ICGN Global Stewardship Principles ICGN GLOBAL STEWARDSHIP PRINCIPLES ICGN Global Stewardship Principles Published by the International Corporate Governance Network 2016. All rights reserved. Dissemination of the contents of this paper is encouraged. Please give full acknowledgement of the source when reproducing extracts in other published works. ICGN, accepts no responsibility for loss occasioned by any person acting or refraining from action as a result of any views expressed in these pages. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. British Library Cataloguing in Publication Data ISBN 978-1-907387-18-0 © International Corporate Governance Network 2 3 ICGN GLOBAL STEWARDSHIP PRINCIPLES Preamble The ICGN Global Stewardship Principles set out ICGN’s view of best practices in relation to investor stewardship obligations, policies and processes. These Principles provide a framework to implement stewardship practices in fulfilling an investor’s fiduciary obligations to beneficiaries or clients. Stewardship can be defined in general terms as the responsible management of something entrusted to one’s care. This suggests a fiduciary duty of care on the part of those agents entrusted with management responsibility to act on behalf of the end beneficiaries. In an investment context institutional investors are the agents acting on behalf of beneficiaries, who are often long-term savers or members of pension funds. At an individual company level stewardship helps to promote high standards of corporate governance which contributes to sustainable value creation, thereby increasing the long-term risk adjusted rate of return to investors and their beneficiaries or clients. At an investor level, stewardship is about preserving and enhancing long-term value as part of a responsible investment approach. This includes the consideration of wider ethical, environmental and social factors as core components of fiduciary duty. In a broader context, stewardship enhances overall financial market stability and economic growth. A cornerstone of ICGN’s policy programme relates to investor responsibilities and making effective stewardship a reality. The ICGN Global Stewardship Principles draw from ICGN’s policy work in this area over the last twenty years. These Principles replace the ICGN Statement of Principles for Institutional Investor Responsibilities (2013), which date back to 2003. These new Global Stewardship Principles incorporate this earlier guidance and recommendations, while adding new principles and guidance in keeping with changes in market practice and regulation. In particular, there is now a principle dedicated to promoting long-term value creation and the integration of environmental, social and governance (ESG) factors into investment decision-making. The ICGN Global Stewardship Principles also draw on the ICGN Model Mandate, published in 2012, which outlines model contract language for investment management agreements between asset owners and asset managers to integrate core stewardship practices into the asset management process. Included in the scope of the Model Mandate are sections on systemic responsibility, long-termism and integrating ESG factors into investment analysis and decision-making. The more recent publication of the ICGN Global Governance Principles builds further on the responsibilities of institutional investors, and focuses on the internal governance arrangements of investors which sit alongside an investee company’s responsibility to maintain good corporate governance practices. Drawing from these policy foundations, ICGN has made contributions to consultations about stewardship code developments in a number of jurisdictions. Such codes are publicly available on the ICGN website. 4 5 ICGN GLOBAL STEWARDSHIP PRINCIPLES The standards set out here are intended to apply, with appropriate flexibility, to all investment styles • Serving as a point of reference for regulators and standard setters seeking to establish their and approaches. They are aspirational standards that ICGN encourages Members and their peers own stewardship codes by providing an overarching model of stewardship which has been to adhere to as appropriate to their circumstances. The application of the Global Stewardship developed from international experience that can be adapted to the individual situations of Principles should be governed and monitored by market forces in the spirit of promoting good countries or regions. As a global point of reference the ICGN Global Stewardship Principles corporate governance, investor stewardship and the sustainable success of companies. While ICGN can be a useful source of latest innovation both for stewardship codes under formation, and encourages asset managers and asset owners to make constructive use of the Principles, ICGN also as existing codes come up for periodic review. The ICGN Global Stewardship Principles does not currently intend to monitor statements of compliance. Monitoring of the asset manager’s are therefore intended to complement (and not supersede) national or regional codes which compliance to the Principles should be undertaken in the first instance by the asset owner to ensure reflect domestic realities, laws and governance standards. If there is a difference or conflict that the asset manager is robust in its approach to supporting the Principles. Monitoring of the asset between the ICGN Global Stewardship Principles and the local code, it is ICGN’s expectation owner’s governing body adherence to the Principles should in turn be undertaken by the asset that the investor in the local market should first adhere to standards of stewardship owner’s to ensure that the asset owner is taking the necessary steps to conform to the Principles on articulated in the domestic stewardship code. behalf of the asset owner’s end beneficiaries. The ICGN Global Stewardship Principles have been developed following a peer review and The ICGN Global Stewardship Principles offer a basic framework of key stewardship responsibilities, consultation with ICGN Members and were ratified at the 2016 ICGN Annual General Meeting in San and is drafted with a view towards application in either developed or developing countries. The Francisco, USA. As