ICGN Global Governance Principles Published by the International Corporate Governance Network Saffron House 6 -10 Kirby Street London EC1N 8TS UK © International Corporate Governance Network 2014 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, the contributors and the editor of this publication accept 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 A catalogue record for this book is available from the British Library ISBN 978-1-907387-13-5 © International Corporate Governance Network (2014) 2 ICGN GLOBAL GOVERNANCE PRINCIPLES ICGN Global Governance Principles About ICGN An investor-led organization of governance professionals, ICGN’s mission is to inspire and promote effective standards of corporate governance to advance efficient markets and economies world-wide. Established in 1995 and present in over 50 countries, the ICGN membership includes global investors with assets under management in excess of US$26 trillion. For more information, contact the ICGN Secretariat by telephone: +44 (0) 207 612 7011, email: secretariat@icgn.org or visit www.icgn.org. 3 Preamble The ICGN Global Governance Principles (“the Principles”) describe the responsibilities of boards of directors and investors respectively, and aim to enhance dialogue between the two parties. They embody ICGN’s mission to inspire effective standards of governance and to advance efficient markets world-wide. The Principles are the ICGN’s primary standard for well governed companies and set the framework for a global work programme focused around influencing public policy, connecting peers around the world and informing governance debate. The combination of responsibilities of boards of directors and investors in a single set of Principles emphasises a mutual interest in protecting and generating sustainable corporate value. Sustainability implies that the company must manage effectively the governance, social and environmental aspects of its activities as well as financial operations. In doing so, companies should aspire to meet the cost of capital invested and generate a return over and above such capital. This is achievable if the focus on economic returns and strategic planning includes the effective management of company relationships with stakeholders such as employees, suppliers, customers, local communities and the environment as a whole. First initiated at the founding of the ICGN in 1995, this is the fourth edition of the Principles. They generally reflect the views of the ICGN membership, the majority being institutional investors (asset owners and asset managers) responsible for assets under management in excess of US$26 trillion. The recommendations are therefore substantively developed from an investor perspective, while taking into account other relevant parties including company directors, professional advisors and the standard-setting community. 4 ICGN GLOBAL GOVERNANCE PRINCIPLES The Principles apply predominantly to publicly listed companies and set out expectations around corporate governance issues that are most likely to influence investment decision-making. They are also relevant to non-listed companies which aspire to adopt high standards of corporate governance practice. The Principles are relevant to all types of board structure including one-tier and two-tier arrangements. We refer to both non-executive and independent non-executive directors (also known as ‘outside directors’) throughout the Principles. This recognises the different approaches to board composition in various markets and the role of executive officers, non-executive directors and independent non- executive directors. The latter refers to directors who are free from any external relationships which may influence the directors’ judgement. We refer to the term ‘investor’ throughout the Principles and, more specifically, to institutional investors in Section B who act on behalf of beneficiaries or clients, such as individual savers or pension fund members. This includes collective investment vehicles or asset owners which pool the savings of many (e.g. insurance companies, pension funds, sovereign wealth funds and mutual funds), or asset managers to which such collective vehicles or individuals allocate funds. We note that in controlled companies (where there is a dominant shareholder or block such that they ultimately have the majority power) the governance considerations are primarily concerned with protecting the interests of minority shareholders. In this regard, many of the recommendations in the Principles will apply but others may be less relevant. We also acknowledge different investment strategies, for example as employed by passive or active funds, and advocate that investors embrace their obligations to act fully aligned in the interests of the company, or as institutional investors, to their beneficiaries or clients, over relevant time-horizons. As such, the Principles set out a series of recommendations on the governance of investors themselves as well as their external stewardship responsibilities related to investee companies. The Principles are intended to be of general application, irrespective of national legislative frameworks or listing rules. As global recommendations, they should be read with an understanding that local rules and cultural norms may lead to different approaches to governance practices. National codes reflect local standards and explanation is encouraged where there is divergence from the Principles against this framework. Members of the ICGN support the flexible application of these Principles, and therefore the specific circumstances of individual companies, investors and the markets within which they operate should be recognised. The Global Governance Principles are supplemented by ICGN Guidelines on a range of governance themes which are issued from time to time to elaborate on key concepts and practices. A full list of ICGN Guidelines is provided in Annex 1. Both the Principles and the more specific Guidelines are often used by ICGN members as benchmarks in assessing investee company governance practices, in voting guidelines and are referenced by academia and standard-setters. The recommendations are subject to change in recognition of continually evolving standards and practices and are reviewed at appropriate intervals. 5 Contents Section A: Board of Directors 1 Responsibilities 7 2 Leadership and independence 9 3 Composition and appointment 11 4 Corporate culture 13 5 Risk oversight 14 6 Remuneration 15 7 Reporting and audit 17 8 General meetings 20 9 Shareholder rights 21 Section B: Institutional Investors 10 Responsibilities 23 11 Leadership and independence 25 12 Capacity 26 13 Conflicts of interest 27 14 Remuneration 27 15 Monitoring 28 16 Engagement 29 17 Voting 30 Annex 1 ICGN Guidance 31 6 ICGN GLOBAL GOVERNANCE PRINCIPLES Section A: Board 1 Responsibilities 1.1 Duties c) embody high standards of business ethics and oversee the implementation The board of directors should act on of codes of conduct that engender a an informed basis and in the best long corporate culture of integrity; term interests of the company with good faith, care and diligence, for the benefit d) oversee the management of potential of shareholders, while having regard to conflicts of interest, such as those relevant stakeholders. which may arise around related party transactions; 1.2 Responsibilities e) oversee the integrity of the company’s accounting and reporting systems, The board of directors is accountable to its compliance with internationally investors and relevant stakeholders and accepted standards, the effectiveness responsible for protecting and generating of its systems of internal control, and sustainable value over the long term. the independence of the external audit In fulfilling their role effectively, board