Engagement and Stewardship Flashcards
Stewardship - responsibilities of institutional investors
origins from the steward left in charge of an absentee landlord’s estate.
the process of intervention to make sure that the value of the assets is enhanced overtime, or at least does not deteriorate through neglect or mismanagement.
It can encompass the buying and selling of assets to maintain value within the fund as a whole, as well as acting as a good owner of assets.
Engagement
- voting most visible in AGM
Annual general meetings in public events
the way in which investors put into effect their stewardship responsibilities in line with the Principles for Responsible investment RPI 2.
one aspect of good stewardship
is the individual interventions in specific assets to preserve and/or enhance value.
usual definition of engagement
- a purposeful dialogue with a specific objective in mind
- pre-supposes something vital: that the engager sets objectives for their engagement at the start of the process, and the dialogue’s purpose is to deliver those objectives over time.
engagement can encompass 包含the full range of issues that affect the long-term values of a business:
strategy capital structure operational performance and delivery risk management pay and corporate governance
a full assessment of operational performance must encompass not only financials, but vital areas relevant to the company’s stakeholders:
- highlighting the long-term health of the business, such as relations with the workforce;
- establishing a culture that favors long-term value creation
- dealing openly and fairly with suppliers and customers
- having proper and effective environmental controls in place
Stewardship and engagement are beneficial because
they enhance shareholder value and support investors in the execution of their fiduciary duty.
When done well, they encourage enhanced information flows between investors and investees as the parties discuss and debate issues.
allow to lean from each other and to build relationship, to encourage change where shareholders communicate their perspectives on key issues that the company is facing.
Principles for Responsible Investment PRI highlighted 3 ESG engagement dynamics that it believes create value:
- communicative dynamics
- learning dynamics and
- political dynamics
mindset of success being measured against the delivery of pre-agreed objectives fits well in the UK’s
Stewardship Code 2020
The Financial Reporting Council, in the code, repeatedly discusses the need for signatories to disclose the outcomes of their engagement work as well as the concrete benefits from stewardship activity for clients and beneficiaries.
Engagement is successful only to the extent that
it delivers the pre-agreed objectives
engagement impact Returns to shareholders activism
evidence from a clinical study of the Herms UK Focus Fund
It studies the internal records of Focus Fund team activities and considered their impact both in terms of delivering change at the companies in question and in delivering returns for the investors.
the successful engagement activity was followed by positive abnormal financial returns
On average, ESG engagement generated an abnormal return of 2.3% in the year after the initial engagement, rising to 7.1% for successful engagements and with no adverse response to unsuccessful engagement.
ESG engagement leads to
a reduction in downside in risk
the effect is stronger the more successful the engagement is.
Engagement helps investee companies to understand their investors’ expectations
allowing them to shape their long-term strategies accordingly to suit them
also enables companies to explain how their approach to sustainability relates to their broader business strategy, and can provide an opportunity for companies to comment on ratings or scores driven by templates that they feel do not reflect the complexity of an issue.
Defining stewardship and engagement 2019 white paper
the Investor Forum provides a framework for understanding the nature and key elements of stewardship.
Components of stewardship
preserving and enhancing the value of assets with which one has been entrusted
delivery through Investment approach and decision
Allocation of capital in accordance with inv. purpose, mandate and client interests at portfolio and individual asset levels.
Dialogue
Active discussions b/w companies and investors, of which there are two principal forms:
- monitoring
Dialogue for inv. purposes:
to understand the company, its stakeholders and performance.
Informs incremental buy/sell/hold decisions - Engagement
Purposeful dialogue with a specific and targeted objective to achieve change.
Individual or collective basis, as appropriate.
typified by
detailed and specific questioning; investor seeking insights
two-way dialogue; investors expressing opinions
Characteristics of high-quality delivery
- Frame by close understanding of nature of company and drivers of its business model and LT opportunity to prosper
- appropriately resourced, so dialogue can be delivered professionally in the context of full understanding of individual company
- Dialogue must be consistent, direct and honest
- Dialogue is respectful and seeks to build mutual trust
Monitoring dialogues
are the conversations between investors and mgmt to more fully understand performance and opportunity, which are typified by detailed questions from the investors and which are likely to inform buy, sell or hold inv. decisions.
Engagement dialogues
are conversations between investors and any level of the investee entity featuring a two-way sharing of perspectives, such that the investors express their position on key issues, and in particular, highlight any concerns that they may have.
distinct between monitoring dialogue and genuine engagement shows
the ways in which stewardship can sometimes be ineffective or inappropriate
The delivery of concrete outcomes is core to the ‘why’ of engament
Effective engagement generates change and, if the intended engagement outcomes have been chosen well, that change will preserve and enhance long-term value at the company subject to the engagement itself.
high quality delivery require that it:
is set in an appropriate context of long-term ownership and has a focus on long-term value preservation and creation, so that the engagement is aligned with the investment thesis.
is framed by a close understanding of the nature of the company and the driers of its business model and long-term opportunity to prosper
recognizes that change is a process and that, while haste may at times be necessary, change should not be inappropriately rushed
employs consistent, direct and honest message and dialogue
is appropriately resourced so that it can be delivered professionally in the context of a full understanding if the individual company
uses resources efficiently so that engagement coverage is as broad as possible whilst using all the tools available, including collective engagement and
involves reflection so that lessons are learned in order to improve future engagement activity
The Investor Forum
A UK group set up to facilitate collective dialogue between investors and investees.
Walker Report ushered in a new era of shareholder engagement
the report formally called for the Financial Reporting Council FRC to issue a stewardship code to provide a framework for shareholder engagement and was to be reinfored by a FSA financial services authority.
requirement that any registered fund manager must make a statement as to whether and how it approached its principles
1st stewardship code 2010 Stewardship Code
largely unchanged from the existing Statement of Principles on the Responsibilities of Institutional Shareholders and Agents issued by the Institutional shareholders Committee
7 principals:
Institutional investors should:
publicly disclose their policy on how they will discharge their stewardship responsibilities
have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed
monitor their investee companies
establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value
be willing to act collectively with other investors where appropriate
have a clear policy on voting and disclosure of voting activity
report periodically on their stewardship and voting activities
Global codes
ICGN Global Stewardship Principles
