Investors in the local capital market generally tend to remain silent through years, and sometimes decades, of underperformance, poor governance and a lack of transparency from their investee companies. Market participants in frontier economies such as Trinidad and Tobago typically lack the sophistication of their peers in developed countries, which see institutional investors play the role of active market custodians and keep listed companies in line. Nevertheless, despite weak minority shareholder rights, local asset managers have the capability to shape the firms they are invested in.
Inactive Culture
Institutional investors, such as banks, pension plans, insurance companies and mutual funds, hold a substantial combined stake of at least 25% in 14 of the 20-largest companies in the All Trinidad and Tobago Stock Index. However, the combined influence of institutional money managers currently lays dormant. Cooperation between different investment houses is minimal at present, and concerted actions to aggressively pursue shareholder enhancing activities such as cost rationalisation or revenue growth in investee companies are not pursued.
The need for greater financial stewardship has escalated since the 2008-09 global financial crisis and the subsequent collapse of Colonial Life Insurance Company (CLICO). Institutional investors have the ability to band together to ensure that issues such as executive pay, full and timely disclosures of material events, adherence to best practices, and adequate due diligence on merger and acquisition (M&A) transactions are fully addressed by their investee companies. In fact, since the collapse of CLICO, over 20 different M&A transactions have been pursued by publicly listed entities with little to no involvement from institutional investors. Some transactions have required shareholder consent and proxy votes, but institutions either provided rubber-stamped approvals or have abstained from voting. Nominating an individual to a company’s board of directors, which is a much sought-after privilege in most markets, is also routinely glossed over, with asset managers frequently waiving their rights to such an important decision.
Step Up
Furthermore, the demand for socially responsible investing has increased significantly in developed economies and will no doubt follow in the local market. Asset management firms, therefore, have to be more agile and forward-looking in ensuring that their managers are trained to fulfil a broader mandate than ever before. While adopting the Stewardship Code in full, as applied in the UK, may be a distant goal, regulators must work now to ensure that they create an environment where active management becomes the new norm. Soliciting feedback from large investors in situations where it may not be a legal requirement, providing clarity to corporate management that communicating with institutional investors would not carry punitive actions, and confirming that discourse and dialogue is encouraged are all small ways in which regulators can promote this change to the investing environment.
The need for institutional investor involvement in the early stages of initial public offerings and debt financing deals is also apparent, as the pricing, size and timing of transactions are always aligned with the needs of large investors. Additional communication and involvement with institutions may resolve some of these issues, and the rewards of pursuing this model have been demonstrated. In the case of Trinidad Cement, large investors were able to unite and form a steering committee that guided the company through a default and difficult market conditions until it was financially stable enough to be acquired by a large multinational company at a 45% premium to where it had been trading in the stock market. The firm’s relative success was based on numerous factors, the most important of which was the rare collaboration of different institutional investors to rescue an investee company from extinction. This model of active management by institutional investors and coordination between different investment houses ought to be the new paradigm for T&T’s local market.
