Fighting the wrong battles

I turn to a final question: why now? This article has been framed around the Modernising Corporate Reporting consultation, and yet has mostly spoken about corporate governance and investor stewardship rather than disclosure.

This piece has deliberately not taken a stance on which of the proposed disclosures should be kept, and which repealed. The appropriate balance of disclosures depends on a number of factors, including companies’ cost of producing them, their usefulness to investors, and the degree to which they support progress on the outcomes they relate to. This last consideration is surprisingly absent from the consultation paper. The near-exclusive focus on cost and usability may suggest a loss of faith in the idea that these disclosures lead to changes in the real economy.³⁴

To me, this consultation, following on from other governance rollbacks, appears to be opening up a familiar two-sided debate, with each side offering answers which have already been proven not to work. On the “pro-business” side, we have the idea that requirements pushing businesses to be managed better and to do better by broader society are holding back growth; we need to cut red tape to unleash innovation and productivity. It seems unlikely these disclosures are the difference between stagnation and high growth. Yet even if it does succeed, we lack the incentives for the right kind of inclusive, broadly-shared growth. We’d end up right back here in a few years, mourning that inequality has worsened, communities are being left behind, and workers feel like they’re not sharing in the value they’ve created. Probably with some new ideas around what companies should disclose.

On the other side, we have the pro-shareholder camp, the investors and related organisations that are defending the status quo, saying that this information is useful for investor decision-making and public scrutiny, and that strong shareholder rights are an enabler rather than a threat to inclusive green growth. Yet this is a regime that has dominated much of the last two decades, and has often failed to do much more than frantically wave at a range of systemic risks worsening all around it.³⁵ To reject the need for reform is to privilege ideology over evidence.

Neither side can permanently win because neither side seems capable of delivering the decent living standards and sustainability that we need. A third way, based on a governance structure that promotes the shared interests of management, investors and workers, each holding the others to account, appears to me to offer a better path forward.

I do not expect mobilising investor support for these reforms to be straightforward. In the near-term, we’re less than a month out from the consultation close; most investors and related groups will be hurrying to put together their responses, relying on familiar lines. A long piece like this (or this), essentially asking individuals and organisations to reconsider their world view, is easy to brush off at times like this, essentially when faced with an imminent erosion of rights and disclosures. “Maybe I’ll think about it another time”, you might say.

Yet just as shareholders often find themselves trapped voting for proposals whose substance they don’t truly support, so it often is with policy engagement. Many in responsible investment accept that the current set-up isn’t working, but find themselves propelled into defending it. I myself have penned many consultation responses over the years, on implementation of TCFD reporting, or changes to the Stewardship Code, suggesting where tweaks could be made. I’ve done this despite knowing that the very policy tool I’m commenting upon does not have the weight to drive the changes sought. But I responded nonetheless, as that was the open door on which to push, progress there might build momentum for more substantial reforms down the line, and in any case my job was to articulate my organisation’s viewpoint, not necessarily my own.³⁶ I suspect many others have found themselves in the same position, and may now find themselves defending policies which they know don’t really deliver.

To take just one example: I have already mentioned ShareAction’s recent briefing on virtual-only AGMs, calling them a “massive setback for corporate accountability” and emphasising that “AGMs are vital to effective corporate governance”. It proposes some moderate administrative tweaks to improve them, but otherwise implies they’re A-OK.

Yet here is an excerpt from their 2021 paper, Fit-for-purpose? The future of the AGM:

“Yet even before this crisis, company AGMs had shortcomings. Many FTSE 100 companies held AGMs with less than a handful of attendees present, and occasionally no questions asked at all. Institutional investors, who generally own over 90% of the company’s shares, are frequently absent. At the other end of the spectrum, some AGMs suffer from heated exchanges and unmet expectations as the major - but very brief - forum for contact between shareholders, stakeholders and company staff each year. Even the value derived by boards themselves has not always been clear. Many AGMs have ossified in style and content - but the AGM is not beyond redemption.”

Reforms it proposes include allowing other stakeholders to attend and delaying voting until after the AGM has taken place, so that AGM proceedings can influence outcomes. These go unmentioned in the recent briefing, presumably on the basis that now is the moment to defend what we have rather than push for what we want. But this has it backwards - the reason physical AGMs are on the chopping block is because they’ve ossified in the ways ShareAction pointed out. Their 2021 proposals, however, offer a vision of something that might be worth saving.³⁷

There are times when the best course of action is to take a policy agenda as you find it, and use your influence to tweak it in the best way you can. But here we have a new Prime Minister who has complained about power being held in too few hands, and a policy consultation threatening to swap one failed theory of change for another. The Overton window is open. Those committed to addressing inequality and corporate accountability have a chance to pitch something that works.

With some former responsible investment colleagues, I’m inviting UK-based investors and others who would be interested in actively discussing this more, with a view to engaging the UK government on reforms along these lines. If that sounds like you please get in touch.