Over 130 members of the U.K. stewardship community came together at the London Stock Exchange (LSE)last week as Diligent Market Intelligence brought its Stewardship Series to London for the first time. Investors, advisors and issuers heard insights over a packed afternoon with an agenda that included five panel discussions and a line-up featuring expert speakers from our sponsors White & Case, Georgeson and Okapi Partners, as well as institutional investors including Schroders, Fidelity International and Aviva Investors.

It was standing-room-only for a lively debate concerning the Financial Conduct Authority’s (FCA) recent overhaul of the U.K. listing regime where the audience heard that the rules are just one part of a complex puzzle to make London a more attractive market. Furthermore, all speakers supported the goal of a more competitive market and the focus on ensuring companies succeed but stressed that management and their advisors need to be aligned with the company’s owners in order to truly succeed in that vision.

Under the old regime, the FCA argued that many companies looking to list in the U.K. had viewed London as having stricter, overly onerous rules with hopes the overhaul in regulation will make it more straightforward in line with international counterparts."Regardless, no-one is arguing for a rush to the bottom and a huge de-regulating of the market, just a softening of the existing rules to be aligned to other markets,” Inigo Esteve, partner in White & Case's capital markets group in London, argued.

As a result of the changes, companies can expect increased engagement from investors. "It’s our responsibility to navigate through that risk and allocate to companies accordingly. We’re going to be placing greater emphasis on our research activities and our stewardship activities are going to become even more critical," said Richard Butters, head of stewardship, Aviva Investors. "I think as investors, we’ll have to consider how to escalate certain issues and I think there will be a greater shift towards keeping boards accountable for their actions." 

Boards need to ensure the investor voice is being heard after fears key protections have been diluted with the removal of a vote on related party transactions and the introduction of flexibility around dual-class share structures. "We don’t believe there is a need for these radical changes imposed. We actually believe other jurisdictions around the world could learn from the well-established U.K. rules and achieve better outcomes for all stakeholders," Doug McMurdo, chair of the Local Authority Pension Fund Forum (LAPFF), told the gathering.

Europe carves out unique approach to activism

The U.K. is attracting even more players with the whole ecosystem becoming more familiar. "The universe of activism and active shareholder engagement is expanding year after year. There are many traditional hedge funds turning their eyes away from the US for the first time and the U.K. is a pretty good place for them to go,” noted Tom Matthews, partner, White & Case.

Activists new to the European market can struggle to adapt to the less confrontational approach. "Activist investors who are just entering the European market can sometimes get frustrated with the expectations of many European investors for a less combative approach although those expectations are changing as more activists enter the European market," said Pat McHugh, co-founder and senior managing director, Okapi Partners, who headed up the firm’s London expansion last year.

The perception of activist investors has changed in Europe with a growing recognition among company boards that they can be constructive, effective stewards and operate with a less aggressive style when compared to their U.S. counterparts. “We don’t use ‘activist’ as a term. We see ourselves as a shareholder, doing our fiduciary duty and if there is no dialogue, we will use our rights, speak to others and consider a contest if needed,” said Anne-Sophie d'Andlau, co-founder and deputy CEO, CIAM.

Most of the engagement in Europe takes place behind closed doors with few campaigns being made public as companies are expected to open the door transparently to investors, especially in the current climate as management navigates geopolitical challenges, a slowing economy and evolving disclosure demands such asthe corporate sustainability reporting directive (CSRD).

Closed end fund (CEF) activism is expected to take hold in the U.K. market as it has in the U.S. “Most closed end funds trade at a discount to net asset value and you don’t need a lot of shares to control a large percentage of the vote,” Anthony Kluk, head of UK and Nordics at Georgeson, told the gathering. “Closed end fund AGM turnout is also around on average 12% less than the standard FTSE 350 company, giving activists the opportunity to have an outsized influence.”

While the U.K. is often seen to trail the U.S. on CEO pay, competitiveness is only part of the conversation with investors more focused on comparing companies within peer groups and sectors, and against other markets such as the wider European region, Asia and Australia. The U.S. is also considered an outlier due to its higher historical total shareholder returns.

There is now a greater focus on sustainable business practices and long-termism when investors engage with remuneration committees with transparency considered key when revising pay structures to consider alternatives such as hybrid plans. “Schroders looks at three key areas when analyzing an increase in executive compensation: Is there a retention risk? Is there a competitive risk? And is the compensation justifiable from a pay for performance perspective? All three of these questions need to be answered,” explained Pippa O’Riley, corporate governance analyst, Schroders.

Looking to 2025, investors are also considering the other end of the compensation spectrum to move their focus beyond executive pay to also include the wider workforce and issues around wage and pension inequality." Schroders are conscious that the focus should not just be on remuneration at the top of the organization and are therefore also running an engagement project with the lowest paid industries around workforce pensions. Where these companies are in a financial position to do so, we are encouraging them to think about increasing these above the currently low statutory minimum,’’ noted O'Riley.

