Past Exam Questions - Shareholders rights and engagement Flashcards
JUNE 2021 - MY ANSWER
- Explain the purpose of the annual Stewardship Report, which signatories to the Stewardship
Code must publish.
The UK Stewardship Code 2020 sets high stewardship standards for asset owners and asset managers, and for service providers that support them.
Section 9,10 and 11 of the code provides information around engagement inc. reporting expectations.
The aim of the report is to show fair, balanced and understandable reporting about how they have engagement as institutional investors. This is published by the intuitional investor as they are inventorying on shareholders behalf (e.g. a pension fund) so that customers can determine e if they feel they have been effective.
It should be set out clearly, in plain English and show the following:
It should demonstrate engagement, escalation, collaboration and how they have exercised their rights as institutional investors.
It should distinguish between monitoring and engagement and should report on engagement data relating to the reporting period.
JUNE 2021 - MARKERS ANSWER
- Explain the purpose of the annual Stewardship Report, which signatories to the Stewardship
Code must publish.
The purpose of the Stewardship Code (Code) is to enhance the stewardship role that asset owners and service providers play in relation to UK traded companies (1)
and by requiring signatories to the Code to issue an annual Stewardship Report (Report) the Code encourages better stewardship behaviour (1).
The Report also creates transparency in relation to signatories’ compliance with the Code and allows their clients, the companies in which they invest (or in relation to which they provide services) and other market participants to get information about their approach and actions in relation to stewardship issues. (1)
The Code operates on an “apply and explain” basis and so a key purpose of the annual Report is for signatories to explain how they have applied the Principles in the Code over the last 12 months. (1)
Each of the Principles in the Code are supported by reporting expectations set out in the Code, that indicate the information that organisations are expected to include in their Stewardship Report. (1)
The purpose of these reporting expectations is to support the Principles by asking organisations to
describe their stewardship activities and the outcomes that have resulted from their application of each Principle. (1)
The Report is also required to contain information about the organisation’s purpose, investment beliefs, strategy and culture and how these, and the organisation’s governance arrangements and resources, enable it to practice stewardship. (1)
Reward other valid responses.
NOVEMBER 2020 - 9B - MY ANSWER
Talon Consultants plc (Talon) is an IT consultancy business which has its shares listed on the
Alternative Investment Market (AIM). It states on its website that it has adopted the UK Corporate
Governance Code 2018 (the Code) as the governance code against which it will provide a ‘comply
or explain’ statement. The Talon Board comprises three executive directors and four non-executive
directors. There are four Board committees: audit, nomination, remuneration and corporate
responsibility.
The Talon Board has decided that it needs to take steps to improve engagement with its workforce
in order to comply with the Code and also because its staff turnover levels have increased and a
recent staff survey showed falling staff morale. Talon has a large workforce, who fall into three
main categories: call centre employees who represent about 70% of the total number of employees
and are all based at its head office, IT experts who are located in a range of different local offices
and who often work remotely or from home, and IT contractors on zero-hour (casual) contracts
who are called in to assist when there is a particularly large contract to fulfil.
Talon’s shareholders are unhappy because the business has had a difficult year: its income has
fallen and it has recently announced that its prior year sales figures had been overstated as a
result of an accounting error which was not picked up by the audit committee or the company’s
auditor. Talon’s share price has halved over the last year as a result. The Talon Annual General
Meeting is due to be held in a month’s time.
Discuss the application of the UK Stewardship Code to the institutional shareholders of Talon
who are signatories to that Code. Include which principles in the Stewardship Code are most
relevant for them to apply in light of the company’s difficult year and the reduction in Talon’s
share price.
(10 marks)
LISTED - UK CG CODE
As signatories to the UK Stewardship code, the institutional investors need to report how they have applied the prinaicpals to the customer on which they invested with them and explain this via a report.
Principal 9, 10 and 11 will be the most relevant part of the code to them to appy.
Principal 9 - In terms of the income and errors made by the audit committee, they need to consider if they meet with the chair and chair of the audit committee to better understand how the errors were made.
Principal 10 - Once they have understood this, depending on the outcome of their discussions, they may want to infleunce decision in this area where they can.
This could include voting against the reports provided by the audit commitee.
Depending on their shareholding, assuming as institutional investors it would be larger than 5%, they may also want to propose a resolution for voting at the forthcoming AGM.
Lastly, they could consider the removal of the director who chairs the audit commitee by voting against their reappointment, as annually, they would need reappointment at the AGM.
In terms of the staff turnover, morale and low staff engagement survey scores, they should raise this concern via the chair to the CEO and ask what resposnes or mitigations are being put in place to manage these.
