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Responsible investing

31 Oct 2011 Voices

Charities should be taking on the role of 'activist shareholders' and investing responsibly to further the objectives of their organisation, says Andrew Hind.

Charities should be taking on the role of 'activist shareholders' and investing responsibly to further the objectives of their organisation, says Andrew Hind.

 “In the absence of global institutions, laws and regulations, the only effective enforcer of corporate governance standards in a world of global capital flows is ownership.” So said Robert Monks, the pioneering shareholder activist, speaking last month via video link from the US at a Sarasin & Partners seminar in London on responsible investment.

Monks was the founder of Institutional Shareholder Services (ISS) which, as Charity Finance was going to press, was calling for Rupert Murdoch, and his sons James and Lachlan, to be voted off the News Corporation board at its shareholder meeting on 21 October, following the phone-hacking scandal at the News of the World.

According to Monks, CEOs are no longer held accountable in the corporate world. He asserts that: “The traditional, ritually recited, authority of shareholders to elect directors, who select and monitor CEOs, is a nullity.”

There is compelling recent evidence that this is the case in the UK, as well as the US. In September, the High Pay Commission – established last year with support from the Joseph Rowntree Charitable Trust – published data showing that, despite all the governance reforms since the 1980s, there is rarely a link between directors’ pay and the way their company performs.

Monks believes that the failure of shareholders to properly enforce corporate governance standards is not just about senior executives receiving unjustifiably generous remuneration packages.

He claims that the absence of effective corporate governance threatens the generation of adequate resources to meet society’s needs: “Whether we live in a poor, or an adequately financed, society depends on our system of corporate governance.”

So what has all of this got to do with charities? A lot more, in my opinion, than most of us have previously realised.

Consider for a moment the staggering fact that, despite the tough times being experienced by many civil society organisations, charities collectively have almost £80bn of investments on their balance sheets.

Activist shareholders

That gives an awful lot of charities the opportunity to help make capitalism more responsible, by playing a role as ‘activist shareholders’.

Although shareholder resolutions seeking to improve the stewardship of companies are still relatively unusual in the UK, they are becoming more common as investors start to act together to bring about change.

In a welcome recognition of this trend, the newly published guidance on investment from the Charity Commission (CC14) confirms that a charity can engage in shareholder activism. The guidance says that a charity can exercise its voting rights “in order to safeguard its investment and to ensure that the companies it invests in are being managed for the long-term benefit of shareholders”.

Indeed, CC14 goes so far as to recognise that: “In some circumstances, a charity may wish to acquire investments that are related to its values and ethos primarily to engage in stakeholder activism.”

Charities need to recognise that an investment portfolio is not just a source of sorely-needed income, and capital growth, to help finance their charitable activity.

Increasingly, if they become more prepared to take the initiative as active investors, charities can use their potential power as responsible investors to be – in the words of Robert Monks – “a wealthpreserving energy in a free society”.

Andrew Hind is editor of Charity Finance magazine

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