process; members should: f) oversee the implementation of effective  a) guide, review and approve corporate risk management and proactively review strategy and financial planning, including the risk management approach and major capital expenditures, acquisitions policies annually or with any significant and divestments; business change; b) monitor the effectiveness of the g) ensure a formal, fair and transparent company’s governance, environmental process for nomination, election and impacts, and social practices, and evaluation of directors; adhere to applicable laws; 7 h) appoint and, if necessary, remove 1.5 Directorships the chief executive officer (CEO) and develop succession plans; The number, and nature, of board appointments an individual director holds i) a  lign CEO and senior management (particularly the chair and executive remuneration with the longer term directors) should be carefully considered interests of the company and its and reviewed on a regular basis and the investors; and degree to which each individual director j) conduct an objective board evaluation has the capacity to undertake multiple on a regular basis, consistently seeking directorships should be clearly disclosed. to enhance board effectiveness. 1.6 Induction 1.3 Dialogue There should be a formal process of The board of directors should make induction for all new directors so that they available communication channels are well-informed about the company as for dialogue on governance matters soon as possible after their appointment. with investors and stakeholders as Directors should also be enabled to appropriate. Boards should clearly explain regularly refresh their skills and knowledge such procedures to investors including to discharge their responsibilities. guidance relating to compliance with disclosure and other relevant market rules. 1.7 Committees 1.4 Commitment Committees should be established to deliberate on issues such as audit, The board of directors should meet remuneration and nomination. Where regularly to discharge its duties and the board chooses not to establish such directors should allocate adequate time committees, the board should disclose to meeting preparation and attendance. the fact and the procedures it employs to Board members should know the discharge its duties and responsibilities business, its operations and senior effectively. management well enough to contribute effectively to board discussions and 1.8 Advice decisions. The board of directors should receive advice on its responsibilities under relevant law and regulation, usually from the company secretary or an in-house general counsel. In addition, the board should have access to independent advice as appropriate and at the company’s expense. 8 ICGN GLOBAL GOVERNANCE PRINCIPLES 2 Leadership and independence 2.1 Chair and CEO 2.4 Effectiveness The board of directors should have The chair is responsible for leadership of independent leadership. There should be the board of directors and ensuring its a clear division of responsibilities between effectiveness. The chair should ensure the chairmanship of the board and the a culture of openness and constructive executive management of the company’s debate that allows a range of views to business. be expressed. This includes setting an appropriate board agenda and ensuring 2.2 Lead independent director adequate time is available for discussion of all agenda items. There should also The chair should be independent on be opportunities for the board to hear the date of appointment. If the chair is from an appropriate range of senior not independent, the company should management. adopt an appropriate structure to mitigate any potential challenges arising 2.5 Independence from this, such as the appointment of a lead independent director. The board The board of directors should identify should explain the reasons why this in the annual report the names of the leadership structure is appropriate and directors considered by the board to be keep the structure under review. A lead independent and who are able to exercise independent director also provides independent judgement free from any investors and directors with a valuable external influence. The board should channel of communication should they state its reasons if it determines that a wish to discuss concerns relating to director is independent notwithstanding the chair. the existence of relationships or circumstances which may appear 2.3 Succession relevant to its determination, including if the director: If, exceptionally, the board of directors decides that a CEO should succeed • is or has been employed in an to become chair, the board should executive capacity by the company or communicate appropriately with investors a subsidiary and there has not been an in advance setting out a convincing appropriate period between ceasing rationale and providing detailed such employment and serving on explanation in the annual report. Unless the board; extraordinary circumstances exist there should be a break in service between the roles, (e.g. a period of two years). 9 • is or has within an appropriate period • is a significant shareholder of the been a partner, director or senior company, or an officer of, or otherwise employee of a provider of material associated with, a significant professional or contractual services to shareholder of the company; the company or any of its subsidiaries; • is or has been a nominee director as a • receives or has received additional representative of minority shareholders remuneration from the company apart or the state; from a director’s fee, participates in • has been a director of the company the company’s share option plan or a for such a period that his or her performance-related pay scheme, or is independence may have become a member of the company’s pension compromised. scheme; • h  as or had close family ties with any of 2.6 Independent meetings the company’s advisers, directors or The chair should regularly hold meetings senior management; with the non-executive directors without • h  olds cross-directorships or has executive directors present. In addition, significant links with other directors the non-executive directors (led by the through involvement in other lead independent director) should meet companies or bodies; as appropriate, and at least annually, without the chair present. 10 ICGN GLOBAL GOVERNANCE PRINCIPLES 3 Composition and appointment 3.1 Composition 3.4 Appointment process The board of directors should comprise The process for director nomination and a majority of non-executive directors, the election/re-election should be disclosed, majority of whom are independent, noting along with information about board that practice may legitimately vary from candidates which includes: this standard in controlled companies a) board member identities and rationale where a critical mass of the board is for appointment; preferred to be independent. There should be a sufficient mix of individuals b) core competencies, qualifications, and with relevant knowledge, independence, professional background; competence, industry experience and c) recent and current board and diversity of perspectives to generate management mandates at other effective challenge, discussion and companies, as well as significant roles objective decision-making. on non-profit/charitable organisations; d) factors affecting independence, 3.2 Diversity including relationship(s) with controlling shareholders; There should be a policy on diversity e) length of tenure; which should include measurable targets for achieving appropriate diversity within f) board and committee meeting its senior management and board (both attendance; and executive and non-executive) and report g) any shareholdings in the company. on progress made in achieving such targets. Aspects of diversity include 3.5 Nominations gender, nationality, and special skills  hareholders should be able to nominate S required by the board. candidates for board appointment. Such candidacies should be proposed to 3.3 Tenure the appropriate board committee and, Non-executive directors should serve subject to an appropriate nomination for an appropriate length of time to threshold, be nominated directly on the properly serve without compromising the company’s proxy. independence of the board. The length of tenure of each director should be reviewed regularly by the nomination committee to allow for refreshment and diversity. 