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Podcast: with great empowerment comes great responsibility


This is a transcript from the Investor Download podcast: “With great empowerment comes great responsibility”. It was prepared by an automated transcription service. This version may not be in its final form and may be updated.

You can listen to the full podcast by clicking the play button at the top of the page. You can subscribe to the Investor Download wherever you get your podcasts. New shows drop every Thursday at 1700 BST.

David Brett (DB): The information age has changed the way people invest. Vast amounts of knowledge and analysis is now available online. And investors can now buy shares via online platforms and apps as easily as buying any other product on the internet.  It’s led to rise in individual share ownership and consequently investors now feel they have more power than ever before.

So, for the first part of this year’s Global Investor Study, which surveyed more than 23,000 investors in 33 locations around the world, Schroders wanted to find out what it means to be an “empowered investor”.

The study found that investors should be able to influence corporate behaviour, with 60% of respondents agreeing and saying that they feel empowered to do so.

So, in this show along with Sheila Nicoll, Head of Public Policy at Schroders, and Stuart Podmore, an Investment Propositions Director and Behavioural Finance expert at Schroders, we’re going discuss how investors might use that empowerment responsibly and what more the financial industry can do to harness that empowerment.

But in the first part of the show we’ll discuss what it means to be an empowered investor and what’s changed between now and three decades ago.

Part one: What it means to be an empowered investor

DB: It, it has been a while and it's great to be back and I'm delighted to be back with you. Alright, Sheila, just for those at home, could you just explain what your role is at Schroders?

Sheila Nicoll (SN): Yeah. I mean, fundamentally I lead a very small team, whose job it is to engage with policy makers. That's with governments, with regulators, both in terms of making sure the environment, the regulatory environment, is conducive to our business and to that of our clients, and also alerting horizon scanning, alerting, the business to what's coming up on the horizon when it comes to regulatory and political in initiatives.

DB: And Stuart Podmore, you're back on the show, an Investment Propositions Director and behavioral finance expert, and again, it's been awhile. Welcome back.

Stuart Podmore (SP): It has been a while. And we've been talking about some quite challenging subjects over the last couple of years and, actually this, the subject we're gonna be covering today is no different, there's plenty to say.

DB: And speaking of challenging subjects, you cycled 25 miles into work this morning.

SP: Yes. I think I've overdone. Actually on reflection, but I've actually broken my caffeine free approach just for this morning. So I should be fine.

DB: We mentioned the global investor study at the top of the show. So Sheila investors feel they should be able to influence corporate behavior. What do you think that means? Is it just about profitability?

SN: No, I, I mean, I think, the world is shifting quite a lot and quite fast in this area. And I think actually investors, while of course they continue to be interested in getting a return on their investments, I think they're taking much, much more interest in actually how profits are achieved. And, and I think, you know, we'd very much agree with that understanding, that the impact that companies have on society and the impact that the can have on the planet, and a whole range of different stakeholders, is actually crucial to determining their true cost.

DB: Okay. I just wonder if you could take us back a little bit, is what you're seeing now, anything different from what we saw maybe 20 or 30 years ago?

SN: I'd love to say, I didn't remember 20 or 30 years ago, but I'm afraid I can't actually say that. I think things are very different now from I think even just in the last five years ago. There's been a lot more interest in a broader range of issues. I think traditionally engagement with companies was in that ESG - environmental, social governance. I think traditionally the focus was on governance and it was on things like executive remuneration and, and things like that. I think that's really shifted now probably, prompted by climate change and a lot more focus on the E, but it isn't just climate change in the E context. And then there's the S which is the, the social aspects, which I think is also more and more important and, and likely to become so, um, in the future.

DB: And what do you think investors are looking for from companies when they're looking at the social aspect of things?

SN: I mean, it's things like employee relations, working conditions, relationships with the local communities, and so on. So it's all very well having a great environmental policy, but actually if you are not supporting, if you are exploiting the local communities or something like that, then that you're not gonna get very far. So actually they're all in inextricably linked the E, S and the G I think are all inextricably linked

DB: And sure. Apart from the technology, what do you think is making people say they feel more empowered?

