Stewardship & Engagement Flashcards
What is the difference between stewardship and engagement? How is this different than activism?
Stewardship is an encompassing term for the approach that investors take as active owners of the companies whereas engagement is the way in which investors put into effect their stewardship responsibilities in line with the Principles for Responsible Investment (PRI) principle 2 (“We will be active owners and incorporate environmental, social and governance (ESG) issues into our ownership policies and practices”).
It is often described as purposeful dialogue with
a specific objective in mind.
By contracts, activist is most frequently now associated with activist hedge funds, the activism mindset appears increasingly short-term and involves extraction of
value rather than the longer-term value creation which is the driver for most engagement.
What is the purpose of stewardship?
To make sure that the value of the assets is enhanced over time, 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.
What are the various elements that encompass engagement as a form of stewardship? What are some key ESG concerns?
▶ strategy;
▶ capital structure;
▶ operational performance and delivery;
▶ risk management;
▶ pay;
▶ corporate governance.
ESG:
▶ highlighting the long-term health of the business, such as relations with the workforce;
▶ establishing a culture that favours long-term value creation;
▶ dealing openly and fairly with suppliers and customers; and
▶ having proper and effective environmental controls in place
The Principles for Responsible Investment (PRI) highlighted three ESG engagement dynamics that it believes create value, what are they and how are they developed successfully?
▶ communicative dynamics (the exchange of information);
▶ learning dynamics (enhancing knowledge); and
▶ political dynamics (building relationships)
Developing these dynamics requires investors to go beyond a superficial understanding of the company and its activities.
In order to be successful in engagement, investors need to seek understanding and rapport, and not simply declare that things need to change. This means that good engagement is time-consuming and tailored to the individual company.
How does the Investor Forum framework understand the key elements of stewardship?
By defining stewardship in the context of fiduciary duty of the assets with which an organisation has been entrusted.
Particularly key is the contrast that it draws between monitoring and engagement dialogues:
- Monitoring dialogues are the conversations between investors and management to more fully understand performance and opportunity, which are typified by detailed questions from the investor and which are likely to inform buy, sell or hold investment 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.
The Investor Forum publishes ten key features of this private collective engagement framework, what are they?
- Trusted facilitator, not an adviser: Members retain full voting and other investment rights in respect of their shareholdings. No control is ceded to the forum or other members.
- Opt in/opt out: A member actively chooses to participate in an engagement involving a company in which it is
a shareholder. It can also choose to opt out of an engagement at any time. - Complementary to members’ direct engagement: Members are actively encouraged to continue their direct interaction with companies outside the forum’s auspices.
- Confidentiality: Members must agree to comply with confidentiality obligations during an engagement. Disclosure of identities and public statements must be agreed by participants during an engagement.
- Nominated key engagement contact: Members retain full control as to whether or not they receive
information, and who receives that information. - Hub and spoke model: A bilateral model is the usual method of communication between the executive and
members involved in engagements. - No inside information: The forum is not intended to be a means of facilitating the exchange of inside information between companies and members or among members themselves.
- No-concert party and no-group: Members agree that while participating in a forum engagement they will not form a concert party in respect of the relevant company, including by requisitioning a board control-seeking
resolution or seeking to obtain control of the company. - Heightened procedures: At various points in an engagement, heightened procedures may be deemed necessary, including seeking specialist advice.
- Conflict of interest avoidance: The forum maintains control procedures to avoid conflicts of interest which could impact either its own governance or individual engagements.
The UK Stewardship Code model has been followed around the world, and there are now such codes in 20 markets, either developed by stock exchanges or regulators with one consistent difference among them which pertains to? What is the focus for the 2020 Code model?
Dealing with conflicts of interest.
New focus on outcomes and how delivery
against objectives will be measured over time.
Most Stewardship codes globally have what over arching principles?
i. requiring investors to have a public policy regarding stewardship
ii. regular monitoring of investee companies
iii. active engagement where relevant (aka. escalation)
iv. thoughtful voting
v. honest open reporting on stewardship activities
Describe the different types of engagement styles?