such ICGN hopes to encourage a robust commitment by all market participants Principles offer several possible applications, including: to continuously refresh and contribute to the evolution of defining good stewardship policies and practices. It is in this spirit that ICGN will ensure that the Principles remain relevant and fit for purpose • S  erving as an international framework for global stewardship policies developed by investors over time, which will call for periodic reviews and updates of the Principles themselves. seeking to signal their approach to stewardship, either when investing in markets without codes or when they invest in multiple markets with differing codes. This enables investors The seven high-level principles that comprise the ICGN Global Stewardship Principles are with international portfolios to efficiently communicate fundamental stewardship standards summarised in Part One. For each of these principles, ICGN provides guidance on how they can in a global context. The ICGN Global Stewardship Principles serve as a single source of be implemented in practice; this is presented in Part Two. The final part of this document outlines international reference for both investors and companies on what stewardship entails and the ecosystem of stewardship and the pre-conditions for effective adoption within the context of a how to implement it in practical terms. It also provides a useful benchmark for investors when ‘comply or explain’ system of corporate governance oversight. periodically reviewing and refreshing their in-house stewardship policies. The ICGN Global Stewardship Principles are supplemented by ICGN Guidance on a range of • E  nhancing dialogue between companies and investors by complementing Corporate governance themes which are published from time to time to elaborate on key concepts. All ICGN Governance Codes applied in a ‘comply or explain’ context. In the event that company Principles and Guidance are publicly available on the ICGN website along with previous versions. explanations are inadequate, it is the role of investors to use ownership rights to challenge companies when necessary. Without the active monitoring of explanations by investors, a “comply or explain” system would lack an ultimate means of enforcement or influence. A stewardship code therefore plays a critical role in providing a market-based system for investors to hold companies to account for their corporate governance practices. 6 7 ICGN GLOBAL STEWARDSHIP PRINCIPLES Contents Part 1: Principles 11 Part 2: Guidance 12 2.1 Internal governance: the foundation of effective stewardship 12 2.2 Developing and implementing stewardship policies 14 2.3 Monitoring and assessing investee companies 15 2.4 Engaging companies and investor collaboration 16 2.5 Exercising voting rights 18 2.6 Promoting long-term value creation and integration of environmental, social and governance (ESG) factors 19 2.7 Enhancing transparency, disclosure and reporting 20 Part 3: Ecosystem of stewardship 21 Annex 1: Model contract terms to embed stewardship practices in investment management agreements 25 Annex 2: Acknowledgements 28 Annex 3: References 29 8 9 ICGN GLOBAL STEWARDSHIP PRINCIPLES Part 1: Principles 1 Internal governance: foundations of 5 Exercising voting rights effective stewardship Principle 5: Investors with voting rights  Principle 1: Investors should keep under should seek to vote shares held and make review their own governance practices informed and independent voting decisions, to ensure consistency with the aims of applying due care, diligence and judgement national requirements and the ICGN across their entire portfolio in the interests of Global Stewardship Principles and their beneficiaries or clients. ability to serve as fiduciary agents for their 6  romoting long-term value creation and P beneficiaries or clients. integration of environmental, social and 2  eveloping and implementing D governance (ESG) factors stewardship policies Principle 6: Investors should promote the Principle 2: Investors should commit to long-tem performance and sustainable developing and implementing stewardship success of companies and should policies which outlines the scope of their integrate material environmental, social and responsible investment practices. governance (ESG) factors in stewardship 3  onitoring and assessing investee M activities. companies 7  nhancing transparency, disclosure and E Principle 3: Investors should exercise reporting diligence in monitoring companies held in Principle 7: Investors should publicly investment portfolios and in assessing new disclose their stewardship policies and companies for investment. activities and report to beneficiaries or 4  ngaging companies and investor E clients on how they have been implemented collaboration so as to be fully accountable for the effective delivery of their duties.  Principle 4: Investors should engage with investee companies with the aim of preserving or enhancing value on behalf of beneficiaries or clients and should be prepared to collaborate with other investors to communicate areas of concern. 10 11 ICGN GLOBAL STEWARDSHIP PRINCIPLES 1.4 Capacity and experience situations in which an investor in a company Part 2: Investors should have appropriate capacity and experience to effectively oversee and also provides financial products and services to the same company. Such conflicts of Guidance interest should be disclosed, along with the manage their stewardship obligations remedies to mitigate them. Comprehensive (particularly in terms of monitoring, compliance capabilities should help in voting and engagement) in the interests minimizing conflicts and ensuring investors of beneficiaries or clients. This includes have effective policies to deal with issues, devoting time and training to decision- including insider information and market 1. Internal governance: foundations makers along all parts of the investment chain, particularly co-ordinating with fund manipulation. of effective stewardship managers, to exercising stewardship and fiduciary duties. It can also include, 1.7 Appropriate remuneration delegating to governance specialists to Investors should reinforce their obligations Principle 1: Investors should keep under review their own governance practices  guide governance policies and voting. to act fully in the interests of beneficiaries to ensure consistency with the aims of national requirements and the ICGN Global or clients by setting fee and remuneration Stewardship Principles and their ability to serve as fiduciary agents for their beneficiaries or clients. 