Chapter 6 pt 2 Flashcards
(32 cards)
1
Q
What did the Walker Report do?
A
- Formally called for the Financial Reporting Council (FRC) to issue a stewardship code that provides a framework for shareholder engagement
- for this code to be reinforced by a Financial Services Authority (FSA; now FCA) requirement that any registered fund manager must make a statement as to whether and how it approached its principles
2
Q
What idd the FRC do in response to the Walker Report?
A
- 2010: published the UK Stewardship Code - largely unchanged from existing doc
- A code with regulatory backing was thought likely to have greater force
- Industry acceptance of the code was relatively rapid
3
Q
What is the latest revision of the UK Stewardship Code?
A
- UK Stewardship Code 2020
- The 2020 Code includes 12 principles for asset owners and managers
- It also introduces six new principles for service providers.
- Increased ambition for practical delivery by signatories
- Now expected to report annually on activity and outcomes from activity
- Each principle has associated outcomes that must be reported on and require concrete examples of outcomes
4
Q
What are the 12 principles of the 2020 UK Stewardship code for asset owners and managers?
A
- Purpose, strategy, and culture
- Governance, resources, and incentives
- Conflicts of interest
- Promoting well-functioning markets
- Review and assurance
- Client and beneficiary needs
- Stewardship, investment, and ESG integration
- Monitoring managers and service providers
- Engagement
- Collaboration
- Escalation
- Exercising rights and responsibilities
5
Q
What are the 6 principles of the 2020 UK Stewardship code for service providers?
A
- Purpose, strategy, and culture
- Governance, resources, and incentives
- Conflicts of interest
- Promoting well-functioning markets
- Supporting client’s stewardship
- Review and assurance
6
Q
What are the 2 distinct functions that the 12 principles can fall under?
A
- Principles 1 through 8 address the foundations of stewardship.
- Principles 9 through 12 focus on the practical discharge of engagement responsibilities.
7
Q
What do the outcomes of principles 1,2,3,5, 6 need to look like?
A
- Cover such structural issues within the investment institution as governance, culture, and managing conflicts of interest.
- The outcomes that need to be disclosed in relation to these issues are evidence that those structures concretely work in practice in the clients’ best interests.
8
Q
What do outcomes of principles 7-8 need to look like?
A
- require the integration of ESG factors into the investment process along with effective oversight of service providers.
- The disclosures of related outcomes need to be explanations of how these processes have been delivered effectively on behalf of clients and beneficiaries.
9
Q
What do outcomes of principles 9-12 look like?
A
- cover engagement (and voting) activities.
- The intended outcome of these principles (which must be part of the annual reporting) is to show substantive change at companies (or other investee assets) because of the engagement activity.
- The disclosure of at least some voting outcomes, not just the investor’s voting activity, is also expected.
10
Q
Which principle found in the 2020 code is the most challenging and why?
A
- Principle 4: charges signatories with identifying and responding to market-wide and systemic risks
- The requirement to “disclose an assessment of their effectiveness in identifying and responding to” such risks imposes a new and significant burden, even for those who already recognize this as a stewardship responsibility.
11
Q
Which Australian Principle sets out similar expectation as principle 4 in UK code?
A
- Principle 5
- Asset owners should encourage better alignment of the operation of the financial system and regulatory policy with the interests of long-term investors.
- examples of industry-wide issues include advocating for corporations law, listing rules, or government policy change in relation to governance and shareholder rights, climate change, and ESG disclosures.
- Examples of activities could include contributing to government, parliamentary committees, and other relevant public regulatory or policy forums.
12
Q
Describe influence of UK Stewardship Code:
A
- International Corporate Governance Network (ICGN) updated its 2016 Stewardship Principles - discusses the need for investors to engage with public policymakers on systemic risks
- Not proving as much of a model for global codes as predecessors
3/ Japan only followed lead in small way - requirement to report on outcomes of engagement activity but downplayed so only a limited impact
13
Q
What were the changes to the 2020 Japan’s Stewardship code?
A
1.. extending coverage to all asset classes, not just equity;
2. incorporating sustainability and ESG;
3. encouraging asset owners to become involved in stewardship and provide a little more clarity on their role in the stewardship hierarchy; and
4. clarifying the position of service providers in the hierarchy and adding higher expectations of proxy advisers.
14
Q
What are the stewardship codes in other countries:
A
- Global—ICGN Global Stewardship Principles
- Europe—European Fund and Asset Management Association Stewardship Code)
- Australia—Australian Asset Owner Stewardship Code
- Brazil—AMEC Stewardship Code
- Hong Kong SAR—Principles of Responsible Ownership
- India—Securities and Exchange Board of India Stewardship Code
- Japan—Principles for Responsible Institutional Investors
- Malaysia—Malaysian Code for Institutional Investors
- Singapore—Singapore Stewardship Principles for Responsible Investors
- South Africa—Second Code for Responsible Investing in South Africa
- South Korea—Korea Stewardship Code
- Switzerland—Swiss Stewardship Code
- United States—The Stewardship Principles
15
Q
What are most of the countries stewardship codes modelled on?
