We own about 4.5% of the FTSE 350 index on behalf of our customers and are typically a major shareholder for companies in this index. With this reach and scale comes significant influence, which we aim to use to foster responsible governance within organisations whilst delivering returns for our customers.
Historically, this influence has not been fully acknowledged. Institutional investors have been described as 'absentee landlords' that create 'ownerless companies'. When this charge was levelled against our industry in the 2001 Myners Report, we listened, and it has shaped our approach to corporate governance.
We don't believe it is fair for this charge to be brought against us again, primarily as we believe failure to engage affects the returns on our investment. Research we conducted with Business in the Community (BITC) on "The value of good governance" in 2008 suggested a correlation between good governance and an increased total shareholder return of between 3.3% and 7.7% between the period 2002 – 07.
Moreover, we know that all too frequently, individual shareholders lack the influence to ask difficult questions on how companies are affecting society, the economy and the environment. We believe that it is therefore the responsibility of institutional shareholders to take this challenge to large companies on behalf of the individuals they represent.
Despite the social dimension that comes into play when we engage with companies, we also know that our customers want us to continue delivering against their investment expectations. Our Index Tracker investment product, for example, spreads customer risk by investing in the whole FTSE 350 – meaning their return on investment moves with the whole index. However, in order to do this, we are required to invest in some companies that may be viewed as 'unethical.' In 2009, this meant that we were targeted by activists for having investments in arms companies within this index. While we do not think it is our place to comment on a company's core product offering, we do all we can to make sure companies such as these operate ethically and responsibly, and we would intervene on these issues as appropriate.
The overall number of ESG engagements with companies was consistent with 2008 levels and represented an increase of 25% over 2006 levels.
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As a major shareholder on the register of many FTSE 350 companies, we are also frequently asked for our opinion on societal issues by NGOs and activists. In 2009 we voiced opinions on the following issues:
- Executive remuneration, where we recommended that poorly performing companies cut bonuses to executives. During the last 12 months we have voted against 80 remuneration reports because it was felt that the companies had not acted in the best interests of the investor.
- On Heathrow expansion we insisted that proper account needs to be taken of local residents and infrastructure constraints. In particular, we believe it needs to be demonstrated whether the economic and employment benefits are as great as supporters claim, and whether there are more appropriate alternatives
- UNPRI (United Nations Principles for Responsible Investment), which we declined to participate in as it does not accommodate the ESG engagement approach taken by Index Tracking Investment Houses.
- We supported the development of the Princes Rainforest Project Rainforest Bond because it's important that Financial Institutions provide expertise and support for solving world issues.
Engagement with other companies is more effective when done together; the banking crisis taught us that a strong Chief Executive could easily ignore even a significant shareholder.
Cooperation is key and we have for a while been engaging collectively on selective issues, behind the scenes in this important area.