Various fund managers have owned up to being a bit pathetic when it came to challenging powerful banking figures. They have been roundly castigated by the likes of Lord Myners and Hector Sants for their failure to act as responsible owners, and cannot expect to escape notice in Sir David Walker’s review of corporate governance in the banking industry when that is published later this week.
No doubt they could and should have been a bit less accommodating of banks’ plans for world domination, but in the end there is limit to the sanction they can apply. Passive trackers, which probably hold the biggest stakes, cannot threaten to sell, and active managers rarely hold large enough stakes to make selling much of an issue for a company.
The fact that passive managers cannot sell is why they need to engage with companies – and generally do so. If better-run companies equals higher-rated companies, they have an interest in making sure boards or chief executives are not pursuing high risk strategies likely to end in tears. But engagement is expensive - which is why it is no surprise that active managers often prefer to sell or go underweight in shares of companies they do not think are being run well.
I raised this with Rupert Clarke, chief executive of Hermes, manager of the BT Pension Scheme, who agrees it is a difficult issue for asset managers. There is an immediate cost to running an engagement programme, which is not reflected in an immediate return, either in terms of performance and performance fees or in terms of profitability.
He estimates the cost at about 1 basis point, which may not sound much but is significant when applied to billions of pounds of assets under management.
Hermes is in the unusual position of being owned by a pension fund with the view that being a responsible owner will pay off in the long term, and prepared to invest in a team of 26 devoted exclusively to engagement and governance issues. Mr Clarke reckons that is the biggest such resource in the world. It would be hard for others to build a similar resource, he says, but hey – Hermes will provide engagement services for third parties. Indeed, it acts for nine clients already.
He believes pension funds are keen to be responsible owners, but asset managers are less enthusiastic because of the cost. Pension funds should demand to know what resources fund managers devote to engagement before they hand out mandates, he says.
It looks as if Hermes is well-placed to benefit from any demands regulators decide to make on institutional shareholders to become more responsible owners. Will other fund managers follow its lead?