11 3.6 Elections 3.8 Nomination committee  oard directors should be conscious B A nomination committee should be of their accountability to investors. comprised of non-executive directors, Accountability mechanisms may the majority of whom are independent. require directors to stand for election The main role and responsibilities of on an annual basis or to stand for the nomination committee should be election at least once every three years. described in the committee’s terms of Shareholders should have a separate vote reference. This includes: on the election of each director, with each a) developing a skills matrix, by preparing candidate approved by a simple majority a description of the desired roles, of shares voted. experience and capabilities required for each appointment, and then evaluating 3.7 Evaluation board composition. The nomination committee should b) leading the process for board evaluate the process for a rigorous review appointments and putting forward of the performance of the individual recommendations to shareholders on directors, the company secretary (where directors to be elected and re-elected; such a position exists), the board’s c) upholding the principle of director committees and the board as a whole independence by addressing conflicts prior to being proposed for re-election. of interest (and potential conflicts of The board of directors should also interest) among committee members periodically (preferably every three and between the committee and its years) engage an independent outside advisors during the nomination process; consultant to undertake the evaluation. The non-executive directors, led by the d) considering and being responsible lead independent director, should be for the appointment of independent responsible for performance evaluation of consultants for recruitment or the chair, taking into account the views evaluation, including their selection, of executive officers. The board should and terms of engagement and publicly disclose the process for evaluation and, disclosing their identity and consulting as far as reasonably possible, any material fees; issues of relevance arising from the e) entering into dialogue with shareholders conclusions and any action taken as a on the subject of board nominations consequence. either directly or via the board; and f) board succession planning. 12 ICGN GLOBAL GOVERNANCE PRINCIPLES 4 Corporate culture 4.1 Codes of conduct/ethics 4.4 Political lobbying High standards of business ethics should In jurisdictions where corporate political be adopted through codes of conduct/ donations are allowed, a policy should ethics (or similar instruments) and oversee exist on political engagement, covering a culture of integrity, notwithstanding lobbying and donations to political causes differing ethical norms and legal standards or candidates where allowed under law. in various countries. This should permeate The policy should ensure that the benefits all aspects of the company’s operations, and risks of the approach taken are ensuring that its vision, mission, business understood, monitored, transparent and model and objectives are ethically sound regularly reviewed. and demonstrative of its values. Codes should be effectively communicated and 4.5 Employee share dealing integrated into the company’s strategy and There should be clear rules regarding any operations, including risk management trading by directors and employees in systems and remuneration structures. the company’s own securities. Individuals should not benefit directly or indirectly 4.2 Bribery and corruption from knowledge which is not generally The board of directors should ensure available to the market. that management has implemented appropriately stringent policies and 4.6 Behaviour and conduct procedures to mitigate the risk of bribery A corporate culture should be fostered and corruption or other malfeasance. which ensures that employees understand Such policies and procedures should be their responsibility for appropriate communicated to investors and other behaviour. There should be appropriate interested parties. board level and staff training in all aspects relating to corporate culture and ethics. 4.3 Whistle-blowing Due diligence and monitoring programmes There should be an independent, should be in place to enable staff to confidential mechanism whereby an understand relevant codes of conduct and employee, supplier or other stakeholder apply them effectively to avoid company can raise (without fear of retribution) involvement in inappropriate behaviour. issues of particular concern with regard to potential or suspected breaches of a company’s code of ethics or local law. 13 5 Risk oversight 5.1 Proactive oversight 5.4 Dynamic process The board of directors should proactively Risk should be reflected in the company’s oversee, review and approve the strategy and capital allocation. It should approach to risk management regularly be managed accordingly in a rational, or with any significant business change appropriately independent, dynamic and satisfy itself that the approach is and forward-looking way. This process functioning effectively. Strategy and risk of managing risks should be continual are inseparable and should permeate and include consideration of a range of all board discussions and, as such, the plausible impacts. board should consider a range of plausible outcomes that could result from its 5.5 Risk committee decision-making and actions needed to While ultimate responsibility for a manage those outcomes. company’s risk management approach rests with the full board, having a risk 5.2 Comprehensive approach committee (be it a stand-alone risk A comprehensive approach to the committee, a combined risk committee oversight of risk which includes all material with nomination and governance, strategy, aspects of risk should be adopted, audit or other) can be an effective including financial, strategic, operational, mechanism to bring the transparency, environmental, and social risks (including focus and independent judgement political and legal ramifications of needed to oversee the company’s risk such risks), as well as any reputational management approach. consequences. 5.3 Risk culture The board of directors should lead by example and foster an effective risk culture that encourages openness and constructive challenge of judgements and assumptions. The company’s culture with regard to risk and the process by which issues are escalated and de-escalated within the company should be evaluated periodically. 14 ICGN GLOBAL GOVERNANCE PRINCIPLES 6 Remuneration 6.1 Alignment and deemed appropriate in the context of the company’s underlying performance Remuneration should be designed to in any given year. This extends to non- effectively align the interests of the CEO cash items such as director and officer and executive officers with those of the insurance, fringe benefits and terms of company and its investors. The board is severance packages if any. responsible to ensure that remuneration should be reasonable and equitable in 6.4 Share ownership both structure and quantum, and should be determined within the context of the The company policy concerning company as a whole. ownership of shares by the CEO and executive officers should be disclosed. 