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Engaging for Godot?

Investors should be made to engage – or so it has been suggested. Speaking at last week’s CEIOPS conference (Committee of European Insurance and Occupational Pensions Supervisors) Patrick Brady, chair of the Joint Committee on Financial Conglomerates (JCFC), aired the idea that institutional investors should be mandated to engage. Coming in the week before the publication of the eagerly awaited Walker Review, the timing of Brady’s comments will certainly have raised a few eyebrows with his idea that institutional investors should be made to follow pre-set guidelines determining how they oversee larger holdings in their portfolio.

Whilst not a formal proposal, Brady was speaking at a panel debate, it elicited a spirited response from Eddy Wymeersch, Chair of the Comittee of European Securities Regulators (CESR). Wymeersch countered that there is a lack of definition as to what engagement role investors should be expected to take and that it would not deal with the problem of other shareholders ‘freeriding’ on the good work of a core few. He also pointed out the inappropriateness of a ‘one-size-fits-all’ approach to corporate governance standards where practices frowned upon in some countries may be perfectly acceptable in others, such as, for example, the debate about joint Chair/CEO roles.

This is not far from what we might see if Samuel Beckett were asked to satirise the current Responsible Investment debate – two arguments combining to form a single discussion in spite of each other. On the one hand, an idea which is positive in intention but could create a multitude of unintended consequences which mask the original spirit – you can take an investor to a boardroom but you can’t make them engage (and nor should you if that’s not their strategy). On the other, a lack of definition is an opportunity for investors to refine their own approach; others free-riding is a lower risk than not engaging because at least you can be satisfied the engagement work and the benefit is still yours just as much as anybody else’s; if one size does not fit all then it is all the more incumbent upon shareholders to understand the investment strategy they are pursuing.

So where’s the common ground? Engagement, carried out in the right way, is clearly a valuable tool which enhances return. It is a fragile thing which needs nurturing and its own place to grow. The Godot in the plot is perhaps the notion that engagement is, per se, the solution. As a means to an end (stronger companies) it is a necessary part of the equation – Brady echoes the points made on these pages in recent months past that there had been “little interference by institutional investors at companies’ general meetings”.

If there is a danger to be highlighted here it is perhaps in the over-emphasis on the importance of engagement as one of many ownership tools at shareholder’s disposal. An understanding of its value – and its place in the wider governance process – is certainly a more healthy perspective to retain.

What do you think?