Achilles’ heel or simply the cobbler’s children? - FutureValue
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Achilles’ heel or simply the cobbler’s children?
16/06/2015
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Institutional investors ought to be the very embodiment of best practice in their own corporate reporting given the requirement for them to adhere to the Stewardship Code in investing on behalf of their clients. Sadly this does not always appear to be the case. The quality of in-house corporate reporting by the leading FTSE100 investment management companies falls short of a standard that their shareholders and investment clients might expect of them. There are two possible conclusions. On the one hand this weakness might just be that, like the cobbler’s children, their own business is the last place to get any attention and has so far escaped the best practice they expect of their investee companies. A more worrying interpretation might be that investment managers’ own efforts reflect a mediocre attitude to stewardship – perhaps a pointer to an Achilles’ heel? So, which one is it?

There are three pure investment management companies in the FTSE100. Evaluation of the strategic value of all three current Strategic Reports reveals a general standard that is below the average for all FTSE100 companies. A separate appraisal of their respective current Governance Reports indicates broad compliance but also displays content that falls some way short of best practice. Indeed it is only when one gets to the largest investment manager in the FTSE250 that one begins to find an in-house reporting standard that might reassure, if not also enthuse its investors and clients. Of course, there are also investment management companies that are the business units of FTSE life insurance companies. These tend to do better. These insurance groups, of which the investment managers are a component, typically prepare corporate reports to a higher standard and are mostly above FT100 average in strategic value terms. And it may be that the capital intensive longer-term culture of the life insurer rubs off positively on its in-house investment manager. This still doesn’t explain the lower reporting standards of the largest standalone investment managers.

Does this matter? You bet it does. More persuasive strategically focused narrative and more compelling evidence of good governance can impact market values across the stock market. In the consultation period leading up to the revisions to the Companies Act that enshrined the Strategic Report, the author met with the Department of Business Innovation and Skills to discuss concerns. “How did the Government expect to ensure the quality of reporting in the new Strategic Report?” was one of our questions. “Oh, the investment community will do that for us.” was the reply. “It will be in their best interest, and their clients’ best interest, to ensure that investee companies report to the highest standard”. So, two years’ on, if an influential portion of the investment community still doesn’t appear to understand what good corporate reporting is, for whatever reason, then what hope is there for all the companies they invest in?

But, perhaps it really is a case of the cobbler’s children? The bigger investment managers have simply not got round to their own Annual Reports yet; they are too busy engaging with all their investees. But, isn’t a really good Annual Report a first-class advertisement to reassure, if not also engage and enthuse shareholders and investment clients? If that is the case then the reality of what is going on may be more worrying. Could weak reporting standards point to a bigger issue and the investment industry’s Achilles’ heel?