6.2 Performance This should include the company policy as to how share ownership requirements are Performance measurement should to be achieved and for how long they are integrate risk considerations so that there to be retained. The use of derivatives or are no rewards for taking inappropriate other structures that enable the hedging of risks at the expense of the company an individual’s exposure to the company’s and its investors. Performance related shares should be discouraged. elements should be rigorous and measured over timescales, and with 6.5 Shareholder approval methodologies which help ensure that performance pay is directly correlated Shareholders should have an opportunity with sustained value creation. Companies to vote on the remuneration policies, should include provisions in their incentive particularly where significant change to plans that enable them to withhold the remuneration structures is proposed or payment of any sum (‘malus’), or recover where significant numbers of shareholders sums paid (‘clawback’), in the event have opposed a remuneration resolution. of serious misconduct or a material In particular, share-based remuneration misstatement in the company’s financial plans should be subject to shareholder statements. approval before being implemented. 6.3 Disclosure A clear, understandable and comprehensive remuneration policy should be disclosed, which is aligned with the company’s long-term strategic objectives. The remuneration report should also describe how awards granted to individual directors and the CEO were determined 15 6.6 Employee incentives 6.8 Remuneration committee Remuneration structures for company A remuneration committee should be employees should reinforce, and not established and comprised of non- undermine, sustained value creation. executive directors, the majority of Performance-based remuneration for whom are independent. The main role staff should incorporate risk, including and responsibilities of the remuneration measuring risk-adjusted returns, to help committee should be described in the ensure that no inappropriate or unintended committee terms of reference. This risks are being incentivised. While a includes: major component of most employee a) determining and recommending to the incentive remuneration is likely to be board the remuneration philosophy and cash-based, these programmes should be policy of the company; designed and implemented in a manner consistent with the company’s long-term b) designing, implementing, monitoring performance drivers. and evaluating short-term and long- term share-based incentives and other 6.7 Non-executive director pay benefits schemes including pension arrangements, for all executive officers; Pay for a non-executive director and/or a c) ensuring that conflicts of interest among non-executive chair should be structured committee members and between the in a way which ensures independence, committee and its advisors are identified objectivity, and alignment with investors’ and avoided; interests. Performance-based pay should not be granted to non-executive directors d) appointing any independent and non-executive chairs. remuneration consultant including their selection and terms of engagement and disclosing their identity and consulting fees; and e) maintaining appropriate communication with shareholders on the subject of remuneration either directly or via the board. 16 ICGN GLOBAL GOVERNANCE PRINCIPLES 7 Reporting and audit 7.1 Comprehensive disclosure management and the strategies adopted; A balanced and understandable assessment of the company’s position c) be a faithful representation of the events and prospects should be presented in it purports to represent; the annual report and accounts in order d) generally be neutral and report activity for investors to be able to assess the in a fair and unbiased way except where company’s performance, business model, there is uncertainty. Prudence should strategy and long-term prospects. prevail such that assets and income are not overstated and liabilities and 7.2 Materiality expenses are not understated. There Relevant and material information should should be substance over form. Any be disclosed on a timely basis so as off-balance sheet items should be to allow investors to take into account appropriately disclosed; information which assists in identifying e) be verifiable so that when a systematic risks and sources of wealth creation. approach and methodology is used the Issues material to investors should be same conclusion is reached; set out succinctly in the annual report, or f) be presented in a way that enables equivalent disclosures, and approved by comparisons to be drawn of both the the board itself. entity’s performance over time and against other entities; and 7.3 Affirmation g) recognise the ‘matching principle’ which The board of directors should affirm requires that expenses are matched that the company’s annual report and with revenues. accounts present a true and fair view of the company’s position and prospects. As 7.4 Solvency risk appropriate, taking into account statutory The board of directors should confirm in and regulatory obligations in each the annual report that it has carried out a jurisdiction, the information provided in the robust assessment of the state of affairs annual report and accounts should: of the company and any material risks, a) be relevant to investment decisions, including to its solvency and liquidity that enabling investors to evaluate risks, would threaten its viability. The board past and present performance, and should state whether, in its opinion, the to draw inferences regarding future company will be able to meet its liabilities performance; as they fall due and continue in operation for the foreseeable future, explaining any b) enable investors, who put up the risk supporting assumptions and risks or capital, to fulfil their responsibilities uncertainties relevant to that and how as owners to assess company 17 they are being managed. In particular, e) include environmental, social and disclosure on risk should include a governance related information that is description of: material to the company’s strategy and performance; a) risk in the context of the company’s strategy; f) use key performance indicators that are linked to strategy and facilitate b) risk to returns expected by investors comparisons; with a focus on key consequences; g) use objective metrics where they apply c) risk oversight approach and processes; and evidence-based estimates where d) how lessons learnt have been applied they do not; and to improve future outcomes; and h) be strengthened where possible e) the principal risks to the company’s by independent assurance that is business model and the achievement of carried out annually having regard to its strategic objectives, including risks established disclosure standards. that could threaten its viability. 