Andrew Cave, Baillie Gifford
‘Governance 2.0’ – evolving engaged ownership
We are approximately 25-30 years into ‘professionalised governance’ as a recognisable discipline. This has been driven by the rise of institutional investment, an accompanying shift from fixed income to equities, and latterly by increasing regulatory and societal expectations placed on asset owners and managers to demonstrate ‘good stewardship’. The time has now come to move towards more engaged ownership and case-by-case company research, rather than the convenience of ‘one size fits all’ input templates. ‘Governance 2.0’ is going to have to be much more about quality rather than quantity.
The different branches and layers of ‘Governance 2.0’
There are two distinct branches of governance, ‘social governance’ and ‘investment governance’. By ‘social’, we mean societal considerations related to running a listed business, such as fairness and sustainability. Asset owners are better placed to take a position on social governance priorities for their underlying holdings – it’s their beneficiaries’ money after all. Asset managers are much less comfortable in this space, particularly when they have a broad and diverse client base with potentially conflicting views. They tend to focus more steadfastly on ‘investment governance’ – the narrower discipline of enabling optimal long-term financial performance for clients.
As stakeholders’ expectations of business increase, these two branches of governance increasingly overlap. Social governance and investment governance can and do focus on and worry about the same issues – think data privacy concerns in big tech, or the risk of stranded assets in the fossil fuel extractives sector – but they set a different threshold on the importance of financial materiality.
Within investment governance, it may be helpful to think about different layers of active ownership. The level of focus applied will depend on your organisation’s business model and investment approach (e.g. passive versus active versus activist, average holding period, absolute levels of ownership and portfolio concentration):
- ‘Portfolio Governance’ is the highest-level attempt at active ownership. It aims to apply some sort of minimum standards across a portfolio either through a standardised voting policy and / or a scoring methodology for assessing the standard of governance holdings. This is at the good housekeeping end of the governance spectrum.
- ‘Event Governance’ goes deeper, with more analysis and / or engagement and voting action for a holding or sector. It can be triggered by a news event, M&A activity or by a significant AGM proposal that attracts wider attention. It tends to be mostly reactive.
- ‘Forensic Governance’ is the deepest layer of active ownership. It involves proprietary investigative research and extensive company engagement, even seeking to influence significant changes when required. Activists with concentrated positions tend to do ‘forensic governance’ as a matter of course. For the rest of us, how do we begin to proactively identify the very small number of holdings where we can justify this level of analyst time and energy? Better use of ESG ‘big data’ and AI to identify priority holdings may be part of the answer, as well as better coordination across the investment management sector wherever regulation permits.
Where do we go from here?
There is no singularly ‘right’ approach, but as an industry we need to collectively up our game if we are to step up to the challenge of improving governance and supporting long-termism in our portfolios.
Andrew Cave is head of Governance and Sustainability at Baillie Gifford. In his previous role as Chief Sustainability Officer for RBS, Andrew was responsible for rebuilding RBS’s approach to corporate responsibility after the financial crisis. He is a member of the Financial Reporting Council’s Investor Advisory Group and is a former Chairman of the UK Global Compact Network.