As the ball drops in Times Square during the first seconds of 2018, a new investor stewardship framework will come into effect that could prove to be a major talking point during the 2018 proxy season.
The Investor Stewardship Group (ISG) has announced two frameworks that come into effect January 1. The first holds issuers accountable to a list of corporate governance principles and the second holds investors accountable to their clients to ensure their investments are being managed in good faith.
As many as 50 US investors – representing $22 tn in assets under management – have signed up to the ISG.
The signatories are a mixture of large institutional investors – such as Blackrock, Vanguard, State Street and CalSTRS – and hedge funds – such as ValueAct Capital.
‘There had been a lot of people in the governance world who had talked about trying to develop a stewardship code because we knew that a stewardship code wasn’t going to come from the regulator here in the US,’ Anne Sheehan, director of corporate governance at CalSTRS, tells IR Magazine. ‘This was a sounding group of investors saying we have to own this. When we have a dialogue with a company, we also have to hold ourselves to account.’
This investor group has been working with the University of Delaware’s Weinberg Center for Corporate Governance identifying the governance issues where there is agreement and codifying them into these standards.
In many cases, an investor’s own corporate governance principles may go further than the ISG framework, but Aiesha Mastagni, portfolio manager, corporate governance at CalSTRS tells IR Magazine that these principles will be a new tool for holding issuers to account.
‘There are lots of times when we’d have conversations with issuers who would say we’re the only company to bring up a specific corporate governance issue,’ Mastagni says. ‘This framework helps in a dialogue to now say that CalSTRS isn’t the only one.’
The corporate governance framework has six principles, which are:
- Boards are accountable to shareholders
- Shareholders should be entitled to voting rights in proportion to their economic interest
- Boards should be responsive to shareholders and be proactive in order to understand their perspectives
- Boards should have a strong, independent leadership structure
- Boards should adopt structures and practices that enhance their effectiveness
- Boards should develop management incentive structures that are aligned with the long-term strategy of the company.
The ISG’s website provides the full list of sub-articles related to these principles.
In 2018, ISG’s signatories were most interested in engaging with issuers on the principles, Sheehan says.
The ISG isn’t prescriptive about how issuers engage and communicate their compliance with the framework and are open to conversations with IR teams, corporate governance teams, board directors, or inclusion in disclosures or on IR websites.
There haven’t been conversations about whether the ISG signatories would be willing to act as a voting block against an issuer that ignores the principles and refuses to engage around these governance topics, Sheehan adds.
The ISG’s principles come into effect just weeks after the Financial Reporting Council (FRC), the UK regulator, published proposals for a revised corporate governance code focused on long-term growth and sustainability.
New corporate governance codes have also been introduced in Holland and the Philippines in the last year – although the ISG is the only example of a market-led standard.