7.6 Internal controls 7.5 Non-financial information The board of directors should oversee An integrated report that puts historical the establishment and maintenance of an performance into context should effective system of internal control which be published and portray the risks, should be measured against internationally opportunities and prospects for the accepted standards of internal audit and company in the future, helping investors tested periodically for its adequacy. Where and stakeholders understand a an internal audit function has not been company’s strategic objectives and its established, full reasons for this should be progress towards meeting them. Such disclosed in the annual report, as well as disclosures should: an explanation of how adequate assurance a) be linked to the company’s business of the effectiveness of the system of model; internal controls has been obtained. b) be genuinely informative and include 7.7 Independent external audit forward-looking elements where this will enhance understanding; The report from the external auditor should c) d  escribe the company’s strategy, and provide an independent and objective associated risks and opportunities, and opinion whether the accounts give a explain the board’s role in assessing true and fair view of the financial position and overseeing strategy and the and performance of the company. The management of risks and opportunities; engagement partner should be named in the audit report and the company should d) be accessible and appropriately publish its policy on audit firm rotation. integrated with other information that If the auditor resigns then the reasons enables investors to obtain a picture of for the resignation should be publicly the whole company; disclosed by the resigning auditor. 18 ICGN GLOBAL GOVERNANCE PRINCIPLES 7.8 Non-audit fees b) maintaining oversight of key accounting policies and accounting judgements The audit committee should, as far as which should be in accordance with practicable, approve any non-audit generally accepted international services and related fees provided by the accounting standards, and disclosing external auditor to ensure that they do such policies in the notes to the not compromise auditor independence. company’s accounts; The non-audit fees should be disclosed c) agreeing the minimum scope of the in the annual report with explanations audit as prescribed by applicable where appropriate. Non-audit fees should law and any further assurance that normally be less than the audit fee and, if the company needs. Shareholders not, there should be a clear explanation (who satisfy a reasonable threshold as to why it was necessary for the auditor shareholding) should have the to provide these services and how the opportunity to expand the scope of the independence and objectivity of the audit forthcoming audit or discuss the results was assured. of the completed audit should they wish to; 7.9 Audit committee d) assuring itself of the quality of the audit The audit committee should be comprised carried out by the external auditors of non-executive directors, the majority and assessing the effectiveness and of whom are independent. At least independence of the auditor each one member of the audit committee year. This includes overseeing the should have recent and relevant financial appointment, reappointment and, if experience. The chair of the board should necessary, the removal of the external not be the chair of the audit committee, auditor and the remuneration of the other than in exceptional circumstances auditor. There should be transparency which should be explained in the annual in advance when the audit is to be report. The main role and responsibilities tendered so that investors can engage of the audit committee should be with the company in relation to the described in the committee’s terms of process should they so wish; reference. This includes: e) having appropriate dialogue with the a) monitoring the integrity of the accounts external auditor without management and any formal announcements relating present and overseeing the interaction to the company’s financial performance, between management and the and reviewing significant financial external auditor, including reviewing reporting judgements contained in the management letter provided by them; the external auditors and overseeing management’s response; and f) reporting on its work and conclusions in the annual report. 19 8 General meetings 8.1 Shareholder identification 8.4 Vote mechanisms The company should maintain a record Efficient and accessible voting of the registered owners of its shares or mechanisms should be promoted that those holding voting rights over its shares. allow shareholders to participate in general Registered shareholders, or their agents, meetings either in person or remotely should provide the company (where (preferably by electronic means or by anonymity rules do not preclude this) with post) and should not impose unnecessary the identity of beneficial owners or holders hurdles. of voting rights when requested in a timely manner. Shareholders should be able to 8.5 Vote disclosure review this record of registered owners of Equal effect should be given to votes shares or those holding voting rights over whether cast in person or in absentia shares. and all votes should be properly counted and recorded via ballot. The outcome of 8.2 Notice the vote, the vote instruction (reported The general meeting agenda should be separately for, against or abstain) and posted on the company’s website at least voting levels for each resolution should one month prior to the meeting taking be published promptly after the meeting place. The agenda should be clear and on the company website. If a board- properly itemised and include the date endorsed resolution has been opposed and location of the meeting as well as by a significant proportion of votes, the information regarding the issues to be company should explain subsequently decided at the meeting. what actions were taken to understand and respond to the concerns that led 8.3 Vote deadline shareholders to vote against the board’s recommendation. A date by which shareholders should cast their voting instructions should be clearly published. The practice of share blocking or requirements for lengthy share holdings should be discontinued. 20 ICGN GLOBAL GOVERNANCE PRINCIPLES 9 Shareholder rights 9.1 Share classes and put periodically to shareholders for re-approval;  Sufficient information about the material attributes of all of the company’s classes e) proposals to change the voting rights of and series of shares should be disclosed different series and classes of shares; and on a timely basis. Ordinary or common f) material and extraordinary transactions shares should feature one vote for each such as mergers and acquisitions. share. Divergence from a ‘one-share, one-vote’ standard which gives certain 9.3 Conflicts of interest shareholders power disproportionate Policies and procedures on conflicts to their economic interests should be of interest should be established, disclosed and explained. Dual class share understood and implemented by directors, structures should be kept under review and management, employees and other relevant should be accompanied by commensurate parties. If a director has an interest in a extra protections for minority shareholders, matter under consideration by the board, particularly in the event of a takeover bid. then the director should promptly declare such an interest and be precluded from 9.2 Major decisions voting on the subject or exerting influence. Shareholders should have the right to vote on major decisions which may change the 9.4 Related party transactions nature of the company in which they have The process for reviewing and monitoring invested. Such rights should be clearly related party transactions should be described in the company’s governing disclosed. For significant transactions, documents and include: a committee of independent directors a) amendments to governing documents of should be established to vet and approve the company such as articles or by-laws; the transaction. This can be a separate b) company share repurchases (buy-backs); committee or an existing committee comprised of independent directors, c) a ny new share issues. The board for example the audit committee. The should be mindful of dilution of existing committee should review significant related shareholders and provide full explanations party transactions to determine whether where pre-emption rights are not offered; they are in the best interests of the company d) s hareholder rights plans (‘poison pills’) or and, if so, to determine what terms are other structures that act as anti-takeover fair and reasonable. The conclusion of mechanisms. Only non-conflicted committee deliberations on significant shareholders should be entitled to vote related party transactions should be on such plans and the vote should be disclosed in the company’s annual report binding. Plans should be time limited to shareholders. 