A
- seven principles of the 2012 version of the UK Stewardship Code
- conflicts of interest are dealt with very differently.
- It has been stated that those codes drafted by the fund management industry are more likely to downplay the issue of conflicts, while those codes with greater regulatory backing place more emphasis on the issue.
16
Q
What is an example of a code that deals almost entirely avoids the conflict of interest issue?
A
EFAMA Stewardship Code
17
Q
What are the similarities between most stewardship codes?
A
- 6 or 7 principles
- first often requiring investors to have a public policy regarding stewardship
- the last noting the need for honest and open reporting of stewardship activities.
- Main body calls for:
a. regular monitoring of investee companies;
b. active engagement, where relevant (sometimes termed “escalation,” or sometimes escalation is deemed worthy of a separate principle of its own);
c. thoughtfully intelligent voting.
18
Q
What are the two principles that are sometimes but not always present in stewardship codes?
A
- investors manage their conflicts of interest regarding stewardship matters; and
- the escalation of stewardship activity includes a willingness to act collectively with other institutional investors.
19
Q
Why is the collective engagement issue controversial?
A
- there are concerns about the creation of so-called concert parties (groups of shareholders so influential that they, in effect, take control of companies without mounting a formal takeover).
20
Q
What asset classes are stewardship activities most developed for?
A
- Public equity investment
21
Q
What is going to cause the number of stewardship codes to increase in Europe?
A
- European Union’s Shareholder Rights Directive II (SRD II), which came into force in June 2019.
- SRD II will raise expectations in each country about the level of stewardship carried out by local investors.
- This directive is likely to supersede such initiatives as the voluntary EFAMA Stewardship Code and may move European markets toward expanding expectations that have regulatory backing.
22
Q
What was the first legislation around stewardship?
A
- US ERISA legislation, the Employee Retirement Income Security Act of 1974
- advisers should act as fiduciaries in relation to the beneficiaries
- the fund will vote at investee company general meetings and engage with companies.
- Fresh interpretation are more supportive of ESG stewardship - if linked to value
23
Q
What are the different ways asset owners can engage with companies?
A
- Directly through team members who act as stewards of portfolios
- Expect external fund managers to do so through portfolio managers or stewardship specialists
- Entirely outsourced to specialist stewardship service providers
24
Q
What is an example of a stewardship service provider?
A
- Proxy voting advisory firms
- Offer analysis and voting recs across many public companies
- Almost all institutions hire them to provide framework that ensures their voting decisions are delivered
- Most pay for advice on voting decisions
25
How do other forms of stewardship service provider work apart from proxy voting advisory firms?
1. Offer various degrees of engagement services by stepping into shoes of investor to engage on their behalf
2. By aggregating the interests of clients, the scale that is necessary to be present and visible enough in dialogue and engagement with company management and boards can be built.
3. Boards can offer a form of collective engagement, enabling investors to have a greater reach and influence by working alongside others and sharing precious resources
26
How does engagement style vary depending on heritage of stewardship teams?
1. Distinct between those with history of governance-led engagement vs E&S-led
2. E&S heritage: tend to be organised by sector
3. G: determined more by national law and codes - teams split by geography
27
How does E&S engagement work?
1. Bottom up
2. Teams tend to focus on individual environmental and social issues and to pursue those vigorously across sectors or markets as a whole.
3. This can encompass trying to establish better practice standards and highlighting leading practice as well as targeting those perceived as laggards.
4. The dialogue would tend to start with investor relations or sustainability teams and then be escalated upward, to both senior management and the board
28
How would governance heritage engagement work?
1. Top down
2. tend to focus first on individual companies, starting with the chair (often with the assistance of the company secretary) and working through the board and down to management from there.
29
Which engagement style fits with which portfolio type?
1. Top down: align with passive or broadly diversified investment portfolios
2. Bottom up: active investment approaches with concentrated portfolios
30
How do passive investors or those with broadly diversified portfolios tend to start engagement?
1. Start with an issue—identified by the team from news or broader analysis or through a screening or other research provider
2. seek to engage with all the companies affected by that issue (which may be a whole sector or even broader).
3. Usually, the starting point is a letter written to all those affected, which is then followed up with dialogue
4. Issue-based approach normally accompanied by examples of best practice
31
How do Active investors or those with focused portfolios tend to start engagement?
1. start with the company itself and its business issues
2. develop a tailored engagement approach cutting across a range of issues, often with the investment teams taking a leading role.
3. Companies selected for this approach are often identified from among investment underperformers or are firms that trigger other financial or ESG metrics.
4. The starting point is typically to seek a direct discussion with senior management and then the board.
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