1.5 Investment chain structures that provide appropriate alignment over relevant time horizons. Investors should consider their position in Investors should disclose to their consistent with good corporate governance the chain of responsibility for stewardship beneficiaries or clients an explanation of 1.1 Time horizons for delivering value matters and be prepared to call to account practice. This includes the conduct of how their remuneration structures and regular internal evaluations and periodic other agents in the investment chain, performance horizons for individual staff Investors should recognise that a primary third-party led evaluations, to ensure they including custodians and service providers, members advance alignment with the responsibility is to preserve and enhance meet expectations of accountability and to preserve or enhance value on behalf of interests of beneficiaries or clients. value which is aligned in the interest of effectiveness. The way in which individuals beneficiaries or clients. beneficiaries or clients over an appropriate time horizon, which in most cases requires a are appointed to serve on the governing long-term perspective. body should be disclosed. 1.6 Conflicts of interest Investors should have robust policies to 1.2 Independent oversight 1.3 Ethics and conduct minimise or avoid conflicts of interest and Investors should have in place a code of such policies should address how matters Investors should be overseen by ethics or conduct that guides investment are handled when the interests of clients governance structures that act and fiduciary activities on behalf of their or beneficiaries diverge from each other. independently and without bias to advance beneficiaries or clients. The investor’s board Investors should rigorously review their beneficiary or client interests. This may or trustees are ultimately accountable for the investment activities and their client interests involve the need to separate or ring-fence investor’s stewardship activities, and they to identify and appropriately manage real or investment activities for clients from the should provide the proper tone and support potential conflicts of interest. investor’s own commercial pressures. for meaningful execution of stewardship Examples of conflicts might include Such governance structures should be subject to periodic independent review as duties. 12 13 ICGN GLOBAL STEWARDSHIP PRINCIPLES 2. Developing and implementing 3. Monitoring and assessing investee companies stewardship policies  rinciple 3: Investors should exercise diligence in monitoring companies held in investment P portfolios and in assessing new companies for investment.  rinciple 2: Investors should commit to developing and implementing stewardship P policies which outline the scope of their responsible investment practices. 3.1 Regular monitoring b) t he company’s approach to environmental and social matters that may influence its 2.1 Developing policies 2.4 Investment contracts Investors should regularly monitor investee sustainable long-term success; Asset owners should clearly incorporate companies in order to assess their individual Investors should develop stewardship c) the effectiveness of the company’s their expectations regarding stewardship circumstances, performance and long-term policies which address the components governance and leadership; and practices in the awarding of investment potential. Company monitoring should be of relevant national stewardship code management agreements and in selecting integrated with the investor’s engagement d) the quality of the company’s reporting. requirements (if one exists) and the asset managers to ensure that the programme, particularly to help identify ICGN Global Stewardship Principles (as responsibilities of share ownership are situations where there is value in intervening appropriate). Such policies should address appropriately and fully delivered in the to encourage change. 3.4 Corporate governance the scope of assets held in an investment portfolios including, but not limited to, listed interests of their beneficiaries. Investors should develop an understanding equities and debt obligations. 3.2 Risk analysis of the company’s corporate governance 2.5 Stewardship oversight practices and consider the quality of Investors should develop methods or company reporting against relevant national 2.2 Periodic review Asset owners should effectively oversee risk-based tools to identify and prioritise or international codes. They should also and monitor asset manager stewardship portfolio companies for further analysis Investors should periodically review understand the specific circumstances of activities and their consistency with the and engagement, which can include stewardship policies which should be the investee company, taking into account asset owner’s investment beliefs, policies environmental, social and governance endorsed at the highest level of the the legal environment, cultural norms and and guidelines. Asset owners with passive issues. This is particularly important for investor’s management and governance ownership characteristics. or index-linked strategies should take into asset owners and managers with passively structure. This provides an accountability account the stewardship capabilities of the run portfolios, where the number of mechanism to ensure that the investor is asset manager, particularly given the often companies held in portfolios may be large. 3.5 Reasoned judgements taking the necessary steps to conform to recommended principles and guidance on large number of holdings in institutional Investors should carefully assess the quality behalf of their beneficiaries or clients. indexed portfolios. 