SP: Well, actually, before we skip over technology too quickly, I think it's worth just making the point here that in two clicks you could buy a property with cryptocurrency or you could invest directly with leverage, via platforms such as Robin hood. So let's not go over technology too quickly. It does enable greater accessibility. And I think that can bring with it the impression of empowerment. And let's not forget that access to all of this without any understanding can be dangerous for investors. I would take it a step further. And I'd say that technology enabled social media also plays a part. What this does is behaviorally create an instant herding effect that happens very rapidly, perhaps more rapidly than it might have happened in the past. And it brings forward a very much the reality of a fear of missing out.

 

And we've seen that with some of the, the newer crypto occurrences and the non fungible tokens and behavioral scientists often when they start talking about approaches to investing and how to avoid some of the pitfalls, they often advise people in a deceptively basic way. They say, well, hang on a minute, at least slow down that decision making process. And that sounds very simple, but actually that's really good advice. And the problem there is that technology enables us to speed everything up, so let's not forget that. And I think then aside from technology, intuitively, I do feel as if there's greater demand across society now, especially in liberal democracies. I do get the sense that our kids and those up and coming generations, as they head through school and beyond, are developing a sense that they can make a difference. And this can lead to a general feeling of empowerment across society. It certainly happened and we've got evidence of this haven't we on climate. And I think what's gonna be really interesting is how this manifests itself through some of the societal decisions and judgments Sheila's already referred to.

DB: You mentioned social media, we saw the wall street bets phenomenon and how much of an impact a group of investors can have, perhaps egged on by one another and what they can do to individual stocks, the so called mean stocks such as game stock, but does that present any obvious dangers for investors?

SP: Well, I don't think we can point to data on that necessarily at the moment, but again, intuitively, although I always feel slightly worried when I use that word, intuitively I wonder whether that increased activism, that almost immediate herding effect through platform through technology can lead to greater levels of volatility in the markets. But I suppose I'd say on the other hand, let's not forget that so long as there have been markets. And so long as there have been investors, there have been many human traits which lead people in extremists to demonstrate greed. And, so whilst I do believe that the examples you gave just now must have had a bearing on that volatility, I don't think we should overlook the fact that the existing factors with which we have become so familiar throughout the years of investing, they remain.

DB: So going back to the global investor study, perhaps unsurprisingly, those who rate themselves as investors with an advanced level of knowledge, feel more empowered than those with beginner or intermediate knowledge. So are we seeing any behavioral biases at play here or is it justified?

SP: Well, that's a really interesting one. So I think we need to remember here that it's well documented in behavioral science that desiring and seeking more information when faced with decisions or judgment under uncertainty does not necessarily lead to better decision making. And I think investors should just remember that having said that investors increasing their understanding of how the financial system works, how we deploy capital, how capital is deployed, well, surely that I, I would argue that could only be a, a good thing. And I think, the transparency increasing associated with that is, is really quite important. We, as professional investors, well, we can help with that. We can add value there. And in the global investor survey, we, we see very much that increased investment knowledge really does appear to support people's confidence when they are thinking about corporate decision making and whether or not they agree with it, whether or not they feel they can influence it. But remember there too, that behaviorally and typically, you know, we overestimate our absolute ability as individuals. I always think I'm better than I actually am, I'm afraid. And also we overate ourselves relative to others. I have to have to confess to this, but I probably think subconsciously that I'm better at it than maybe Sheila or yourself, David. But that's part of how we are constructed as humans. I think as professionals, as guardians of our clients' assets, we've got a lot of experience here and experience helps. I mean, that helps you develop an idea of slow down process, work this one out, and that's where we can bring some value to bear in order to support better investment outcomes for our clients

DB: And Sheila how's it affected the way that Schroders engages with companies and with investors?

SN: Yeah, well, of course we see it from both sides because we are, of course, a FTSE100 company ourselves with shareholders, with whom we need to communicate. And we also, as Stewart says, I mean, we are looking after other people's money and we engage ourselves with the companies in which we invest. And picking up on Stewart's point about engagement, I mean we are very thoughtful. So, part of our role as a manager is precisely that role of engaging. There's a lot to talk about voting, but it's not just about voting at AGMs. That's in many ways, the end of a much longer process of engagement that we are able to have as a professional investor looking after other people's money. So I think, you know, it's not just about individuals engaging with the companies, it's about us as an asset manager, engaging with the companies, but what that then means for us is that we really need to be, I mean increasingly because investors are interested in this, we need to explain ourselves.