Top Down and Bottom Up: distinction in mindset and approach between those teams with a history of governance-led engagement (company board focused) and those that have worked more on the environmental and social side ( which is sector focused).
Issue based or Company Lead: Passive investors, and others with broadly diversified portfolios, typically start with an issue, whether identified by the team from news or broader analysis, or through a screening or other research provider, and seek to engage with all the companies impacted by that issue (which may be a sector as a whole, or broader than this).
Active investors, particularly those with focused portfolios, start with the company itself and its business issues and develop a tailored engagement across a range of issues, often with the investment teams taking a leading role. Companies selected for this approach are often identified from investment underperformers or ones that trigger other financial or ESG metrics.
What should be the steps into defining a Collective Engagement approach as per the the Investor Forum 2019 White paper titled accordingly?
SF1 – Objective(s) should be specific and targeted to enable clarity around delivery.
SF2 – Objectives should be material strategic and/or governance issues.
SF3 – The engagement approach should be bespoke (tailored) to the target company.
SF4 – The participants should have clear leadership with appropriate relationships, skills and knowledge.
SF5 – The scale of coalition gathered (both scale of shareholding and overall AUM of group) should be meaningful.
SF6 – The coalition should have a prior relationship and/or cultural awareness of the target company.
How can engagement strategies be designed to deliver meaningful results in the most cost- and time-effective manner (translating into the fewest operational challenges)?
- Investors need to define the scope of the engagement and prioritise their engagement activities carefully in order to ensure it is value-adding for their clients/beneficiaries
- Investors need to frame the engagement topic (be it climate risk or supply chain risk) into the broader discussion around strategy and long-term financial performance with the management team and the board.
- Investors must develop a clear process that articulates realistic goals and milestones so that both investment institutions and their clients have a clear indicator to measure their expectations and the effectiveness of the
engagement strategy. - The engagement process needs to be adapted to the local context, language and cultural approaches to doing business. Beyond dialogue, investors also need to have clear escalation measures in case engagement fails.
The behavioural challenges in working as part of investor coalitions are?
- challenge in reaching consensus on how to address a problem ( agreeing on a problem is easy, agreeing on a solution is not)
- conflicts of interest
- competition
Note: The PRI’s 2018 report on how engagement adds value for investors and companies found that individual engagement can be more strategically valuable (and might allow an investor to resolve an ambiguous or anomalous position that they might prefer to deal with alone), but that individual approaches can be time-consuming and costly. They suggest that “engagement practices should be adapted to balance the trade-offs
of individual and collective forms of engagement”.
The first key step in engagement is to set clear objectives. Why?
Having clear objectives helps set a clear agenda focused on outcomes.
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Name some escalation tactics that can be used?
▶ holding additional meetings with management specifically to discuss concerns
▶ expressing concerns through the company’s advisers
▶ meeting with the chair or other board members
▶ intervening jointly with other institutions on particular issues
▶ making a public statement in advance of general meetings
▶ submitting shareholder resolutions and speaking at general meetings
▶ requesting a general meeting and/or proposing to change board membership
Fun fact: Many escalation tools need to be used wisely and not over-exploited: for example, litigation must be used rarely not least given the expense and the staff time taken up with any legal case; the step of making concerns public through the media or social media needs to be applied with care because the investor who rarely raises issues in public will be listened to more on the occasions when it does than an investor who is always
expressing views publicly. But often, moving an engagement from the private sphere into the public is seen as one of the most important ways to bolster influence.
What is the most resourced efficient model for engagement?
Collective engagement - The pooling of resources by investors can aid their own education about an issue, and also add weight to their concerns, which may mean they are more likely to be heard. HOWEVER - investors
must beware of regulatory constraints such as rules against acting in concert.
The challenges around collective engagement are perhaps the obvious ones of coordinating a potentially disparate group of separate investors, and trying to maintain a consistent perspective and agreeing on a solution.
Fun Fact: A number of collaboration resources/platforms now exist including one by the PRI and CA 100+ targets the most polluting companies.
