Investor Hermes critical of Deutsche Bank - why we need more of this sort of thing

The reason that scandals involving big business are so prevalent is that too few fund managers are willing to do what Hermes does: engaging with companies and pointing out problems

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The Independent Online

The fund managers who invest money on our behalf generally do a pretty rotten job of overseeing the companies they hold for us. 

If you want to know why CEO pay has been allowed to head off unchecked into the stratosphere, why corporations so often behave badly and scandals so often blow up as a result, look to the doors of ABC Asset Management, which has the ability to influence these things, but rarely bothers to do so. Too costly. And we'll lose lunch invites. 

Just occasionally, however, there is a chink of light in the darkness. Arriving in my inbox comes a missive from Hermes EOS concerning Deutsche Bank, one of Europe’s biggest financial institutions. Some of your pension may be exposed to it, some of your ISA too (I have a some European funds so I know some of mine is). 

In addition to working commendably closely with Hermes' own fund managers, Hermes EOS also provides engagement services to others (which helps to keep the costs manageable). 

As part of that, it has just published a detailed report on Deutsche. Some of it is good - it thinks the bank is making progress and gives a (partial) thumbs up to the reforms it has made to its pay practices. 

However, it also has some pointed things to say about what is going on there. 

“We remain underwhelmed by Deutsche’s progress on culture change,” the report opines. “The most recent employee engagement survey suggests that the employee commitment and enablement index levels have declined to critical lows.”

And there’s more: “We implore Deutsche to be more transparent about the internal investigations that it has conducted into alleged wrongdoing by management and supervisory board members. This is a necessary step, to provide clarity, regain shareholder trust and move on.”

For the City, it’s quite strong stuff, all the more so given that it has been made public. While Hermes itself doesn’t hold Deutsche, you would hope that those that do will consider carefully what it has to say and use their votes accordingly. 

Similar missives have emerged on, for example, Volkswagen, and British mining outfit Rio Tinto, which was castigated for a lack progress when it comes to boardroom diversity. 

Sadly, one reason Hermes’ reports stand out is because they are so rare. As is its commitment to seeking “outcomes for our clients that go far beyond the financial and consider the impact our decisions have on society, the environment and the wider world”. 

Those on the business right might snarl that revenues and profits are the only criteria against which businesses should be judged. That’s not good enough. They are a part of society.

Hermes stresses that its priority is helping people to "retire better by providing world class active investment management” but the fact that its mission statement reflects the former fact as well is very welcome. The pity is that so few others think similarly. 

If they did, business would benefit as much as anyone. The low esteem in which it is held by the British, and by the citizens of other nations, might be somewhat higher. 

Unfortunately, it’s hard for small investors who might support Hermes' aims to get exposure to the company's products, unless their pension fund happens to use them (it should be said that there are  other asset management firms in the retail space that pay more than lip service to engagement eg Legal & General).  

Perhaps Hermes bosses could consider how they might change that? It would be consistent with their business’s stated mission, after all.  

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