3.3 Comprehensive factors of explanations given for any deviations from relevant corporate governance codes  Investors should be clear about what that a company may report from a “comply 2.3 Delegation standards they are applying and how they or explain” perspective, and be prepared monitor investee companies. Monitoring Asset owners cannot delegate their to engage with companies regarding their companies encompasses a wide range of fiduciary responsibilities, and where they reasoned judgements. factors including: are unable to exercise stewardship over investee companies directly, they should a) the  company’s business model, strategy and ongoing performance, as well as 3.6 Periodic review ensure that their asset managers are undertaking these activities on their behalf developments within and external to the Investors should periodically review through contracts or by other means. company that might affect its value and and measure the effectiveness of their the risks it faces; monitoring activities and communicate the results to beneficiaries or clients. 14 15 ICGN GLOBAL STEWARDSHIP PRINCIPLES 4. Engaging companies and investor 4.4 Integrated approach collaboration Investors, from both corporate governance teams and portfolio management, should seek to engage not only with company  Principle 4: Investors should engage with investee companies with the aim of preserving executive management, but also with or enhancing value on behalf of beneficiaries or clients and should be prepared to board directors. In the case of controlled collaborate with other investors to communicate areas of concern. companies, investor engagement may also extend to meeting with controlling shareholders. 4.1 Strategic approach 4.3 Engagement escalation Investors should develop their own risk- Investors should clarify how engagement might be escalated when company 4.5 Investor collaboration based approaches to select individual companies for engagement in alignment dialogue is failing including: Investors should be open to collaborating with the overall investment strategy. The a) expressing concerns to corporate with other investors (both domestic and spectrum of engagement activities may representatives or non-executive overseas investors) to leverage the voice vary, depending on the nature of the directors, either directly or in a of minority investors and exert influence, investment or the size of shareholding, shareholders’ meeting; where required, with investee companies. and this will affect the appropriateness Investors should respect individual market b) expressing their concern collectively with regulations relating to acting in concert of the engagement approach taken with other investors; and market manipulation, and be prepared investee companies. Pressures on investor resources for engagement call for due c) making a public statement; to form or join investor associations to weight to be placed on quality, evidence promote collective engagement. d) submitting shareholder resolutions; based engagement focusing on clear outcomes. e) speaking at general meetings; 4.6 Public policy f) s ubmitting one or more nominations for Where relevant, investors should engage 4.2 Engagement policies election to the board as appropriate and with policy makers on issues that affect convening a shareholders’ meeting; responsible investment and corporate Investors should establish clear policies outlining their approach to the engagement g) s eeking governance improvements and/ governance. Organisations like ICGN and process which should be communicated or damages through legal remedies or national investor membership organisations to companies as part of a framework for arbitration; and can be useful to help encourage public company dialogue. Part of this policy h) e  xit or threat to exit from the investment policy changes. should address how engagement might be as a last resort. escalated in the event any concerns are  ote that many of the engagement tactics N unresolved. noted above, shareholder nominations to the board for example, are also relevant in normal engagement situations when escalation is not required. 16 17 ICGN GLOBAL STEWARDSHIP PRINCIPLES 5. Exercising voting rights 6. Promoting long-term value creation and integration of environmental, social and  rinciple 5: Investors with voting rights should seek to vote shares held and make P informed and independent voting decisions, applying due care, diligence and judgement governance (ESG) factors across their entire portfolio in the interests of beneficiaries or clients. Principle 6: Investors should promote the long-term performance and sustainable 5.1 Voting policies possible, seek to confirm from companies success of companies and should integrate material environmental, social and whether or not such voting instructions governance (ESG) factors in stewardship activities. Investors should develop and publicly have been received and formally counted. disclose clear voting policies, including how potential conflicts of interest are addressed 6.1 Long-term focus 6.4 ESG integration in the exercise of voting rights. Where an 5.5 Voting services Investors should understand the Investors should consider ways to analyse, investor chooses not to vote in specific Investors should disclose the extent objectives and timeframes of their clients monitor, assess and integrate ESG related circumstances, for example where holdings to which they use proxy research and and beneficiaries and should promote risks and opportunities as part of their are below a certain threshold, this should voting services, including the identity of a company’s long-term success and approach to stewardship and in particular be disclosed. the provider and the degree to which any sustainable value creation over short-term in their monitoring, voting and engagement recommendations are followed. Use of a considerations. This long-term perspective practices. 