Snap's IPO plans demonstrate why the ISG's Framework for US Stewardship and Governance is so desperately needed.
As if to demonstrate why a stewardship and governance code is so badly needed in the US, Snapchat’s IPO plan, designed to raise $3bn for the company, will only offer shares with no voting power (today’s FT). The Council of Institutional Investors has 'strongly urged' Snap to reconsider, while Calpers criticised Snap's ‘banana republic-style' approach.
Their concerns are well founded.
The Investor Stewardship Group’s Framework for US Stewardship and Governance comes as very welcome news among the melee of negativity flowing out of the US over the last week.
The collective clout held by the group of 16 US and international institutional investors representing a combined total of just over $17 trillion is very considerable and sends a very strong message to corporate America about how investors expect them to behave.
I’ve heard a lot of fund managers and investors complain in recent weeks about the lack of ESG frameworks in the US, which has made it harder to hold companies to account and get them to engage. In no small part, this has been to blame for the significantly higher levels of executive pay Amercian CEOs still enjoy relative to their global peers.
Data from MSCI shows that for companies included in the MSCI World index, US CEOs' average total compensation far exceeds that of their international rivals.
Traditional capitalism failed so many for so long because it failed to capture the unintended consequences of how it functioned. We need a more informed version of capitalism, under which investors recognise the wider risks they create in societal and environmental terms and take responsibility for managing those risks.
Last week, while engaging in a little commentary on LinkedIn, I suggested that populism was a growing concern across Europe because ‘our capitalist system has failed so many for so long’. Another member subsequently posed the question: Why has capitalism failed? Europeans/Westerners still enjoy the best standards of living in the world.
While I would agree with the latter part of this response, I feel it warrants further exploration.
The Davos Paradox: Executives have completely failed to show 'responsive and responsible leadership'
Executive pay is a clear indication that top executives are failing shareholders and employees. The theme of this year's World Economic Forum of 'responsive and responsible leadership' appears somewhat paradoxical in the context of the widening inequality gap between the wages of top executives and their own employees.
I often struggle to find affinity with the Daily Mail, but every now and then something catches my eye. Hugo Duncan’s piece on 16 January about a group of UK CEOs, who collectively earned £145 million in 2015, flying to Davos to tackle poverty, was one such piece (read it here).
It does seem rather paradoxical. After all, the theme of this year’s World Economic Forum is ‘responsive and responsible leadership’.
This group of CEOs have proven to be neither responsive nor responsible when it comes to their own pay packages. Recent years have seen a good number of shareholder rebellions over fat-cat pay including (but in on way limited to) Martin Sorrell’s £70.4 million award (WPP) and Bob Dudley’s £16.1 million pay deal (BP). Yet, despite those calls for restraint from some of the leading global investment houses and the UK government, CEOs continue to enjoy exorbitant increases in pay.
It has long been held as gospel that cutting corporate tax fuels investment and growth. However, without fundamental reform, business tax cuts may hinder rather than boost economic progress and investors can ill afford to ignore the consequences.
Governments, in their efforts to boost domestic economies, are offering tax cuts left, right and centre. Brexit-bound Britain, for example, saw its Prime Minister, Theresa May, promise to cut business tax to the lowest level in the G20. President-elect Donald Trump has also promised to cut corporate tax rates. The main reason for the ‘race to the bottom’ in corporate tax? That attracting companies to locate their operations in a country will mean growth and prosperity for those who live there (and vote there).
But does it really work?
If we don’t start to adapt our policies, economies and investment approaches to address the widening gap between the haves and the have-nots, the likely political, societal and financial market ramifications will make Brexit and Trump’s election success look like child’s play.
Rifling through a box of old bits and bobs over the weekend I found my old film camera. Boy, did that bring back some memories, but it also got me thinking: even within my short (ok, short-ish) lifetime, technology has had the most profound impact on how our societies function. I remember buying Kodak films, which I then had to take to a shop to be processed. From purchase to printed product, I typically interacted with at least three people employed to service this hobby. There were of course countless others I never saw. Where have those jobs gone now? Kodak went from employing 170,000 people to being bankrupt within a few years.
And they won’t be the last. Amazon has tolled the death bell for many a high-street brand. How many hotels have been threatened by the Airbnb revolution and what happens to all the people employed in the hospitality sector as margins are squeezed ever tighter? Uber has completely changed the face of taxi services across the globe and, with driverless cars just around the corner, how many more jobs will be lost in that and other transport-related sectors in the coming years and decades? Can the big traditional car companies survive the shift? What happens to all those jobs – and the people doing them?
Green bonds are likely to play a key role in how investors switch to clean energy, but is the asset class right for everyone?
Article written for Portfolio Institutional, published 6th January 2016
Green bonds look set to revolutionise not just the speed at which the world transitions to clean energy, but also how broader bond markets work. The rapid growth of the asset class, which is well supported for continued acceleration, underlines asset owners’ increasing interest in accounting for climate change risk in
According to the Climate Bond Initiative (CBI), there are now $694bn in outstanding climate-aligned bonds, an increase of $96bn (or 16%) since the same analysis was conducted the previous year. Within that total, $118bn are “labelled” green bonds – those that have been certified by the CBI to say the funds raised from their issue will be used to finance new and existing projects with environmental benefits. Green bonds saw record issuance during 2015 with $42bn issued, meaning this sub-section of bonds now account for 17% of the broader climate bond market, an increase from 11% the previous year. Read more here
Roger Mattingly is Director of PAN Trustees, a leading firm of independent trustees working with some of the largest pension schemes in the UK.
Roger, you’ve been working in the UK pensions industry for 37 years. In your experience, are pension schemes taking environmental and/or social factors into account alongside financial returns?
There is a fairly cosmetic approach to these issues. Many schemes pay lip-service to them in their investment principles saying that those factors are taken into account, but, to date, this has mainly been a box-ticking exercise. The Law Commission review (Fiduciary Duties of Investment Intermediaries) in 2014 stipulated that social and environmental impact and ethical standards should be taken into account, but ultimately it is performance that matters.
That said, there has been an increase in the focus on such responsibilities among investors. A trend took root a few years ago, but so far there has been a lot of rhetoric. Have things really changed materially? Not really.
We may see an inflection point where it is taken more seriously and investors have to evidence that environmental and social impacts have been meaningfully considered and taken into account. There will be an acceleration in this regard and a mandatory requirement may also come to fruition.
Another year dawns bringing with it the opportunity of another resolution and I am a sucker for this particular tradition. For 2017, mine will be to give more and take less. I like this one for its simplicity. It works on a multitude of different levels – dieting, philanthropy, the marriage, the kids…
But it also works in the context of my finances and, in that regard, perhaps the most pressing application will be to give more thought to long-term sustainability and take less of a short-term view.
Tempting as it is to spend two weeks driving a sun lounger this summer, I can’t help thinking about the bigger costs coming down the pipeline: university fees for my offspring, and my own retirement to name just two. Suddenly, giving more to my mortgage lender and savings account seem like the more sensible option.
Most read articles
A quick cuppa with Faith Ward, Chief Responsible Investment and Risk Officer, Environment Agency Pension Fund