The Legal & General Investment Management, the largest money manager in the United Kingdom, has issued an emphatic statement regarding climate change. According to its official statement, the world is in the midst of a climate catastrophe and companies worldwide have to urgently address it or deal with the ultimate sanction possible for public companies – the refusal of shareholders to back them.
Legal & General manages more than £1 trillion of pension fund investments in the United Kingdom.
But the money manager wasn’t just concerned about the climate catastrophe although it was the topmost priority in a list of concerns regarding the way businesses are operated. Legal & General also pointed out other flags including the effects and costs of political lobbying, the absence of diversity in senior corporate positions, and the level of executive salaries. Even the poor quality of fiscal information provided by auditors was also on its list of concerns.
Legal & General, furthermore, insisted that its move isn’t virtue signaling, or an attempt to demonstrate to others its goodness by expressing acceptable opinions.
In fact, the money manager vetoed the reelection of almost 4,000 directors in 2018, a move that represented an increase of 37% from the previous year. The votes also included votes against more than 100 chairmen of the board based exclusively on gender diversity.
Sacha Sadan, its director of corporate governance, said that Legal & General has been taking tougher stands with its board and management. He said, “2018 was a record year for us as we continued to engage with companies on a broad range of issues, using our voting power to influence change on behalf of our clients. The increased figures reflect the higher standards we expect companies to adhere to.”
Legal & General’s statement should ideally be considered a serious warning for businesses, not only because the company is known for its sound management practices, but also because of recent examples.
In 2018, for example, Carillion collapsed and, in doing so, exposed the malpractices in company stewardship in the United Kingdom. The construction and services company continued getting good audit reviews from its auditors, as well as paying out high executive salaries and shareholder dividends a few months before its unexpected liquidation. The public backlash was intense, as can be expected.
But Legal & General’s warning has been met by skepticism from the public and private sectors. The business select committee, for one thing, has stated its doubts about the ability and appetite of asset managers in raisin the standards of company management.
According to its chair, the committee members don’t have the “confidence in institutional investors” in terms of their exercise of stewardship functions. They cannot depend on the shareholders either to pressure the institutional investors to improve on these functions.
Legal & General, however, hasn’t been spared from troubles. The money manager has admitted to its mistakes, too.
In 2012, Jeff Fairburn was awarded £100 million in compensation. Legal & General has since then learned its lesson – the company has enforced caps on payouts. The maximum payouts rule has been effective in ensuring that executives’ compensation packages are within reasonable limits, although there are still issues related to executive compensation.
Shareholders and investors have the power to put pressure on companies to adopt higher standards in their stewardship functions. The best way, of course, is to either sell their shares or stop becoming shareholders of companies found to be misleading their shareholders or misbehaving in general.
While this step has its challenges, it’s completely doable. Interested individuals have a wide range of resources that can be used in their decision-making process, and these include reports by regulatory authorities, media reports, and external audit reports.
Many fund managers assert that they are reforming from within, and it’s an argument that can be heard often. But many of them are also happy to accept excessive compensation packages including dividend payouts from controversial industries. The tobacco and oil industries are often used as examples of the practice.
Legal & General has insisted that they are able and willing to reform from within. Last year, for example, it released a list of companies whose shares the money manager will drop. The list included eight companies like China Construction Bank, Rosneft, and Subaru. The company said that all eight companies, which have been blacklisted, contacted it and asked to be taken off the list.
The money manager believes that it’s proof that, indeed, its shareholder engagement is truly working.
But as with many shareholder engagement or disengagement, there are still lingering doubts about the sincerity of Legal & General in divesting itself of companies with dubious practices. Many feel that money managers should be more careful about choosing the types of investments that they pour their clients’ money into.
In the end, the people who are putting their hard-earned money in the hands of money managers have the right and responsibility to demand proper handling of their money. These include making more ethical investments although that in itself has its challenges in an interconnected world.