21 9.5 Shareholder approval 9.8 Shareholder meetings Shareholders should have the right to Shareholders, of a specified portion of its approve significant related party transactions outstanding shares or a specified number of and this should be based on the approval shareholders, should have the right to call of a majority of disinterested shareholders. a meeting of shareholders for the purpose The board should submit the transaction of transacting the legitimate business of the for shareholder approval and disclose (both company. before concluding the transaction and in the company’s annual report): 9.9 Thresholds a) the identity of the ultimate beneficiaries Any threshold associated with shareholder including, any controlling owner and any resolutions, shareholder proposals or other party affiliated with the controlling owner such participation, should balance the need with any direct/indirect ownership interest to ensure the matter under consideration is in the company; likely to be of importance to all shareholders b) other businesses in which the controlling and not only a small minority. shareholder has a significant interest; and c) shareholder agreements (e.g. 9.10 Equality and redress commitments to related party payments  hareholders of the same series or S such as licence fees, service agreements class should be treated equally and and loans). afforded protection against abusive or oppressive conduct by the company 9.6 Shareholder questions or its management, including market manipulation, false or misleading There should be a reasonable opportunity information, material omissions and insider for the shareholders as a whole at a general trading. Minority shareholders should be meeting to ask questions about or make protected from abusive actions by, or in the comments on the management of the interest of, controlling shareholders acting company, and to ask the external auditor either directly or indirectly, and should questions related to the audit. have effective means of redress. Proper remedies and procedural rules should 9.7 Shareholder resolutions be put in place to make the protection Shareholders should have the right to place effective and affordable. Where national items on the agenda of general meetings, legal remedies are not afforded the board and to propose resolutions subject to is encouraged to ensure that sufficient reasonable limitations. Shareholders should shareholder protections are provided in the be enabled to work together to make such a company’s bylaws. proposal. 22 ICGN GLOBAL GOVERNANCE PRINCIPLES Section B: Institutional Investors 10 Responsibilities 10.1 Duties 10.3 While different agents in the investment chain play different roles, each should Institutional investors, both asset owners focus on the needs of its beneficiaries or and asset managers, should focus clients such that it is always seeking to on delivering value by promoting and deliver value over their required time- safeguarding the interests of beneficiaries horizon. Benchmarks for measuring or clients over an appropriate time-horizon. success should be tailored to the needs This is often expressed as a fiduciary duty, and risk exposures of beneficiaries requiring prudence, care and loyalty on the or clients, with reporting designed to part of all agents which are subject to such provide them with an understanding of obligations. success toward meeting those needs and managing related risks, in addition 10.2 Asset owners should actively consider (as relevant) to providing applicable which of their agents should be subject to market-relative performance metrics. the strictures of fiduciary duty and if such requirements are not applied what lower standards of behaviour are appropriate. Asset owners cannot delegate their underlying fiduciary duties. Even when they employ agents to act on their behalf, asset owners need to ensure through contracts or by other means that the responsibilities of ownership are appropriately and fully delivered in their interests and on their behalf by those agents, who are to be held to account for doing so. 23 10.4 Responsibilities 10.5 Reporting Asset owners should fully align the Institutional investors should adopt and interests of their fund managers with disclose clearly stated, understandable their own obligations to beneficiaries and consistent policies to guide their by setting out their expectations approaches to stewardship and voting. in fund management contracts (or Asset owners should report at least similar instruments) to ensure that annually to those to whom they are the responsibilities of ownership are accountable on their stewardship policy appropriately and fully delivered in their and its execution. Fund managers and interests. This should include: other agents should seek a clear set of objectives and expectations from their a) ensuring that the timescales over clients and beneficiaries, in particular with which investment risk and opportunity regard to their investment time-horizon. are considered match those of the client; 10.6 Public policy b) setting out an appropriate internal risk management approach so that Institutional investors should engage material risks are managed effectively; as appropriate in the development of relevant public policy and good practice c) effectively integrating relevant standards and be willing to encourage environmental, social and governance change where this is deemed helpful by factors into investment decision- beneficiaries or clients to the delivery of making and ongoing management; value over appropriate time horizons. d) aligning interests effectively through appropriate fees and pay structures; e) where engagement is delegated to the fund manager, ensuring adherence to the highest standards of stewardship recognising a spectrum of acceptable stewardship approaches; f) e  nsuring commission processes and payments reward relevant and high quality research; g) ensuring that portfolio turnover is appropriate, in line with expectations and managed effectively; and h) providing appropriate transparency such that clients can gain confidence about all these issues. 24 ICGN GLOBAL GOVERNANCE PRINCIPLES 11 Leadership and independence 11.1 Oversight 11.4 Time horizons Institutional investors should be overseen Governing bodies should clearly by boards or other governance structures understand the objectives of their that act independently and without bias, beneficiaries or clients, communicate advancing beneficiary or client interests such objectives to fund managers and as their primary obligation. Governing other agents employed, and ensure they bodies, and where relevant, individuals are being met. They should oversee the in a fiduciary position of responsibility for management of risk and the work of all ultimate investors, such as pension fund their agents such that they deliver fully trustees and representative boards, should in the interests of the beneficiaries or be aware of their primary oversight role. clients over appropriate time-horizons. In considering what time-horizons are 11.2 Constitution appropriate, institutional investors will need to consider the best interests of their All decisions should be taken in the clients and beneficiaries, and any issues interests of the beneficiaries or clients. The of intergenerational fairness between them governing