Investor stewardship: Facing the COVID-19 test
Amidst this tremendous disruption, how investors respond and work together along the entire value chain to safeguard the viability of our wealth creation system will not only influence the ability of businesses to survive, but also to recover and thrive. As an investor, how do you execute your responsibility as a trustee of funds in these tumultuous times?
Chow Jau Loong
Senior Research Assistant, Stewardship Asia Centre
31 May 2020
In the wake of the 2008 financial crisis, there were widespread review and reflection on corporate governance practices in companies and financial institutions. Consequently, these led to the development and adoption of various governance measures and stewardship codes — principles and guidelines meant to steer investment decisions and actions towards responsible and long-term value creation for the entire investment and stakeholder community. We now have over 20 known stewardship codes across the globe.
Today, we are in yet another crisis, one that is in many ways as devastating and certainly more widespread globally than the one faced a decade ago. It is an unprecedented, systemic crisis that many are calling a black swan event. The IMF is forecasting a contraction of the global economy by 3%[1] and predicting this crisis to be the worst economic blow since the Great Depression.
Amidst this tremendous disruption, investors as always occupy an important position in the business landscape and have a critical responsibility in the evolving situation. How investors respond and work together along the entire value chain to safeguard the viability of our wealth creation system will not only influence the ability of businesses to survive, but also to recover and thrive. The attitudes and actions taken will differentiate responsible investors from those who take flight, and whose irresponsible motivations contribute to exacerbate the economic devastation.
As an investor, how do you execute your responsibility as a trustee of funds in these tumultuous times?
What makes a responsible investor?
While it can be generalised that all clients invest in order to realise returns, it would be superficial to assume they all have a short-term “profits-only” mentality. Without ascertaining, as far as is practical, how the clients interpret value as shareholders, and factoring into the investment criteria the issues that will have an impact on both the value of the investment and the ability of beneficiaries to enjoy the returns, investors would not be doing justice to their fiduciary duty.
In fact, keeping a long-term horizon on investments may well be the most responsible and profitable approach. In a recent study of data going back to 1930, the Bank of America found that if an investor missed the S&P 500’s ten best days in each decade, total returns would be just 91% — way below the 14,962% return for investors who held steady throughout the market ups and downs[2].
A responsible investor must hence look after the interests of their beneficiaries holistically and understand the impacts of the crisis at both an individual and systemic level. Short-term decisions up and down the investment chain invariably exacerbate volatility and value destruction. On the other hand, collective action by the financial sector, sharing of the burden and investors supporting sound government policies all reduce the overall fallout[3] and generate better long-term shareholder and stakeholder value.
Investor stewardship in times of crisis
Investors should recognise that their investment fortunes are highly interconnected and interdependent on the well-being of the community. Only when people are protected can there be a conducive environment to prosper. Responsible investors must have an ownership mentality to safeguard social assets by possessing the will and commitment to help their investees and leverage their capital to extend aid. They should also take a long-term view, encouraging actions that help improve their investees’ governance and sustainability to protect the interests of all and the future value of their portfolio.
Among the principles investors can adopt during times of crisis:
- Be stabilising anchors to companies. While it is inevitable that shareholder value in most companies are affected, continued support from blockholder investors helps boost business confidence and reduce market volatility.
- Continue engaging investees. While timely response to investors’ queries may not be possible throughout the crisis period, information flow should still be clear and regular. Companies and blockholder investors need to be proactive in sharing their strategies in tackling the impact of COVID-19. Investors should also be active in engaging the board and company on the management of the crisis and the impact on its stakeholders[4]. This is a great opportunity for investors and investees to cultivate long-term robust relationships.
- Strive for strategic alignment along the entire value chain. Investors who take a long-term view will be united in ensuring that the fundamentals of their investees are secure enough to overcome this downturn and be able to rebound swiftly. Larry Fink, chairman of BlackRock, reiterated the call for companies and investors to have a strong sense of purpose and focus on long-term returns while navigating this crisis[5]. Globally, investors have come together to collaborate with the public sector in coming up with effective responses to reduce the pandemic’s impact on the economy, social inequality and the mental health of affected workers[6].
- Focus on shared value creation. An inclusive investment community ensures that all the constituents are properly safeguarded. Pension and sovereign funds can also form partnerships and capitalise new investments in social infrastructure such as schools, hospitals and other public amenities. The shift from shareholder value towards shared value can engender a change towards the value and purpose of investing, as well as forge a more collaborative relationship between businesses and investors.
- Build sustainable business strategies and improve business resilience. COVID-19 is also a test of investors’ sustainability resolve. Research by the Bank of America Merrill Lynch and Bloomberg found that ESG assets saw lesser investment outflows and achieved less earning cuts compared to stocks in S&P 500[7]. The resilience of ESG funds is an added impetus to integrate sustainability into business practices.
Walking the talk
These principles have been encapsulated in many of the stewardship codes, to varying degrees. While many are signatories to these codes, for these principles to come alive, investors need to understand their role within the stewardship value chain — owing their duty to the beneficiaries, the companies they invest in and influencing the health of all the relevant relationships within the community. By exercising their stewardship responsibilities, investors will drive a whole-of-economy response and recovery, and in the process, bring long-term prosperity for the beneficiaries through channeling money toward the development of a sustainable economy which drives real value creation along the entire chain.
The true test of investor stewardship is to walk the talk. And now is the time to do it.