5.2 Decision-making proxy voting advisor is not a substitute for is particularly relevant for pension funds and the investor’s own responsibility to ensure other long-term savings or retirement funds. Investors should be prepared to abstain 6.5 Integrated reporting that votes are cast in an informed and or vote against management resolutions responsible manner. Investors should clearly Investors should encourage integrated if such resolutions are regarded as 6.2 Awareness and understanding specify how they wish votes to be cast and reporting by companies to link ESG and inconsistent with good corporate should ensure that such votes are cast in Investors should build awareness of factors other qualitative factors more clearly governance practices. In doing so, investors a manner consistent with their own voting that may affect a company’s long-term with company strategy and operations, should seek to explain to companies the policies. prospects which includes an understanding and ultimately long-term value creation. reasons underlying their voting decisions, of the investee company’s business model If a company’s ESG disclosures are preferably before the shareholders’ meeting. and strategy and how ESG factors may insufficient to allow for investors to gain an 5.6 Stock lending influence risks and opportunities affecting appropriate understanding of a company’s 5.3 Voting records Investors should disclose their approach a company’s long-term performance and sustainability-related risks, investors should to stock lending and voting in a clear sustainable value. encourage more robust ESG reporting. Investors should regularly disclose their policy which should clarify the types of actual voting records publicly on their circumstances where shares would be website as well as directly to clients. 6.3 Systemic threats recalled to vote and how stock lending of Voting records should indicate whether individual shares may have affected voting Investors should build awareness of resolutions were cast for, against or activity. In order to preserve the integrity of long-term systemic threats, including abstained. the shareholders’ meeting, shares should ESG factors, relating to overall economic not be borrowed or lent for the primary development, financial market quality and 5.4 Vote confirmation purpose of voting them. stability and should prioritise the mitigation of system-level risk and respect for basic Investors should include voting activity in norms (e.g. anti-corruption, human rights) client and beneficiary reporting and, where over short-term value. 18 19 ICGN GLOBAL STEWARDSHIP PRINCIPLES 7. Enhancing transparency, disclosure and reporting Part 3:  rinciple 7: Investors should publicly disclose their stewardship policies and activities P Ecosystem of and report to beneficiaries and clients on how they have been implemented so as to be fully accountable for the effective delivery of their duties. stewardship 7.1 Signifying commitment document summaries of stewardship activities for the benefit of their beneficiaries Investors should signify their commitment or clients. Applied in an investment and capital markets recognise that these participants have differing to stewardship by becoming a signatory to context, institutional investors are the agents, or agency roles throughout the investment chain a relevant national code (if one exists) while stewards, on behalf of assets owned by the end for the successful application of stewardship. also taking into consideration appropriate 7.5 Accountability beneficiaries of stewardship. These beneficiaries The success of stewardship implementation also recommendations in the ICGN Global Investors should disclose to their include individual savers, pensioners and relies on participants understanding their roles Stewardship Principles. beneficiaries or clients their key internal holders of long-term insurance policies. They and working in good faith to contribute positive governance arrangements in order to be rely on institutional investors as their agents, outcomes. 7.2 Meaningful disclosure held effectively accountable for exercising which include both asset owners and asset These participants extend along the “investment stewardship duties on their behalf. managers to act in their interests. Investors should publicly disclose their chain” from the end provider of capital to the stewardship policies, preferably on their Institutional investors invest in a range of user of capital and include specific roles for website and, in a ‘comply or explain’ 7.6 Client reporting assets, including the equity and debt of listed asset owners and asset managers, companies, context, should provide meaningful companies, to produce investment returns for regulators and service providers to play in Investors should provide regular and explanations regarding aspects of the their beneficiaries. Particularly for pension funds making stewardship a reality: appropriate reports to clients, which may stewardship code that the investor does not and insurance companies funding annuities, the be more detailed than public disclosure, comply with. perspective of institutional investors is typically regarding stewardship activities and Asset owners long-term. Both institutional investors and their performance. Such reports should include beneficiaries therefore have a strong interest in One of the main applications of the ICGN Global 7.3 Periodic review their major stewardship priorities and ensuring that investee companies are successful Stewardship Principles is to serve as a guide forward-looking engagement strategy. Investors should annually review their public and sustainable over time. This has broader for asset owners and their trustees in terms disclosure regarding stewardship, and systemic implications in terms of promoting of monitoring an asset manager’s adherence review activities with respect to the national 7.7 Assurance healthy capital markets and economic to stewardship practices. Many asset owners stewardship codes, while also having development. have limited in-house capacity to implement Investors should recognise that external regard to the ICGN Global Stewardship all aspects of stewardship; where this may be assurance of stewardship code activities is While stewardship codes are most Principles. the case asset owners should instead satisfy encouraged as good practice. fundamentally a statement of investor themselves that stewardship principles are responsibilities, the effective implementation being implemented satisfactorily by their asset 7.4 Maintaining records of stewardship activities requires constructive managers and service providers. coordination of many market participants. Investors should