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Active ownership: how does engagement work and does it impact returns?

Read how Olga Cowings has researched the relationship between investor engagement and company returns at Schroders.

27/07/2023
Economic Lens Q2 2023

Authors

Olga Cowings
Active Ownership Operations and Insights Manager

- More information about the research and its findings can be found here: How engagement works: governance and returns. This supports Schroders’ Engagement Blueprint, which outlines priorities and approaches for engaging with companies.

What is engagement and how does it work?

Engagement is the process of actively investing in a company to help it realise its commercial potential. It involves understanding the unique traits of the company, monitoring the strategic landscape, and helping the company thrive in a changing economic environment.

Engagement can involve frequent communication with the company's board and management, proposing and supporting changes, and encouraging better disclosure on sustainability and risk.

What might start as an email about business strategy can develop into trusted partnerships at the highest levels of decision-making.

What did our research into engagement and returns involve?

The research involved analysing the relationship between engagement approaches and returns for investee companies . It looked at different approaches to engagement on governance issues, such as committed and sustained engagement, low-touch engagement, and mass communications of expectations and engagement campaigns. It also looked at the types of conversations that took place, such as those with board chairs and other board directors, remuneration committee chairs, and those related to improving target-setting and providing better disclosure on sustainability and risk.

What are the main findings?

The research findings indicate that companies with committed and sustained engagement see better returns than peers for nearly two years from the start of engagement.

Companies engaged frequently in the first year and just once in the second year saw consistently strong returns over this period, peaking around 7% towards the end of the first year.

Companies with low-touch engagement in the first year saw slightly higher returns than peers in the first year, and for companies where engagement increased in the second year, returns increased, peaking at 11.8% over peers two and a half years into the engagement. For low-touch companies where engagement did not increase, returns worsened compared to peers in year two.

Why is this important?

This research is important because it quantifies the relationship between investor engagement on management and strategy issues, and company returns. It provides evidence of the association between engagement and returns, which can help investors understand how to focus their efforts in order to achieve better returns. The research also provides insight into how different engagement approaches are associated with different outcomes, which can help investors make more informed decisions about how to engage with their investee companies.

The full research can be found here

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Authors

Olga Cowings
Active Ownership Operations and Insights Manager

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