Whilst investors may not have prevented the crisis, it caused them to revisit their approach to stewardship. Emboldened, they sought to play a key role afterwards by holding financial institutions to account and pressing for long-lasting improvements in governance and culture. This work continued well after the crisis had passed, as further breaches and scandals in areas such as money laundering and poor lending practices emerged.
Our engagement with financial institutions
During 2007-8, we conducted in-depth engagement with over 20 global financial
institutions to promote changes in culture and management behaviour. We called for
appropriate capitalisation, robust audit and compliance mechanisms, alignment between
pay and performance, improved management accountability, prudent risk management,
sustainable banking practices and better transparency and reporting. We had extensive
engagement with major banks, including:
5 meetings with Board members at Royal Bank of Scotland to discuss the acquisition of ABN Amro and call for enhanced Board accountability and alignment between pay and performance.
5 meetings with Board members at Barclays to ask for better transparency and protection of shareholder rights; plus a public statement at its extraordinary shareholders’ meeting in November 2008 about capital raising and shareholder rights.
9 meetings with Board members at HSBC to push for more transparency about its strategy, stronger Board oversight and alignment between pay and performance.
Parallel to engagement, the 2008 proxy season saw us actively exercise our voting rights on all bank holdings. We engaged with many of the UK, European and US banks most deeply involved in the crisis before the vote to explain our expectations and opposed poor governance practices where appropriate. We also supported all resolutions calling for a “say on pay” at the large US banks.
A number of important advances for active ownership came out of investors’ activities during this challenging period.
- Engagement as an investor activity gained legitimacy, as we found an increasing number of companies starting to value the discussions with shareholders, rather than regarding the investor as yet another stakeholder to be managed.
- We gained access to companies at Board level more easily than had been the case previously.
- The crisis provided a highly visible example of how governance and pay structures are not just esoteric issues to be debated by specialists but can be critical to companies’ long-term health and survival.
- Across the market, we saw shareholders start to become bolder in expressing their views through their votes, with a number of high-profile rebellions at banks that were demonstrably failing to learn the lessons of the crisis.
Seeking to avoid a repetition of the crisis, regulators looked for ways to encourage all investors to take their stewardship responsibilities seriously. In 2010 the UK’s Financial Reporting Council (FRC) published the UK Stewardship Code – the first formal guidance from a major financial market regulator setting out good practice on matters including engagement and voting. This was to form a blueprint for similar codes in other markets in the decade to come, as stewardship practices expanded internationally.