So we, for example, have published a blueprint, which explains how we will engage with companies, what issues we will engage with them on. And then increasingly we are reporting back to investors as to what the result of that engagement has been, how we're monitoring the engagement, and so on. So I think that a lot, there's a lot more transparency and investors are looking for a lot more transparency around how we, as a professional manager, engages with the companies we invest in.

DB: And do you think it's important for individual investors to have a clearer understanding of how they can influence corporate decision making?

SN: Absolutely. I mean, the more understanding investors have and the more engaged they are in the finances, the better actually. If you are talking about corporate engagement, and if you're talking about influencing the companies in which you're investing in, you are already at quite a high degree of sophistication. I mean, in many ways, just encouraging people to engage with their money, enhancing financial literacy, enhancing the confidence that people have in talking about money, is really important. And this isn't just, I mean, there's, you know, it's, it's not just about financial education. I always much prefer the word engagement. Education gives the sort of impression of talking about teaching teenagers about compound interest. You know, that is a very important aspect of it, but we're told for example, that our attitudes to money are formed at the age of seven.

So it's actually talking about money generally, not, you know, leading to investment. It's talking about attitudes to money and it's about money in primary schools. And then it's throughout one's life, all the way through to retirement care, home care, so on and so forth. And actually engaging and finding interesting and engaging ways of getting people to think about their money. Also getting people to understand the importance of investing actually. So it's as basic as that and the risk of not taking risk. So in this world, as we're facing, you know, higher, higher levels of inflation, actually the importance of taking risk. But also, and again, coming back to Stewart's point about people having confidence and people engaging, it's about having professional advice and turning to professional advisors who can hold your hand, who can advise you, who can talk to you about engagement and what managers are doing in terms of engagement. So, you know, you're not on your own and actually finding a professional advisor is vital.

DB: Yes, we were talking about technology earlier, Stuart, and it's enabled investors to easily buy and sell shares, but is it an enabler for investor empowerment?

SP: Well, as we said earlier, it brings some risk, doesn't it, David? I'd go back to what we do as a professional investor on behalf of our clients. Throughout our investment teams we've deployed a huge amount of technology in support of an investment process or investment processes. So on behalf of our clients we've invested a lot of money in that. And that's for good reason, because if we get those underlying processes right we can manage risk. We can construct portfolios that are, we hope fit for purpose. And I don't think all investors are going to be able to say that they might get the accessibility here, but they might not be able to say that. So whilst technology might help them feel more empowered, there are potentially some behavioral downsides in terms of their investment returns and that's, I think, where guidance and advice comes in.

And I think also that's where our investment in technology can help. It essentially, wherever possible, protects on that downside. And, as Sheila referenced earlier, you know, the idea of doing that throughout our lives, having a sense of process throughout our lives, as investors, versus one off somewhat spontaneous decisions, that can only be a good thing. I like the idea of life stage decision making, or key moments in life. I know I've felt that at certain points. And actually some of the best decisions and some of the best outcomes as we have gone through our lives in our household, unfortunately, have happened by chance. Wouldn't it be better rather than leaving that to fortune or misfortune, to have some sort of plan there at just those points when it's most needed? And that's where I think through our stakeholder engagement, we can help with that. We can bring in element of teamwork and certainty to it. And that's only a good thing.

DB: And Sheila, you mentioned earlier Schroders has many stakeholders itself, as well as being a stakeholder in many companies. So, has Schroders itself seen more activism in recent years from its shareholders or its stakeholders?

SN: Yeah, no, absolutely. Very much so. I think there's much, much more discussion and conversation with our shareholders on a very wide range of issues. You know, as I say, not just remuneration, which is always something that's hits the headlines, but also on our environmental policies. I mean, there are obvious things that we have to make formal statements on things like gender pay gap, generally on pay gaps - all these sorts of things, the things that investors and are much, much more interested in hearing about. And I think when we're looking at it from the perspective of an investor as well, this sort of active ownership that we have gives us a much broader understanding of the companies in which we're investing.

So I think our investors get a much better understanding of how we operate, what makes us tick, and we do the same with the companies that we're investing in. It takes us beyond just what financial data can offer. And I think what we might want to describe is sort of in impact adjusted profits, going beyond profit. And, you know, we are thinking in that way. We are explaining that to our investors. But equally that is the way that we think when we're talking to the companies in which we invest.