bodies of investment institutions as well as where the ultimate risk-bearing should therefore have a structure and lies. They should make clear which, if constitution that reflects this and should any, public or regulatory authorities have be disclosed to beneficiaries and clients, responsibility to monitor and enforce their together with explanations as to how such fiduciary functioning. arrangements address alignment with beneficiary interests. They should have 11.5 Appointments mechanisms in place to solicit and receive ongoing feedback from beneficiaries and The way in which individuals are appointed respond to their concerns. to serve on the governing body should be disclosed to beneficiaries as well 11.3 Review as the criteria that are applied to such appointments. Such criteria should always Institutional investors should also make take account of the need for expertise and use of regular independent reviews of understanding of the matters for which the their internal governance structures, and governing body is responsible. Governing respond to recommendations arising bodies, particularly of institutional investors from them, to ensure that they meet where the beneficiaries or clients face expectations of accountability. the underlying investment risk, should also include representatives of those beneficiaries or clients to build confidence in the collegiality of interests between them. They should reflect the diversity of interests of those whom they represent. 25 12 Capacity 12.1 Experience to that advice. Fund managers and others in a similar agency position should Institutional investors should be led by deploy sufficient, qualified resources to governing bodies and staff with the deliver properly on clients’ expectations. appropriate capacity and experience to Institutional investors should be able to oversee effectively and manage all relevant justify to beneficiaries or clients specific activities in the interests of beneficiaries actions taken on their behalf whether by or clients. Decision-makers along all themselves or by their agents. Institutional parts of the investment chain should be investors remain accountable for the appropriately resourced and meet relevant delivery of actions even where they have standards of experience and skill in delegated the day-to-day responsibility for matters subject to deliberation. All should carrying them out. have appropriate training and induction processes made available to them, and should be able to allocate sufficient time 12.3 Collaboration both to that training and induction and to Where an investment institution is not ongoing decision-making. of sufficient scale to have governance structures or internal resources to 12.2 Advice deliver effective oversight on behalf of beneficiaries or clients, it should consider Governing bodies should have the ways to consolidate, collaborate or right to outside advice, independent build scale such that it is capable of from any received by the sponsoring this necessary oversight. This may body; they need to have the capacity require dialogue with policymakers and critically and prudently to evaluate any government authorities to facilitate such advice received and to take appropriate developments. decisions themselves, not simply defer 26 ICGN GLOBAL GOVERNANCE PRINCIPLES 13 Conflicts of interest 13.1 Policies 13.2 Compliance Institutional investors should have robust Institutional investors should have effective policies to clarify, minimise and help programmes for dealing with compliance manage conflicts of interest to help ensure matters and should also consider their that they maintain focus on advancing obligations to beneficiaries or clients in beneficiary or client interests. In particular, terms of broader ethical considerations. policies should address how matters are For example, they should manage handled when the interests of clients or appropriately and effectively the risks of beneficiaries diverge from each other. Any bribery and corruption, money laundering conflict should be promptly disclosed to and other like risks. They should have those to whom the party is immediately effective policies to deal with inside accountable in the investment chain. information, avoid market manipulation, and foster transparency and fairness in share trade execution and reporting. 14 Remuneration 14.1 Alignment inappropriately incentivize risk-taking behaviours. Institutional investors should reinforce their obligations to act fully in the interests of beneficiaries or clients by 14.2 Performance setting fee and remuneration structures Consideration should be given to that provide appropriate alignment over including a long-term performance relevant time-horizons, and communicate incentive that reflects long-term this to beneficiaries or clients. In large investment results or is in the form of part this will require the structure for fees an interest in the fund that extends paid to parties in the investment chain to through the period of responsibility for be more associated with the long-term the investments. Good practice is for perspectives which will generate returns institutional investors to disclose to their over the time-horizon that beneficiaries or beneficiaries or clients an explanation clients are seeking. Collective investment of how their remuneration structures vehicles may also seek transparency and performance horizons for individual of the remuneration structures for staff members advance alignment with individuals within the agents that they the interests of beneficiaries or clients. hire, in particular to gain assurance that Asset owners may wish to ensure that these provide appropriate incentives remuneration frameworks do not unduly to those individuals. In particular, they constrain their ability to attract and retain may wish to assure themselves that well-qualified personnel. pay structures for individuals do not 27 14.3 Culture longer term. Having greater proportions of variable rewards deferred for Remuneration plays a crucial role longer periods of time and subject to in establishing and maintaining an performance adjustment mechanisms appropriate culture or ‘investment such as claw-back structures, particularly behaviour’ within an organisation. if the deferred awards are invested As such, institutional investors should alongside beneficiaries or clients, is consider whether pay is adequately likely to help instil the right mind-set aligned with performance, whether and culture. These measures are an there is an appropriate balance between appropriate context for the delivery base pay and incentives, and whether of value over time for beneficiaries the period over which performance and clients. is measured is both short term and 15 Monitoring 15.1 Monitoring approach f) where practicable, attendance at general meetings. Institutional investors should regularly monitor investee companies in order to assess their individual circumstances, 15.2 Company dialogue performance and long-term potential, Institutional investors should seek and to consider whether there is value in to identify, as early as possible, any intervening to encourage change. Investors problems that may put significant should be clear what standards they are investment value at risk. If they have applying, and how they monitor investee concerns they should seek to ensure that companies. Monitoring should include: the appropriate members of the investee company’s board or management are a) maintaining awareness of the made aware of them as soon as possible. company’s ongoing performance, as well as developments within and external to the company that might 15.3 Institutional investors should carefully affect its value and the risks it faces; consider explanations given for any departure from relevant corporate b) all relevant factors including the governance codes and make reasoned company’s approach to environmental judgements in each case. Where this and social matters; could lead to a negative vote or an c) assessing the effectiveness of the abstention at a general meeting, the company’s governance and leadership; investee company’s board should, at d) considering the quality of the company’s least in respect of significant holdings, be reporting; contacted to discuss the issue and, if it remains unresolved, notified in writing of e) attending relevant meetings with senior the reasons for the decision. company officers and board directors when appropriate; and 28 ICGN GLOBAL GOVERNANCE PRINCIPLES 15.4 Review to their clients or beneficiaries. Asset owners should monitor the activities and Institutional investors should periodically effectiveness of their fund managers and measure and review the effectiveness other agents, holding them to account for of their monitoring and ownership delivery of value over time according to activities and communicate the results relevant mandates. 