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Feb 01, 2017

Leading asset managers commit to corporate governance

Move addresses concerns institutional investors don’t monitor executive pay

Campaigners for more effective corporate governance have received a major endorsement with the world’s three largest asset managers embracing the issue whole-heartedly.   

BlackRock, Vanguard and State Street have boosted their corporate governance teams considerably in response to pressure from policymakers and clients to demonstrate they are policing the companies they invest in. The move by the asset managers, which collectively control nearly $11 tn of assets, will assist in addressing concerns that institutional investors are not doing enough to monitor contentious issues around executive pay and board diversity at the companies they invest in.

New York-based BlackRock now has the largest corporate governance team of any global asset manager, after hiring 11 analysts for its stewardship division over the past three years, bringing the total headcount to 31.

Vanguard, the Pennsylvania-based fund group, has grown rapidly on the back of its low-cost approach and has nearly doubled the size of its corporate governance team to 20 employees over the same period.

State Street, the US bank, has almost tripled the size of the governance team in its asset management division to 11. Furthermore, both Vanguard and State Street say their governance teams will continue to grow this year.

The focus on corporate governance comes as regulators and politicians around the world increasingly scrutinize the relationship between companies and their shareholders. Asset managers have previously been accused of regularly supporting company proposals in order to avoid damaging their relationships with senior executives.

Theresa May, the British prime minister, launched a green paper on corporate governance reform in the UK last November to address the issue, though the paper was considered somewhat watered down compared with May’s earlier statements on the issue.

The government wants to strengthen shareholders’ power, but is also considering whether to force large investors to disclose their voting records at companies’ annual general meetings.

The EU’s shareholder rights directive – a substantial set of rules expected to come into force across Europe in 2019 – is similarly expected to strengthen shareholders’ rights, as well as force large investors to reveal more information about how they engage with companies.

‘Vanguard continues to invest in the research and infrastructure that enable advocacy and voting across a global portfolio, and we expect to continue our focus on this important capability over the coming years,’ says Glenn Booraem, Vanguard’s head of corporate governance.

Other large asset managers have also expanded their stewardship teams over the past three years: Fidelity International, which now has 12 governance analysts; Legal & General Investment Management, which has 10; Aberdeen Asset Management, which has 20; and US public pension funds Calpers and Calstrs, which have 29 and 12, respectively.

Large pension funds and other institutional investors are at the same time demanding more information from their external asset managers on their approach to corporate governance, putting pressure on fund houses to increase resources in this area. Rakhi Kumar, head of corporate governance at State Street Global Advisors, says client demand for information on the company’s approach to this issue has ‘gone up significantly’.

The principle is that better governance analysis helps investors avoid companies that are on the brink of a costly scandal.

The issue of corporate governance has been in the spotlight over the past two years after the exposure of serious governance failings at Petrobras, the Brazilian oil company, Volkswagen, the German car maker, and UK retailer Sports Direct, which caused their share prices to fall dramatically.