L&G is holding investee companies to account. Others should take note

The bad behaviour of some corporations during the coronavirus outbreak has emphasised the need for big investors to act when executives make crass decisions, writes James Moore

The coronavirus has put a spotlight on corporate behaviour (AFP)

Were companies behaving worse than ever prior to the coronavirus outbreak (when some of them have frankly excelled themselves with their awfulness)?

That’s an interpretation you could put on Legal and General Investment Management (LGIM) voting against the election of more than 4,000 company directors and steaming in against 35 per cent of executive pay packages globally, as detailed by its ninth annual “Active Ownership” report that was published on Wednesday morning.

However, the governance team at the fund manager told me that interpretation is incorrect

They said that they think lots of companies are trying to do better. But they’re nonetheless upping the ante, and asking for more, not least because that’s what clients want.

And we do (for the record I have a number of L&G funds in ISAs).

The flaws in the Anglo Saxon “capitalism red in tooth and claw” model were becoming ever more obvious even before the coronavirus outbreak. It doesn’t serve society, but it doesn’t often serve shareholders very well either, at least those shareholders with the time horizons of more than five minutes.

There is, for example, scant evidence of a link between high executive pay and corporate performance, so over stuffed executive pay packages simply serve to pour shareholders’ money into the pockets of people who don’t deserve it.

If you treat staff poorly and pay them badly they won’t work well. There’s a reason employers that have become accredited by the Living Wage Foundation (something LGIM says it has been pushing others to do) report economic benefits from so doing.

Long term, the climate crisis will crimp investment returns by a far greater amount than even Covid-19 has managed. And so on.

Progress on these issues, and others, requires big investors to act in their clients’ interest and use their voting power to force the issue.

This shouldn’t be read as hagiography, mind. There are areas where LGIM could, and should, do better. It’s been pushing for more employee representation, for example. But it isn’t yet calling for worker directors, and only a handful of UK companies have appointed them.

L&G, as a group, isn’t setting the best example here, by assigning a non-executive director to represent employees rather than allowing its staff to elect a director themselves.

Non-executive directors don’t always do a terribly good job for shareholders, who nominally hire them to represent their interests, as LGIM’s voting against those 4,000 directors rather shows. The one appointed by L&G may take their role seriously. For too many, however, it’s a tick box exercise.

But in general, LGIM’s activity is welcome, and serves as an example that too few of its peers are currently following, particularly those outside of the UK and Europe (although there are plenty of laggards here too).

L&G has made its name as a passive fund manager, which means that its funds aim to “track” the performance of particular stock market indices. These are becoming more and more popular because they’re much cheaper than the actively managed offerings run by stock pickers. They mostly perform better too.

It’s often said that the stock pickers come into their own during downturns. The FT, however, yesterday reported on growing evidence that they have flunked it. Again.

But the problem with “passive” management is that some notable players in the sector think that it means sitting back and leaving executives to their own devices on the grounds of keeping costs low.

Marrying passive management with active engagement does serve to increase costs. It is, however, a price worth paying.

Leaving corporate executives to their own devices will ultimately serve to damage investment returns, and potentially the planet too. As a strategy it’s fundamentally unsustainable.

The coronavirus outbreak has only served to further emphasise the point. While some businesses have done praiseworthy things, others have behaved disgracefully, and sparked anger at a potentially dangerous time. Engaged shareholders can play an important role in nipping these sort of problems in the bud. It’s in their interests to do so.

LGIM is therefore setting an example others should follow. But it should nonetheless keep on raising that bar.