DB: So we've mentioned stakeholders throughout this conversation, we probably should really explain that. So the feeling of empowerment is part of that transition from shareholder capitalism - that's where companies operate for the benefit of their shareholders - to stakeholder capitalism - and that's where companies operate for the benefit of all stakeholders. And investors are now increasingly using their money in attempt to bring about positive change in society. What we got told through the global investor study was the most important issue for investors to engage with companies on was climate change, and that's followed by a natural capital and biodiversity as well as many other issues.

So Stuart, what are these results telling us about investors’ activism?

SP: Well, I think first and foremost, David, this is telling us that investors are recognizing that they can have an influence and they can have a collective influence over companies, but particularly with regard to the environment and climate change and the imperatives associated with that. But I think also the survey is showing us and telling us that actually investors are now starting to recognize that they can have greater societal and cultural influence. That's definitely coming next, it's already happening. What I find so interesting about this is if you talk to any fund manager over the years here at Schroders is you realize very quickly that governance often so overlooked as being that sort of somewhat dry subject. But governance actually, as a sustainable risk, has been absolutely fundamental and key in providing clients with good investment outcomes. And that's been for us since the year dot. And I think with governance comes the recognition, and this is where maybe investors need to think about this a little more, comes the recognition that this is very much, in active management, about exercising good judgment.

 

You can exercise decisions on risks if you understand and recognize all of those risks and if they are there to be recognized, but very often will be making decisions classically against the backdrop of uncertainty. Just think about how that's felt over the last two or three years for many people, investors and many fund managers. So I really hope that investors come to recognize that actually in time, stakeholder capitalism is very nuanced, overall, and that all of the risks and opportunities are linked to one another. And so the challenge here is to balance commercial objectives with how those increasing societal and governance objectives are managed as well. And I think that's a big challenge for companies, but it's simultaneously a big challenge for investors. Those people that think this is just a case of a clear cut binary decision will be burned.

SN: Yeah, I I'd agree with that actually. And it's about being thoughtful and it's, again, so it's not automatically using a proxy voting service and going along with the recommendations. It's not just automatically, unthinkingly thinking, well, this sounds like a good idea. Things are often much more nuanced  and actually really getting to the bottom of the culture of an organization of a company getting to the bottom of the way they think, and is what they're saying matched by what they're actually doing I think is important. So it's really getting to know things and not, not as you say, binary, knee jerk reactions.

DB: So how should companies and advisors be helping investors in that way? How should they be responding?

SP: Well, I think adopting radio silence is dangerous.  So, let's not go down that route. Explanation definitely helps. I think transparency associated with that explanation also helps. And actually, I believe that if companies and advisors and the professionals in this value chain have done their jobs well, then I think investors, the manifestation of that, the symptom of that job well done, is that investors are less worried in times of market and geopolitical turmoil. And let's face it, we've had a gut full of that this year so far. So I think investors actually might be quite surprised by the number of initiatives that are already out there. When you think about the Financial Reporting Council's Corporate Governance Code on employee relations, for example. So what we want here is for companies to provide that explanation, to be transparent, but also to enjoy as much as possible, a freedom from constraint. They have to be able to manage their organizations, manage the culture and be trusted, and that freedom is really quite important. It reminds me a little bit of professor Hans Rosling, the latest professor Hans Rosling, who said, if you give somebody a hammer, everything becomes a nail. And I think we just need to be a little bit careful there. So this is undoubtedly something to watch for all involved.

 

DB: And Sheila, a final question to you. What more can the industry do to engage with these empowered investors?

SN: Well, I think encourage people to ask questions, encourage people, to feel confident about their finances. Encourage policies which cause people to actually engage with their money. Again, picking up a point that Stuart has made. It's not just you are quite far down the sophistication spectrum if you're talking about engaging with companies. So actually giving people, developing the idea for example of financial health checks. So, these would be moments when, a bit like opportunities at certain stages in our lives to have a physical health check, you’re actually offering everyone in the population, the opportunity at either at important points in their lives when they're leaving university or when they're leaving school, when they're starting a job, when they're leaving university, when they're taking out a mortgage when they're having a child. So on those moments in life, when people are actually willing to think, I'm interested in talking about my money and just having, I think that idea of financial health checks is one that could be really

SP: Interesting. That's very much like the idea of behavioral nudges. It's the idea of setting up, wherever possible, almost default environments so that you encourage and guide people towards sensible decisions. And behavioral scientists very often talk about the need for default, wherever possible, and making it easy for people, making it attractive. We get that right. Well, it is very much, empowering for investors in my opinion.

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