the rise of passive investing and activism, esg, brexit ......the rise of passive investing and...

34 IR SOCIETY

INFORMED IR POLICY

The rise of passive investing and activism,ESG, Brexit and political uncertaintyNot only is the UK in the midst of political turmoil, the global economy is also changing significantly. James Jarvis looks at the seismic shifts in the corporate world, and what you can do to avoid becoming extinct.

Darwin once remarked that thesurvival of a species was not down

to strength or even intelligence, but dueto the ability to adapt to change.Likewise, businesses who are best able toadapt to the maelstrom of change todayare the ones most likely to be aroundtomorrow.

These changes range from macroheadline issues, such as Brexit andclimate change, through to nitty grittyregulatory changes and the evolvingnature of investment, all of which arepresenting new dynamics for boards tograpple with.

Multifaceted and uncertainStarting with the B-word, here thepotential for disruption is as multifacetedas it is uncertain. While the word itselfhas been echoing through Whitehall andboardrooms for what feels like an eternity,whatever the end reality actually is willhave an affect not only on organisations’operational endeavours, but also on the

regulatory environment they sit within.With the City of London’s crown nolonger guaranteed and with jurisdictionsacross Europe and beyond vying for thethrone, there is a knock-on risk to theUK’s hard-won position as a leader ingovernance standards and investorprotections.

Relaxing of rulesAs was seen in the recent move to alterlisting rules for sovereign controlledcompanies here in the UK, there is alwaysthe temptation to tinker with standards inorder to attract new business. Regulatory‘loosening’ is already occurring in otherjurisdictions in a bid to woo issuers; HongKong and Singapore have relaxed their‘one share one vote’ requirements, andover in the US the Trump administration isalso making overtures to business via theremoval of regulation.

While a shift in such fundamentaltenets of investor rights may seemimpossible in the UK, the temptation to

cede to the demands of the nextgeneration of companies could proveirresistible.

Changing investor climate Meanwhile investors themselves arefeeling the spotlight shift onto them afterseveral years in which regulators andpolicy makers have been fixated on theboard. The launch of the revisedStewardship Code in the UK will increasethe pressure to evidence both the actionsand results of investment stewardship. Inaddition, mirroring developments wehave seen on the Continent, culture andpurpose have found their way across fromthe main code and feature throughout theproposed document.

This comes at a time when two distinctschools of investment are both growingand converging – the passive index fundand the activist hedge fund.

Activist activity in Europe has beenheating up over the past few years and itis perhaps the changing nature of both thetactics deployed and the size of thecompanies targeted that is interesting toobserve. The language of corporategovernance is being increasingly usedalongside the usual financial focus onshareholder value and huge householdnames are finding themselves to be fairgame for such approaches.

In addition, the clear willingness ofother investors to work alongside these

THE RISE OF ACTIVISM• 85% of UK investors say they are

willing to work alongside activistinvestors.

• Activists are increasingly usingcorporate governance as a tool toachieve their aims.

• Activism is on the rise in Europe. • A company’s governance and equity

story is only as convincing as theunderlying framework on which itrests.

Two distinct schoolsof investment areboth growing andconverging – thepassive index fundand the activisthedge fund

‘

’James Jarvis is director of corporate

governance at D.F. [email protected]

35IR SOCIETY

IR POLICYSPRING 2019

funds (some 85% according to the latestannual Edelman Institutional TrustBarometer) shows the changing marketperception of the ‘corporate raider’.Faced with their superior returns to moreclassic investment strategies, passivefunds regularly invest a portion of itsactive investment with activist investors.

While other investors may be showing apropensity to work with or indeed mirrorsome of the tactics of activists, policymakers on the continent are waking up tothis perceived ‘threat’. France recentlyannounced they would be investigatingactivist funds and other jurisdictionscould well follow suit.

Trillion-dollar investorsOn the other side of the coin, while theindex fund is often heralded as one of thegreatest innovations of modern finance,the exponential growth of their size andinfluence is also beginning to causeconcerns in some corners as its adventhas created the “Trillion-dollar investorclass”.

Even the late John Bogle, the father ofthe index fund, in his later yearsquestioned the wisdom in a foreseeablescenario where a small concentration ofthese funds have such an influence overso much of our equity markets.

Use the right toolsHandling these multiple and ofteninterlinked changes are companydirectors and those that serve aroundthem. How they incorporate the differingpriorities of distinct investmentapproaches, react to regulatory changesand embrace the opportunities whichtomorrow brings will in large part definewhether the companies they work for willsurvive into the next decade and beyond.

Obvious though it may seem getting thestrategic, commercial and financial basicsright will equip companies with potenttools to do just that.

Company purpose, organisationalculture and the values that underpin all ofthese are coming of age in corporatediscourse and marrying these with yourstrategy is as good a start as any to dealwith forthcoming change.

A company’s governance and equitystory is only as convincing as theunderlying framework which assures it.Once in place it is far easier to convincestakeholders of the merits of anynecessary adaptation. ■

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