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Big investors are grandstanding on pay and net zero issues, say FTSE bosses

City of London
City of London

Institutional shareholders have been accused of “box-ticking” and “grandstanding” over net-zero targets and pay policies by the bosses of some of Britain’s biggest companies.

In a report chronicling rising frustration within UK board rooms, company leaders said an “over-prescriptive and formulaic approach” by some shareholders towards environmental, social and governance (ESG) issues is causing a breakdown in relations.

Some bosses feel the situation is now so bad that they are effectively “locked in a struggle” with investors over how to run their own companies, the research by Tulchan, a financial PR company, found.

They also warned that over-regulation was making investors more risk-averse and London a less attractive place to list companies.

The report involved interviews with the chairmen of 34 FTSE 100 and FTSE 250 companies, including Sir Douglas Flint of Abrdn; Lord Stuart Rose, chairman of Ocado; Tesco chairman John Allan; and Sir Andrew Mackenzie of Shell. Investors including M&G and Schroders also participated in the report.

One chairman told interviewers: “Investors are intervening too much in granular detail… It’s gone too far”.

Another claimed: “The public company model is broken.”

The findings have emerged as major institutions such as Legal & General and Aviva take a more muscular approach towards enforcing ESG targets.

Their tactics have ranged from casting high-profile protest votes at shareholder meetings to publicly naming and shaming businesses that fail to meet their requirements.

L&G Investment Management last year began publishing traffic light ratings for more than 1,000 companies on their progress towards cutting carbon emissions, including oil giants BP and Shell, and pledged to divest from those that fall short.

The investor said it wanted to hold companies to account for inaction on climate change and that “engagement with consequences can get companies to change”.

In another example, fund managers at LGIM, Aviva, Fidelity and Royal London, all publicly warned businesses that the Covid pandemic was “not the time” to hand out pay increases and bonuses to “already well-paid” executives.

And ahead of Deliveroo’s stock market float, Aviva said it would not be investing because of the takeaway company’s employment practices, including how much riders were paid.

But in the Tulchan report, the FTSE 100 and 250 chairmen railed against “Dear chair” letters and other high-profile interventions, which they said amounted to grandstanding that does more harm than good.

They called for investors to engage more directly with boards and criticised funds for outsourcing decisions on shareholder votes to proxy advisory services such as Glass Lewis and Institutional Shareholder Services.

These services look at the performance of the company, then make “blanket recommendations” that fail to take account of individual circumstances, they argued.

One chairman said: “There are some shareholders who are subcontracting some of their relationship with a board to the proxy agencies, particularly around the time of an AGM [annual general meeting].

“The problem is some of the issues are quite complex.”

Another said: “There’s a huge agency problem, and there isn’t an easy fix to this. It’s dysfunctional.”

Others complained of the time in board meetings now devoted to addressing ESG issues, which in some cases was as much as 70pc, and the extra work needed for annual reports.

“My own annual report has increased from 150 pages to 250 pages in the last 10 years — but the increase in reporting, especially on ESG, has provided no real benefits for the business,” one chairman said.

Mountains of new regulation and reporting requirements were damaging London’s attractiveness and making the City even more heavily weighted towards passive investment funds, which do not engage as much with the companies they back, some warned.

“I continue to hear from US investors that they are finding the UK market unattractive because of the raft of regulation and interference,” one interviewee said.

Another accused passive investment funds of being “indifferent” and “not vested to the same degree in a company’s success” as active fund managers.

Mark Burgess, a partner at Tulchan, said the majority of boards wanted a “reappraisal” of their relationship with investors.

He added: “With ever greater governance requirements being placed on fewer and fewer institutional resources, it is not surprising that engagement is no longer working effectively.”