Boards and owners need to be stewards

IN THE first quarter of 2015, Tata Steel reported sharp drop in profits in the face of competition from China, and raw material shortages.

But this is a company with a long history of battling back against adversity. The Tata Iron and Steel Company was first floated in 1907. In 1924, it had to fight for its life. There had been an earthquake in Japan, prices had collapsed. According to the company's biographer R M Lala, major shareholders R D Tata and Sir Dorab Tata received a message from the mill that there was not enough money to pay the wages. They could have cut their losses and walked away.

Instead, Sir Dorab pledged his entire personal fortune of ten million rupees, including his wife's jewellery, to obtain a loan of ten million rupees from the Imperial Bank of India for the company. Throughout this struggle for survival, not one worker was retrenched. The shareholders went without a dividend for 12 out of 13 years.

Tata Steel survived then and has survived since in spite of growing competition, always trying to handle cost-cutting sensitively and look after the people affected. Today it remains the eleventh largest steel producer in the world, and produces over a third of India's steel.

This behaviour, and this survival, can be traced to the attitude of its owners. Tata and Sons see themselves as stewards. They want, and have always worked for, a return on their investment. They also want to build on what has gone before. And they feel a responsibility for the company as a living being, with values, relationships, and other intangible assets that cannot be found on a balance sheet.

The health and competitiveness of any market economy is only as good as the companies that operate therein. And the health of those companies is dependent on the combined stewardship exercised by the boards and the owners of companies. Nations thrive when they are home to companies that thrive. These are companies that withstand the shocks of the global economy, and show respect for the environment, and grow ever deeper roots in the surrounding community.

The idea of stewardship has a long history, and it is time for a revival. It describes any situation in which people are looking after assets on behalf of others. Though not a legal term, it reflects the concept of trusteeship. Embedded within stewardship are the passion and the responsibility (not just rights) associated with ownership.

In the context of a company or of businesses more generally, it has been defined by Tomorrow's Company as "the active and responsible management of entrusted resources now and in the longer term, so as to hand them on in better condition". Or, as the newly formed Stewardship Asia Centre has expressed it: "Stewardship essentially means those who are entrusted with wealth of any kind have an obligation to hand those assets on in better shape than they inherited them."

For directors, stewardship is a direct consequence of a director's duty to advance the interests of the company. For a shareholder, the stewardship responsibility is a consequence of the obligations taken on as an owner of shares in the company.

Whether a company is part of a growth industry or one that is in decline, it needs to be able to understand and adapt to the opportunities and risks in the business environment and respond accordingly. Its owners and its directors together need to lead and stimulate that process of adjustment. In the extreme, stewardship is equally applicable to the skills of private equity in the case of a managed exit from an industry or reinventing the company in a new sector.

In a family business, in private equity, or in a trust-owned conglomerate like Tata, it is relatively easier for the shareholders and the boards to engage with other.

But in the listed stock markets, ownership is widely dispersed, and things get more complicated. Who is the shareholder? This question can only be answered by picturing a chain of accountability and responsibility.

This chain links the ordinary saver to the big institutions who handle that saver's money. The big institutions may be pension funds or insurance companies with their own fund managers, or separate asset management companies who compete for the mandate to manage clients' money.

These large institutions may run hundreds of different investment funds, and represent hundreds of thousands of clients with investments in thousands of companies. And there is the state investor, stewarding the savings and reserves of citizens to pay for their future well-being.

Now we are no longer talking about a significant minority or even majority shareholder exercising stewardship. The responsibility is still there, but it is shared among many different institutions with many different accountabilities.

This is the challenge of our age. We want resilient, responsible companies. But their ownership is dispersed, or increasingly complex and indirect. Collaboration between investors, and delegation to directors, becomes important and essential. Institutional shareholders cannot possibly know everything that is going on in every company. But they do elect the boards of those companies. And they can, and have a responsibility to, monitor the performance and orientation of those companies against key criteria and principles. Active engagement give them early warning of trouble ahead. They can make sure that the board has a strategy, understand the changing risks in the marketplace, and operate by strong ethical principles that protect the company's brand and reputation.

This is the emerging stewardship agenda. Without a "golden thread of stewardship" woven through this tangle of relationships and interests, the risk is that our nations will not nurture the resilient companies that all of us need. Worse still, we will see more examples of short-term and self-interested managements and boards, or even intermediate or proxy asset owners in the value chain destroying long-term shareholder value, or damaging our social and environmental fabric in a headlong rush for short-term profit.

Many individual investors have been concerned about the lack of engagement by investment institutions. This is why, in various parts of the world, starting in the UK, we are seeing the emergence of investor stewardship codes. For the same reasons we are beginning to see impatience with the traditional "comply or explain" checklist or "box-ticking" approach to corporate governance which though necessary may not be sufficient to protect investors against misjudgements or failures of leadership in the companies in which they have invested.

The new approach to the governance and regulation of companies will have a more inclusive stewardship orientation. It will be concerned with attitudes and principles. Shareholders want their investments stewarded by effective and responsible boards and management. Together shareholders (owners), board and management have a joint obligation, and are starting to ask: how can a business thrive and grow while enhancing wealth for its stakeholders and the well-being of the societies in which it operates? We urgently need a conversation which helps us develop practical answers to this question.

What might those practical solutions look like? How could they make a difference? That is the subject of our next article.

This is the first in a three-part series on stewardship.