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Policy update
Peter Swabey, FCIS, Policy & Research Director, ICSA
3rd July 2015
Policy update
Agenda
Investor stewardship
PSC Register
The new Government
www.slideshare.net/icsaevents
Investor stewardshipICSA is working with a number of partners
•the 2020 Stewardship Working Party, which comprises 5 institutional investors (Aviva Investors, BlackRock, GO Investment Partners, RPMI Railpen and USS) and Tomorrow’s Company
•the NAPF
•the Investment Association
•the Investor Relations Society; and
•the Quoted Companies Alliance
to help the FRC review the extent to which the Stewardship Code has begun to have an impact on company and investor engagement.
How effective is the stewardship code?Two complementary surveys …..
One by the Investment Association of its members;
One by ICSA
“ICSA is keen to promote active engagement between issuers and their shareholders as not only is this best practice, it is also the only way that shareholders can truly maximise their shareholder rights. ICSA has long supported the principles underpinning the Stewardship Code, having contributed to the FRC consultation on the original code and led the publication of Enhancing Stewardship Dialogue in 2013.”
Peter Swabey, Policy & Research Director at ICSA
What do you see as the purpose of stewardship? (tick all that apply)
It is about building a mutual understanding of trust between company and institutional investors
85%
It is about shareholders holding boards to account for company performance
73%
It is about enhancing company value and investment returns
46%
It is about getting shareholders to vote and attend meetings with companies
42%
It is about shareholders raising environmental social and governance (ESG) issues
25%
None of the above 2%
Other …please explain* 2%
* About ensuring good governance and management of companies for the benefit of shareholders and broader stakeholder groups
Do you see investor stewardship as (tick all that apply)….
An essential part of the legal structure through which public companies are governed and controlled
67%
Promoting the interests of your shareholders/beneficial owners
62%
Promoting the interests of the company 35%
A public duty 23%
None of the above 2%
Other …please explain* 4%
* - When engaged with properly it enhances communication between a company and its shareholders - It is an unnecessary burden
Since the Stewardship Code was introduced in 2010, what changes have you seen in the quantity of investor stewardship activity? (tick all that apply)
Less activity 2%
No difference 40%
More activity 58%
A lot more activity 0%
“While the face to face interaction has remained unchanged there has been an increase in written correspondence from major investors. Although this usually equates to advising their voting policy rather than any real engagement with us.More interest in policies/more questioning of behaviours”
“Certain investors have taken much more constructive approach to this. But bulk do not do much”
“More activity from a minority of investors. Those who did not engage before generally do not do so now.”
Since the Stewardship Code was introduced in 2010, what difference have you seen in the quality of investor stewardship?
It has got worse 8%
No difference 42%
It has got a little better 48%
It has got a lot better 2%
“It remains patchy - we have some very well prepared meetings, with in depth discussion of our markets, our strategy and our performance, and others where the research has not been done, and the questions have clearly been cribbed at the last minute from the sell side”
“More interest, better quality people, better quality questions from investors. Still not much join up with the governance side”
“Now, they merely subcontract out voting intentions to Proxy Advisers who are ill informed and not best placed to engage.”
“I’m not sure how you can measure quality but In have seen no discernable change.”
Do you think Stewardship is relevant for investors engaged in: (tick all that apply)
Buy/sell decisions for active equity funds 94%
Index tracking equity funds 63%
Equity derivatives (e.g. ETFs - Exchange Traded Funds)
23%
Other asset classes [e.g. corporate debt (if so which)] 13%
Examples of ‘other asset classes’ :
•Any/all
•corporate debt x4
•All credit instruments
Do you believe the responsibilities of stewardship should apply to….
All equity investments 63%
Only large holdings 37%
Proportion of company capital 58%
The shareholders ranking in the share register 26%
Market value of investment 16%
Weight of holding in investor portfolio 0%
If “only large holdings” then do you define large holdings by:
Do you think that top 20 shareholders of public companies have special stewardship responsibilities?
Yes 71%
No 29%
“It may not be 'Top 20' but those shareholders that hold a majority of the voting rights have the tools, and therefore some added responsibility, to make sure the company is being governed correctly, promoting the success of the company in the long term”
“All shareholders have the same rights and responsibilities. But it is more important that large shareholders exercise those rights and responsibilities rather than being absentee landlords”
“This leads to a ‘usual suspects’ approach. The responsibility is there it’s how it’s exercised”
“All shareholders need to be treated the same. We are at risk of giving too much credence to a few large shareholders”
“No more responsibility than the next twenty”
There are currently different views whether the signatories to the stewardship code should be an investment house as a whole or investment funds with that house. Do you believe the responsibilities of stewardship apply to:
An investment house as a whole 73%
On individual funds or products 27%
If signatories to the Stewardship Code do not implement their commitments to the code do you think there should be penalties?