maintain records of The ICGN Global Stewardship Principles meetings, voting and engagement to 20 21 ICGN GLOBAL STEWARDSHIP PRINCIPLES Asset managers For listed companies with their own pension A key focus on stewardship from a creditor’s It is important to recognise that there are very funds, companies also act as asset owners, perspective will be on a company’s risk different legal and cultural frameworks in each In many cases asset managers provide and companies should call for appropriate management oversight and on the company market and this will influence the way in which stewardship services on behalf of asset stewardship practices in corporate pension maintaining financial policies that appropriately stewardship is implemented and monitored. owners and their beneficiaries, often including funds. balance the interests of shareholders and Perhaps more important is the understanding monitoring, engaging and voting. As such, creditors. The stewardship principles of that there are different models of corporate they should signify commitment to stewardship monitoring and engagement are both relevant to finance and ownership of listed companies to their clients by adhering to investment Regulators creditors in this context. around the world, for example the family or management agreements and ensuring Regulators wishing to promote effective state owned corporate model prevalent in Asia alignment with their client’s own investment stewardship in any market have a primary role and Continental Europe, compared with a more beliefs, policies and guidelines. It is of particular Investment consultants and advisors in developing, publishing and requiring reporting widely dispersed ownership type of company importance that asset managers dedicate against a national stewardship code. The ICGN Investment consultants and advisors can typically found in the UK, USA or Australia. Such capacity to meet stewardship commitments, Global Stewardship Principles are intended to assist asset owner and asset managers models can differ in very basic principles such which include reviewing internal resourcing in complement local requirements, and are not with developing and implementing their as shareholder primacy versus stakeholder light of the asset manager’s business models. intended to supersede national codes. Instead responsibilities as part of their advisory primacy, and may require deeper consideration They should be prepared to challenge investee the ICGN Global Stewardship Principles offer services. Such consultants and advisors in terms of how stewardship can be effectively companies on governance, strategy and other an internationally recognised set of principles provide research and voting services which can applied. management practices when these do not align which are applicable across markets and can be assume stewardship responsibilities and they with the long-term interests of the company and The risk of an overly prescriptive approach to viewed as a statement of high standards. Some are therefore subject to many of the principles its minority shareholders, and report regularly a stewardship code would be to encourage investors, particularly those with internationally outlined in the ICGN Global Stewardship to clients on how they fulfil their stewardship a counterproductive “tick box” compliance diversified portfolios, may prefer to provide a Principles. In doing so consultants, advisors obligations. exercise by investors – which is not what lies global stewardship policy statement as a means and other service providers – which include behind the intent of ICGN Global Stewardship to respond to multiple local code disclosure proxy voting agencies, analytical services and Principles. In this context, it is important to Companies requirements. custodians – should endeavour to understand highlight the intangible qualities of tone and their role in the investment chain and to provide While companies (as issuers of equity and debt culture as critical components to a stewardship services in the interests of their immediate to investors) are not themselves signatories Creditors code’s success in any market. clients and ultimate beneficiaries. to stewardship codes, they do have a role to Stewardship in the first instance is often Investors play a critical role in ensuring play in supporting the spirit and ambitions of a focused on an investor’s equity holdings given the effectiveness of a “comply or explain” stewardship code in order for it to be effective. Pre-conditions of effective stewardship voting and other ownership rights. However, corporate governance framework. “Comply Companies should recognise the benefits stewardship need not be limited to listed or The pre-conditions to effective stewardship or explain” provides companies with flexibility of building investor relationships that can private equity as an asset class. It is also in a given market include having a critical to not adhere to provisions of a corporate strengthen trust and enhance financial flexibility relevant in the area of fixed income investment. mass of investors willing to adopt stewardship governance code, without legal or regulatory by enhancing access to cost effective capital. In Bondholders in particular provide long-term and the willingness of companies to engage sanction. This reflects recognition that not all doing so companies should cooperate in good risk capital to companies and share with equity with investors in good faith. Asset owners aspects of a corporate governance code may faith with investors, particularly in facilitating holders an interest in promoting responsible play a particularly important role to ensure be relevant for an individual company to apply engagement and constructive dialogue, and sustainable corporate governance and that stewardship responsibilities are built to be well governed. But this approach also including willingness to meeting with investors investor stewardship practices. The ICGN into investment management mandates as carries the obligation for companies to explain acting collectively. Companies should recognise Global Stewardship Principles can therefore be a standard feature of asset management the reasoning as to why specific governance the responsibility of board members to meet applied to fixed income investors, though certain practices. It is also very important to have practices have not been adopted. with key investors to build understanding provisions, such as those relating to voting, will regulatory encouragement for stewardship and dialogue about governance matters. not have the same relevance. activities to take place. 