If they were not satisfied with this, again they could take furtehr action by voting against the reappointment of the CEO to the board or raising a resolution in connection with this at the next meeting / the AGM.
They could also vote against the directors renumeration report based on his performance.
Overall - they need to show their invetsors how they have chosen and prioritsed these issues for engagement, what actions they have out in place, the outcome and explain if these were effective.
NOVEMBER 2020 - 9B - MY ANSWER
Talon Consultants plc (Talon) is an IT consultancy business which has its shares listed on the
Alternative Investment Market (AIM). It states on its website that it has adopted the UK Corporate
Governance Code 2018 (the Code) as the governance code against which it will provide a ‘comply
or explain’ statement. The Talon Board comprises three executive directors and four non-executive
directors. There are four Board committees: audit, nomination, remuneration and corporate
responsibility.
The Talon Board has decided that it needs to take steps to improve engagement with its workforce
in order to comply with the Code and also because its staff turnover levels have increased and a
recent staff survey showed falling staff morale. Talon has a large workforce, who fall into three
main categories: call centre employees who represent about 70% of the total number of employees
and are all based at its head office, IT experts who are located in a range of different local offices
and who often work remotely or from home, and IT contractors on zero-hour (casual) contracts
who are called in to assist when there is a particularly large contract to fulfil.
Talon’s shareholders are unhappy because the business has had a difficult year: its income has
fallen and it has recently announced that its prior year sales figures had been overstated as a
result of an accounting error which was not picked up by the audit committee or the company’s
auditor. Talon’s share price has halved over the last year as a result. The Talon Annual General
Meeting is due to be held in a month’s time.
Discuss the application of the UK Stewardship Code to the institutional shareholders of Talon
who are signatories to that Code. Include which principles in the Stewardship Code are most
relevant for them to apply in light of the company’s difficult year and the reduction in Talon’s
share price.
(10 marks)
Answers should demonstrate a good understanding of the Principles in the Stewardship Code
and which Principles are most relevant to the Talon scenario. They should show an ability to
apply those Principles to the Talon scenario.
The Stewardship Code (the Code) sets standards on an ‘apply and explain’ basis for those
institutional shareholders who are signatories to the Code through 12 Principles which are
applicable to asset owners and asset managers and which are set out under four categories:
Purpose and Governance (Principles 1-5)
Investment Approach (Principles 6-8)
Engagement (Principles 9-11)
Exercising rights and responsibilities (Principle 12).
The Talon scenario sets out a range of issues that should be of concern to Talon’s shareholders
– a decline in its income, the discovery of an accounting error and the halving of its share price.
The two categories of Principles in the Code that the Talon institutional shareholders who are
signatories to the Code should be applying in light of these concerns are those relating to
Engagement and to Exercising Rights and Responsibilities.
Engaging with issuers to maintain and enhance assets (Principle 9)
Investors should monitor the companies that they invest in on a regular basis in order to decide if
and when it is necessary to enter into an active engagement with the company.
Talon’s institutional shareholders should have been following the company’s performance and
should have been following the disclosures about the accounting error. Having followed those
developments, investors should have considered whether it was necessary to actively engage
with Talon’s Board to discuss their concerns about these issues. This could for example be by
asking to meet with the Chair of the Board or by writing a letter to the company or its financial
advisers setting out their concerns.
Where necessary, participating in collaborative engagement to influence issuers
(Principle 10)
Collective action can be particularly appropriate at times when a company is under severe stress
or when there are risks that are significantly affecting a company’s value. Arguably the poor
performance, the accounting error and the large fall in the share price are sufficient to have
triggered a need for collective action by investors. This might include for example a joint
approach asking about why the audit committee and the auditors did not uncover the accounting
error and what steps are being put in place to improve financial systems and controls.
Where necessary, escalating stewardship activities to influence issuers (Principle 11)
Investors should decide when they will intervene actively, i.e. to directly engage with a company
as a result of concerns in relation to strategy, performance or governance.
The poor performance of Talon and the discovery of the accounting error, together with the fall in
the Talon share price, are sufficient for active engagement and influencing to be necessary.
Actively exercising right and responsibilities (Principle 12)
This principle is directed in particular at shareholders exercising their voting rights. In the Talon
case, shareholders will need to decide whether to vote their shares for, against or withhold their
vote, in relation to each of the resolutions at the forthcoming Annual General Meeting. In
particular, they may wish to consider voting their shares against the re-election of the auditor or
the audit committee Chair because of the accounting error.
