employees and other stakeholders of both public and private companies.
‘Votes’ will be aggregated and supplied to registered shareholders and Board before the AGM, after which the poll results will be published alongside the registered shareholders’ actual votes. The registered shareholders will either comply with poll ‘advice’ – or explain why not.
Pension providers should develop an auto enrolment account that employees can take with them from job to job, with tools to show how increasing their savings will enhance their pension at retirement. Together with these stakeholder services, such a platform could energise savers and encourage them to bring all their savings into one service, as should soon be possible under the Open Finance project.
Savers and pensioners put up their savings as risk capital for business and potentially for national or local infrastructure projects and they should be treated as valued investors.
This ‘enfranchisement’ of even a proportion of the 12m individuals in equity related savings products today and the increasing millions more through auto-enrolment, could be akin to the 1980’s sale of council houses in terms of its political awakening. Indeed, Unilever has just announced that there will be an Advisory Vote at its 2021 AGM on its net zero by 2030 policy. Mark Carney also believes that investors could have a vote on a companies’ climate plans – to “establish a critical link between responsibility, accountability and sustainability.”
There are nonetheless challenges as well as opportunities within this proposal:
A new form for stakeholder engagement and communication needs to be developed and is possible using smart technology.
- Encouraging underlying savers and investors participation – who are notoriously hard to engage and there will need to be a pilot to test public appetite.
- Legacy contracts – always a challenge to any systems development.
- A complex data matching project, but well within capabilities.
- Costs – though more of an opportunity for data gathering and mapping.
- Legislation – none should be required as polling would be purely advisory – though political will and support would be a vital ingredient and a spur to the development of a pilot. ‘Votes’ would not be binding and no challenge to Company Law, they will be aggregated and anonymous – it will be their publication that wields the power.
- Regulation or voluntary? All voluntary. Any mandatory requirements will add more complexity with the need for audit trails of huge data – adding inexorably to costs. As the ‘vote’ or poll is advisory, votes will be cast anonymously – it will be publicity and peer pressure that steer Boards’ strategy and behaviour, rather than another tick box exercise.
Strengthening the employee, customer and wider stakeholder voice
Companies including private companies could freely provide such a service to their wider stakeholders. Both public and private corporations are aware of growing disquiet and the new populism that threatens them; their attempts to appear more local and in touch are increasingly apparent through their social media feeds. Boards will soon know if their policies are unacceptable or just misunderstood and be keen to address any concerns, for fear of poor publicity.
The right combination of high standards and low burdens
The key principles at the heart of UK corporate governance – that is unitary Boards and shareholder rights and the voluntary nature of comply or explain, with its high standards and low administrative burden – will each be enhanced by broader inclusion of other stakeholders’ views.
We can’t turn the clock back on global capitalism, it slips around the world with ease, but we can enable savers, employees and consumers to have a say in how it performs.
The awakening of registered shareholders (institutional investors and pension trustees) acting on behalf of millions of smaller investors, savers and pensioners in both passive and active funds, should result in more consideration of their responsibilities and engagement with their underlying customers; while these customers will realise that they do have a stake and it is in their interests that the companies in which they are invested do well, safeguard the planet, make profits and employ the very best talent.
We can’t turn the clock back on global capitalism, it slips around the world with ease, but we can enable savers, employees and consumers to have a say in how it performs. Post-COVID, governments must re-launch capitalism making it more engaging and accountable – to save it from anger and mistrust.
Globalisation is not pernicious as claimed; it is a remarkable force for the broadest prosperity. But while business wields such economic and cultural power it must do so not only for the benefit of its shareholders, but also for its staff and customers, society and the planet – and now interactive technology can make it do so.
To read the full 'Banking on building back better' joint essay series with the Social Market Foundation, click here.