22 23 ICGN GLOBAL STEWARDSHIP PRINCIPLES For a “comply or explain” system to be effective, a company’s explanation of non-compliance Annex 1: Excerpts from the ICGN Model with its corporate governance code needs to be monitored to ensure a company’s explanations Mandate: A selection of model contract terms are robust. While regulators must be able to monitor company compliance with hard law to embed stewardship practices in investment and regulation, they are less well placed to management agreements make sometimes subjective judgements as to the quality of a company’s explanations. This is Integrating stewardship activities in investment Proposed model terms for high-level where institutional investors have a role to play management agreements between asset commitment to be proactive in engaging with companies owners and asset managers can play an The Manager acknowledges that it acts as a whose explanations are unsatisfactory. important role in embedding stewardship fiduciary on behalf of the Client and its investors/ In the event that company explanations are as a component of institutional investment. beneficiaries. inadequate, it is the role of institutional investors ICGN’s Model Contract Terms Between Asset The Manager will not make investments which to use ownership rights to challenge companies Owners and Managers (2012) contain detailed would contravene the Investment Policy when necessary. Without the active monitoring provisions of contract terms that can be inserted Statement/Statement of Investment Principles of explanations by investors, a “comply or into investment management agreements or would be in contravention of the restrictions explain” system would lack an ultimate means to promote stewardship practices. Some of on investments referred to in the Regulations of enforcement or influence. A stewardship the key model contract clauses, including governing the Client’s authority. code therefore plays a critical role in providing possible alternative clauses, are summarised a market-based system for investors to hold below – sometimes with an indication of the companies to account for their corporate circumstances under which one alternative Proposed model terms for integration of governance practices. may be more appropriate than another. The long-term factors including ESG issues Model Contract itself includes additional clauses The Manager will have an investment process that are of relevance, as well as suggestions which incorporates relevant long-term factors as to how these might be structured in such as ESG issues consistent with the Client’s schedules attached to investment management responsible investment policy. agreements. An asset owner’s ability to negotiate acceptance Proposed model terms for investment and wording of these specific clauses is likely horizon to vary between managers, investment vehicles The Manager acknowledges that the risks and situations. Not all clauses will be suitable which the Client and its investors/beneficiaries for all contracts, and asset owners may need face are not solely related to deviations to consider whether they should seek clauses from market benchmarks. The Manager such as those below in the fund management acknowledges its need to consider long-term agreement or within a side letter or the and systemic risk factors in order to manage equivalent. Questions of enforceability may be risks which are relevant on the Client’s long-term particularly relevant to this consideration. investment horizon and to the Client’s fiduciary responsibilities. 24 25 ICGN GLOBAL STEWARDSHIP PRINCIPLES Proposed model terms for systemic Proposed model terms for voting Proposed model terms for conflicts Proposed model terms for reporting responsibility The Manager will enable the Client or its of interest In addition to reporting requirements set forth The Manager acknowledges that both it designated agent to direct the exercise of The Manager will establish and maintain a elsewhere, the Manager will prepare no later and the Client rely on the integrity of the any voting rights attaching to the Portfolio conflicts of interest policy. The Manager will than x business days after the end of the marketplace to generate returns for the Client’s investments. inform the Client of material amendments relevant [quarter], reports covering the reporting investors/beneficiaries. The Manager will play The Manager will procure the exercise of to, and waivers of, this policy from time to period, including: a positive role in supporting the maintenance any voting rights attaching to the Portfolio time, within [one month] of such event. The • Standards and High Level Commitment of appropriate and fit-for-purpose market investments in accordance with the Client’s Manager will ensure that it adheres to this • Systemic Risk regulation and infrastructure and will at least expressed voting guidelines, with a view to policy such that it effectively identifies and annually report to the Client on its activities in manages conflicts with the Manager’s duty to • Monitoring achieving best practice standards of corporate this regard. governance and equity stewardship and with the the Client or otherwise entailing a material risk • Stewardship, voting and stock lending aim of adding value to, and/or preserving value of damage to the interests of the Client or its • Portfolio turnover Proposed model terms for ongoing due in, the Portfolio, as well as reducing unwanted investors/beneficiaries. Where the Manager • Developments and conflicts diligence risk exposures. does not consider that the arrangements under its conflicts of interest policy are sufficient to • Commission and counterparties. The Manager will facilitate access by the Client The Manager will procure the exercise of manage a particular conflict, it will inform the to its staff and systems such that the