Investment managers want the companies in which they invest to do well — and deliver sustainable returns over the years ahead.
That means a key role for the managers, who oversee the savings of 75 per cent of UK households, is to engage with the company executives and boards on their strategy, and to ensure their impact — on their employees, communities and the environment — is positive.
Investment managers want to see companies treat their employees fairly, have boards and senior leadership which reflect the diversity of their customers, and that are planning for the future.
Where companies are not following this long-term approach, the manager will engage with them through the year and may even vote against the company’s plans at their annual general meeting to show their concern.
Crucially, shareholders have the opportunity to vote on a company pay policy. That’s why every year the Investment Association sets out its principles of remuneration — essentially, the best practice investors expect to see when it comes to executive pay and bonuses.
This year, our principles build on our approach from the past few years, focusing on: continued restraint in light of the pandemic and how best to incorporate environmental, social and governance (ESG) metrics into pay structures.
While Covid-19 appears to be easing, no one underestimates its continuing impact. Many companies have struggled during the pandemic, but others have seen a business bonanza because the services they offered have been in greater demand.
We have been pleased to see that business leaders have shown pay restraint throughout this time. These companies have balanced the need to incentivise senior leadership, while at the same time being mindful of the experiences of their staff, customers, suppliers and wider community.
We recognise that companies need to compensate their executive teams properly to attract and keep the best talent.
But companies that furloughed staff should not now seek high levels of executive pay.
At the start of the pandemic we called on companies to ensure that executive pay reflected the approach to pay and conditions for the wider workforce.
If a company took government money, investors were clear that those same companies should not be paying bonuses to senior executives unless that money had been paid back. This is only fair.
We were very pleased to see that the vast majority of FTSE All-share companies met these expectations last year and set their pay outcomes in the context of the stakeholder experience. But as many companies have relied on government funding and still had staff on furlough at the start of this financial year, ensuring this fair approach is maintained will be critical for investors in the coming year.
Climate change is the single biggest risk facing our planet, society and business today, and investment managers are committed to supporting companies to manage their impact on the planet and the effect on their business.
These considerations are of increasing importance to people across the country. This year, retail savers invested on average more than £1bn a month into funds applying ESG considerations. There is no doubt that climate change affects every company, its customers, employees and shareholders.
With the recent COP26 conference focusing minds on the need to take action to address climate change, we have seen more companies link executive pay and bonuses to ESG metrics.
How a company is run will determine its long-term value, and shareholders need to know that company boards are planning now for the transition to a net zero future.
That’s why this year shareholders are asking that where ESG factors are part of a company’s strategy, these are similarly included in their remuneration and, where they aren’t, the board should explain to investors how they will do this in future years.
These expectations and all our principles fall equally on investment managers themselves. They take their impact on the planet very seriously and are rightly incorporating ESG risks into their strategies and their remuneration.
Investors have a responsibility to engage with the companies they invest in, to understand their strategy in order to support them to prosper, but also to hold them to account when need be. By ensuring that company executive pay is fair, and linked to the future sustainability of the business, investment managers are helping the companies they invest in to thrive in future years. This benefits the savers of today who will become the pensioners of tomorrow — and will reap the dividends of this prudent, long- term investment approach.
Chris Cummings is chief executive of the Investment Association