What is effective stewardship, in the UK and globally?
There are many shades of investor stewardship – the nurturing of investments and the engagement with companies by investors on behalf of their clients, with a view to aligning the interests of all parties. At one end of the spectrum, some investors may be totally focused on maximising returns within a short period of time; at the other end are asset owners and managers who take a long-term view and are very concerned with good corporate governance.
In January 2019, the FCA and Financial Reporting Council (FRC) published a joint report – Building a regulatory framework for effective stewardship. Why did they decide to look into this issue?
While the FRC’s UK Stewardship Code provides a generally accepted framework for enabling investor stewardship, it has not been backed up by effective enforcement, which is an essential ingredient for effective regulation. The FCA has responsibility for the vast majority of regulation affecting the investment sector. Therefore, it seems appropriate that it should devote more resources to embracing stewardship within its scope and, working with the FRC, strengthen the overall approach.
Many institutional investors use proxy advisory firms when voting on issues where companies seek shareholder votes, and investors often vote the same way. How do investors differentiate themselves, and why is this beneficial?
Voting patterns on pay-related resolutions at shareholder AGMs (2014–2019)
Average level of shareholder dissent
Percentage of resolutions that attracted ‘significant’ dissent levels of over 20%
Average percentage of approval with which resolutions were waved through
Percentage of FTSE 100 company pay policies put to AGM and approved by shareholders
Source: High Pay Centre
Proxy advisory agencies tend to benchmark their voting recommendations against the UK Corporate Governance Code without having a full understanding of the company’s circumstances and their recommendations. This can undermine the principle of ‘comply or explain’, which lies at the heart of the Code. Many small investment houses do not have the resources to evaluate all the voting resolutions, so vote in accordance with the recommendations of a proxy advisory agency. The larger investment houses tend to have dedicated in-house teams which are responsible for voting, using guidelines that are approved or supported by their clients and are applied to the particular situation. They further differentiate themselves by using different approaches to the public reporting of their engagement and voting activities. It is generally accepted that ‘one size does not fit all’ when it comes to investor stewardship, and this is reflected by the different approaches taken by different houses.
How do they ensure they are achieving best practice in stewardship, particularly when voting on contentious issues?
There is a reasonable degree of thoughtful scrutiny and careful consideration that is given by many (but not all) investors to a company’s circumstances, with a view to voting in the best interests of their clients, customers and beneficiaries, as appropriate.
Has any progress been made in persuading hedge funds to vote?
About the expert
Guy Jubb is an honorary professor at the University of Edinburgh Business School and the former global head of governance and stewardship at Standard Life Investments.Hedge funds will very often not vote. However, it has to also be recognised that hedge funds will often short on shares and therefore the voting decision-making is compromised. There’s a lack of transparency around where the true ownership position of institutional investors lies, and this should be addressed by regulators.
If an institutional investor is unhappy with the direction a company is taking, should they stay invested and try to influence corporate governance or walk away?
Ideally, institutional investors should engage with the company with a view to exercising their influence individually and collectively to achieve the desired change. If the company is unwilling or unable to respond in a positive way, then the investors should sell their investments in the company and be transparent as to why.
Earlier this year, the FRC consulted on proposed revisions to its Stewardship Code. What do you make of them?
The proposed new Stewardship Code is more like a checklist than a code. That said, some of the revisions are a step in the right direction. We are on the cusp of moving from the spirit of effective investor stewardship to merely Code compliance, and that may not be the best way to proceed in the long term. There should be more emphasis on regulatory monitoring of the way in which institutional investors fulfil their stewardship responsibilities, rather than just on Code compliance.
This article was originally published in the October 2019 print edition of The Review. All members, excluding student members, are eligible to receive the quarterly print edition of the magazine. Members can opt in to receive the print edition by logging in to MyCISI, clicking on My account, then clicking the Communications tab and selecting ‘Yes’.
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