Client all voting rights attached to the Portfolio Client of the nature of the conflict so that the can gain assurance on an ongoing basis that investments on the Client’s behalf, in parties can agree how to proceed. the Manager is appropriately implementing accordance with the Managers’ voting policy the Client’s responsible investment policy, and any market-specific guidelines approved by monitoring key long-term risks and integrating the Client. such factors into its investment and risk The Manager will have in place appropriate management decision-making. policies to manage any conflicts of interest in relation to voting matters and shall report at Proposed model terms for stewardship and least quarterly on all votes involving companies engagement where the Manager or an affiliate have a The Manager will engage in stewardship contractual relationship or other material activities as are appropriate in the financial interest. circumstances to monitor and influence the management of the investee companies/ Proposed model terms for fees, underlying funds/underlying assets, where such remuneration and culture activity is considered by the Manager to be The Manager will ensure that the pay structures likely to enhance the value of such securities or of its staff align their interests appropriately assets and in the best financial interests of the with those of the Client and its investors/ Client. beneficiaries, as well as the investment time horizon of the Portfolio. 26 27 ICGN GLOBAL STEWARDSHIP PRINCIPLES Annex 2: Acknowledgements Annex 3: References ICGN was established in 1995 and its members grateful to George Dallas and Kerrie Waring International Corporate Governance Italy: Stewardship Principles for the Exercise are led by investor’s responsible for US$26 for producing the new Global Stewardship Network: Global Governance Principles, 2014 of Administrative and Voting Rights in Listed trillion in assets under management. Principles having researched codes around International Corporate Governance Companies, Assogestioni, 2013 ICGN’s mission is to promote effective the world, reviewed existing ICGN guidance Network: Statement of Principles for Institutional Japan: Principles for Responsible Institutional standards of corporate governance and investor and included new recommendations based Investor Responsibilities, 2013 Investors, Financial Services Agency, 2014 stewardship to advance efficient markets and on regulatory developments. Gratitude is also International Corporate Governance Kenya: Draft Stewardship Code for Institutional sustainable economies world-wide. This sets the extended to Chris Hodge, Members of the Network: Model Contract Terms Between Asset Investors, Capital Markets Authority, 2015 tone for our work programme which is centered Global Network of Investor Associations and the Owners and Their Managers, 2012 Malaysia: Code for Institutional Investors, around: ICGN Board of Directors for their feedback. G20/OECD: Principles of Corporate Minority Shareholders Watchdog Group, 2014 Influencing policy by providing a reliable source In particular, the ICGN is grateful to those who Governance, 2015 Netherlands: Best Practices for Engaged of investor-led opinion and experience around responded to the public consultation which informed the drafting process being: Aberdeen Principles for Responsible Investment: Share-Ownership, EUMEDION Corporate governance and stewardship; Asset Management, AMEC, Assogestioni, Fiduciary Duty in the 21st Century, 2015. Governance Forum, 2011 Connecting peers at global events to provide bcIMC, CalSTRS, Cartica Capital, CFA United Nations Environment Programme Singapore: Singapore Stewardship Code, a forum for dialogue between companies, Institute, Daiwa SB Investments (UK) Ltd, Finance Initiative: The Financial System We Monetary Authority of Singapore, forthcoming investors and other stakeholders; and Delphic Advisors, Eumedion, FirstState, FRC, Need, 2015 2016 Informing debate through knowledge and FutureFund, Governance Institute of Australia CFA Institute: Asset Manager Code of South Africa: Code for Responsible Investing, education to enhance the professionalism of Ltd, Hermes, IIRC, Investec Asset Management, Professional Conduct and Pension Trustee Code Institute of Directors of Southern Africa, 2011 corporate governance and investor stewardship. Martin Currie, MSCI, MSWG, Nationwide of Conduct Switzerland: Guidelines for institutional The ICGN Global Stewardship Principles replace Pension Fund, NEI Investments, Regnan, Australia: FSC Standard 23: Principles of investors, governing the exercising of the ICGN Statement of Principles for Institutional SASB, Susannah Haan, The CAQ, ValueBridge Internal Governance and Asset Stewardship, participation rights in public limited companies, Investor Responsibilities (2013); and includes Advisors and Walter Scott. Financial Services Council, 2015 Ethos Foundation, 2013 references to the original recommendations, For more information, contact the ICGN while adding new principles and guidance in Canada: Principles for Governance Monitoring, Taiwan: Stewardship Principles for Institutional Secretariat by telephone: +44 (0) 207 612 7011, Voting and Shareholder Engagement, Canadian keeping with changes in regulation and market Investors, Taiwan Stock Exchange, 2016 email: secretariat@icgn.org Coalition for Good Governance, 2010 practice. United Kingdom: The UK Stewardship Code, or visit www.icgn.org. The ICGN acknowledges and is grateful to the European Union: Code for External Financial Reporting Council, 2012 ICGN Shareholder Responsibilities Committee, Governance, European Fund and Asset particular the working group members involved Management Association, 2011 in the 2013 Principles development being: Hong Kong: Consultation Paper on the Paul Lee, Rita Benoy Bushon, Stephen Davis, Principles of Responsible Stewardship, Carol Drake, David Jackson, Niels Lemmers, Securities and Futures Commission, 2015 Charles Macek and Ryoko Ueda. ICGN is also 28 29 ICGN GLOBAL STEWARDSHIP PRINCIPLES 30 31 Contact ISBN 9781907387180 Email: secretariat@icgn.org 90000 > Phone: +44 (0) 207 612 7011 Post: ICGN Secretariat, Saffron House, 6 -10 Kirby Street, London, EC1N 8TS, UK 9 781907 387180