With in-demand demo stations staffed by our dedicated research and sales teams throughout the afternoon, and product updates including DMI’s recently rolled out data feeds on Snowflake Marketplace, the gathering was also addressed by Diligent CEO and President Brian Stafford on Diligent’s mission to improve shareholder engagement by empowering both investors and companies with the broadest collection of governance data available in market.

Speaking following the event, Josh Black, editor-in-chief of Diligent Market Intelligence, extended his thanks to all the speakers and sponsors who contributed to the event’s success. “The Diligent Market Intelligence team is delighted to have brought together investors and issuers to share data and best practices for shareholder engagement on activism, executive compensation, and corporate governance," he said. "We're excitedly planning future events in New York and London to continue the conversation."

Investors gather in London to debate trends in UK governance, activism and compensation

Mauro da Cunha is a distinguished governance expert and Independent Director at leading organizations across Latin America, including Embraer, AES Brasil, Klabin, and Hypera. In our conversation, he emphasized the importance of adapting board practices to address emerging risks, the critical value of diverse perspectives in governance, the common challenges boards face today, and the essential role of ongoing education for board members.

Q: The demands placed on board members have increased significantly over the last several years. How can boards balance and prioritize emerging risks like cybersecurity and AI, with more traditional risks on the board agenda?

A: Boards are facing increasing demands, and addressing these challenges requires a more proactive approach. One important step is to acknowledge that the workload has grown, which may mean more frequent and focused meetings, beyond the traditional four or five per year, even when factoring in committee work.

Second, boards should reassess their current purview to make room for new challenges, or in other words, “unload the backpack.” This involves revisiting all board processes, from the annual agenda to policies, to authority thresholds. Routine data and reports should be separated, remaining accessible to directors at any time. This allows meetings to focus on key performance indicators (KPIs) that prompt meaningful discussions or encourage valuable challenges from directors. Corporate secretaries are a strategic asset in this scenario, helping boards be more productive, offering continued education, and encouraging the use of AI-powered software (like the Diligent One Platform) to streamline board activities.

Q: With increasing regulatory scrutiny worldwide, what steps can boards take to ensure they remain compliant while also focusing on long-term strategic goals?

A: Scrutiny is good and should not be feared. Instead, let’s call it accountability, which helps us all become better professionals. As a matter of fact, I believe scrutiny from owners, like shareholders and stakeholders, is even more important than scrutiny from regulators, who often focus on whether or not the right boxes are checked. Also, I would argue that the only way to stay compliant is to focus on long-term strategic goals!

Q: How does having a diverse board contribute to better risk management and decision-making in governance?

A: Diversity is absolutely crucial to better risk management and decision-making. While gender and racial diversity are important and often contribute to diverse perspectives, there is a lot of value in diversity of thought, skillsets and experience. It's essential to ensure that directors bring a variety of viewpoints and approaches, regardless of their background, to truly enhance board discussions and decision-making processes.

I see a lot of nominating committees - as well as activists - focusing strongly on bringing directors with “industry expertise.” In my opinion, this is the opposite of seeking diversity. Of course you need a level of industry experience on the board, but you also need strong cross skills in areas such as governance, audit, compensation, etc. In fact, many boards fail because no one is thinking about these issues.

Q: What challenges does a director appointed by shareholders face when the majority of the board is appointed by another body, such as a controlling shareholder or government?

A: It varies by jurisdiction. In many places, this setup is common because the law permits it. Some companies and boards are mature enough to see it as an opportunity, recognizing that it can bring genuine diversity of thought. However, in other cases, existing board members may view the shareholder-appointed director as an outsider or disruptor, making productive conversations difficult. Over time, though, if the independent director understands this dynamic and approaches it with patience, they can help foster a culture that values the fresh perspectives and debates the outsider brings.

Q: In your view, how critical is ongoing education for board members in staying updated on governance and risk management trends, and what are the most effective ways for boards to stay informed and prepared?

A: Continued education for boards is absolutely critical, but it should not be confined to a series of dull presentations on topics of interest. It requires a joint effort, involving the director, chair, board and company. Directors need to be proactive in seeking continued education, especially in novel areas or those outside his or her area of expertise. The chair should stimulate continued education by openly addressing gaps and needs of the company. The board must allocate resources for education, including frequent visits to facilities. And, management should support curious directors that want to learn by recognizing the importance of a knowledgeable board, helping to identify resources and gaps.

Finally, ongoing education is both a collective and individual responsibility. Much of the learning will need to be tailored to each director’s unique background and experience, especially given the diversity among board members.

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