16 Engagement 16.1 Proactive engagement Companies should ensure that all sensitive information and decisions Institutional investors should engage resulting from engagement are made intelligently and proactively as appropriate public for the benefit of all investors at the with investee companies with the aim appropriate time. of preserving or enhancing value on behalf of beneficiaries or clients. This is particularly constructive in advance 16.3 Engagement approach of general meetings, to work together Institutional investors should have a clear to identify agreeable positions and approach to engagement which should enhance understanding around company be communicated to companies as part strategy, financial performance, risk to of an engagement policy. The spectrum long term performance, governance, of engagement activities may vary, for operations and with respect to social example depending on the nature of the and environmental matters. Engagement investment or the size of shareholding, is most effective when investors have and this will affect the appropriateness the adequate knowledge and skills to of the engagement approach taken with encourage and effect necessary change. investee companies. In situations where dialogue is not producing the desired 16.2 Market abuse result, additional engagement steps that may be taken by investors include: Institutional investors should respect market abuse rules and not seek trading a) expressing concerns to corporate advantage through possession of price- representatives or non-executive sensitive information when engaging directors, either directly or in a with companies. Where appropriate shareholders’ meeting; and feasible, investors should consider b) expressing their concern collectively formally becoming insiders in order with other investors; to support a process of longer term c) making a public statement; change, and the intention whether or not to become insiders should be made d) submitting shareholder resolutions; clear at the outset of the engagement. e) speaking at general meetings; 29 f) submitting one or more nominations for this would assist in advancing beneficiary election to the board as appropriate and or client interest, taking account of convening a shareholders’ meeting; relevant law and regulation. Institutional g) seeking governance improvements investors should disclose their policy and/or damages through legal remedies on collective engagement. Investors or arbitration; and should not face regulatory barriers to discussions between themselves h) exit or threat of exit from the investment regarding forthcoming voting decisions as a last resort. or concerning other governance matters. Concert party rules and/or takeover 16.4 Collective engagement regulations should not prevent investors Institutional investors should act from sharing perspectives about collectively as appropriate when companies in which they have mutual engaging with investee companies where interests and/or concerns. 17 Voting 17.1 Informed voting 17.3 Vote decisions Institutional investors should seek to Institutional investors should seek to reach vote shares held and make informed and a clear decision either for or against each independent voting decisions at investee resolution or, in specific cases, may wish to companies, applying due care, diligence abstain. Voting decisions and the rationale and judgement. They should have a clear taken should be made publicly available in policy on voting made available to investee due course and, where a vote is contrary companies and beneficiaries or clients. to the company board’s recommended position, should be communicated 17.2 Proxy voting to the company in advance of the general meeting. Where an institutional Institutional investors should disclose the investor chooses not to vote in specific extent to which they use proxy research circumstances, or in particular markets or and voting services, including the identity where holdings are below a certain scale of the service provider and the degree threshold, this should be disclosed to to which any recommendations are clients or beneficiaries in a clear policy. followed. Investors should clearly specify how they wish votes to be cast, noting 17.4 Voting records that they cannot delegate their ownership responsibilities, and should ensure that Institutional investors should regularly votes cast by intermediaries are carried disclose (e.g. quarterly or annually) a out in a manner consistent with their own summary of their voting activity on a voting policies. website or other appropriate means and, where possible, their full voting records Voting records should include an 30 ICGN GLOBAL GOVERNANCE PRINCIPLES indication of whether the votes were cast arrangements to the contrary are made). for or against the recommendations of the In order for the votes to be cast, lent stock company’s board of directors. must be recalled before the record date declared by the company. In order to 17.5 Stock lending preserve the integrity of the shareholders’ meeting it is important that the shares Institutional investors should disclose their never be borrowed or received as collateral approach to stock lending and voting in a for the primary purpose of voting them. clear policy which should clarify the types of circumstances when shares would be 17.7 The results of stock lending should be recalled to vote. The policy should be transparent to the beneficial owners of communicated to relevant agents in the shares. The portion of the return from a chain of the vote execution, and, in respect position due to lending activity should of shares out on loan, to the agent lender. be made known in the regular reports. Similarly, the percentage and number of 17.6 Institutional investors should recognise that shares of a given security which were not if shares are lent out, they temporarily lose voted due to stock lending should also be their voting rights for the duration of the reported to beneficiaries. loan because they are no longer the legal owner of those shares (unless contractual Annex 1: ICGN Guidance Anti-corruption Practices Corporate Risk Oversight Executive Remuneration Gender Diversity on Boards Integrated Business Reporting Institutional Investor Responsibilities Model Contract Terms Between Asset Owners and Managers Non-executive Director Remuneration Political Lobbying and Donations Securities Lending Code of Best Practice What investors want from financial reporting 31 Contacts For more information about the ICGN please visit the ICGN website at www.icgn.org or contact the ICGN Secretariat: By Email: secretariat@icgn.org By Phone: +44 (0) 207 612 7011 By Post: ICGN Secretariat, Saffron House, 6 -10 Kirby Street, London, EC1N 8TS, UK