Yes 40%
No 60%
Naming and shaming 90%
Delisting as signatory to code 57%
Formal regulatory censure/loss of regulatory approval 48%
Financial penalties 19%
None of the above 0%
Other …… please explain 0%
If yes which ones:
Should asset managers that clearly demonstrate they comply with the code to a high standard: be recognized in some way?
Yes 67%
No 33%
“Industry recognition they can advertise...perhaps a modern day version of a kite mark”
“The FRC could give a Commitment to Stewardship Award to those investment houses deemed to take their responsibilities sufficient seriously”
How do you think stewardship can be improved, if at all? What impediments are there to being good stewards?
I principally see the impediment being resource, both in terms of governance teams who appear very stretched, and the PMs/analysts, who it would appear do not have sufficient time to consider the issues across all their investments - therefore the focus has been very much on the offenders , with most other companies unlikely to receive much attention beyond a couple of meetings with management a year. Clearly a more continuous dialogue would be helpful to both sides.
Considering the ever-increasing levels of required transparency and disclosure that public companies are subject to, it is surprising how opaque and non-transparent large institutional fund managers remain in terms of explaining their rationales, decisions and performance.
The corporate governance industry is building up and the quality of people is improving. Stewardship is best measured in a few years once the human resources for doing it effectively are in established. One immediate improvement would be a requirement to list all of the consultations received and whether they had replied to them within the deadline set.
How do you think stewardship can be improved, if at all? What impediments are there to being good stewards?
Having a clear understanding that it needs action not tick box compliance
It is a question of attitude. Holdings are not always long term so engagement is futile. Rigid voting guidelines do not help engagement with businesses.
I suspect that, principally for reasons of resource, corporate governance departments of institutional investors focus primarily on FTSE 100 companies, which are higher profile in many of the current issues in the corporate governance debate and therefore meaningful engagement with smaller listed companies tends to be more sporadic.
It's still to difficult to get the relevant contact to engage in a timely manner if at all, particularly as a small cap. Proxy agencies don't help.
The issues that always arise are time and resources. Most of the larger investors focus on holdings over a certain % or where they perceive there are issues to be addressed. Unless institutions are able to resource up their governance teams then it is unlikely that things can be improved beyond the current state.
Since the introduction of the Stewardship Code in 2010 what has changed in your approach to institutional investors?
We certainly take more time to communicate with our top investors if we consider that there is something that we need to explain. We have also written to them on remuneration issues. However we have had little response or feedback. Where they remain happy with a company's performance they rarely seem to wish to take the time to engage. We would also like to have on-going discussions rather than just around the AGM season.
We have always been open to engagement with investors. Now we go out more actively to ask if investors wish to engage on particular topics.
Still responsive
Our engagement levels have increased although this reflects the issues facing the company rather than the introduction of the Code per se.
Higher level of expectation of quality engagement - unfulfilled
We have heightened expectations given the efforts of some investors
Nothing changed in our approach. Engagement remains the key
Have there been improvements in your ability to consult or engage with investors?
Yes 52%
No 48%
If no, why not?
It may be because the governance agenda, especially around remuneration has changed significantly over the past few years so there is not enough time for them to engage with everyone
We have always sought to engage fully with all of the institutional investors and respond to any issues they raise, but our experience is that we often get little feedback.
We were already doing it!
Because we already had the engagement we needed
Have there been any improvements in your ability to influence investor voting
Yes 33%
No 67%
“At least now that some investors are prepared to disclose their reasoning/policies (for example around remuneration), it is at least possible now to correct any factual inaccuracies they harbour!”
“We have great difficulty in establishing from Crest votes, the identity of underlying shareholders and very few are forthcoming in letting us know of their voting intentions. Proxy Advisers appear to becoming less responsive to Companies, and appear to be pushing own agendas.”
“We have devoted large amounts of time to explain our decisions in areas such as pay but not convinced they are always listened to.”
“It is very hard to get hold of them and of course some slavishly follow ISS.”
“We are clearer as to what they are looking for and what they don't like.”
What is your preferred method of engagement with institutional shareholders? (tick all that apply)
Face to face meetings with individual investors 92%
Collective meetings with investors 56%
Telephone/web-based/ email exchanges 33%
Other. Please explain 6%
Other …..
depends on what is being discussed/time available and who is being engaged
Video Conference
Quarterly earning s release Q&A calls
Do you feel investors allocate sufficient resources to this area?
No x10
Not enough of them are (yet) sufficiently clear that more understanding of the items on the stewardship agenda will help them make better investment decisions - in my mind it should not be seen as a compliance hoop to allocate resources to, it is part of the core competency of holding meaningful stakes in companies
Time and resources have always come up as an issue with investors so it would be good if they could resource up in order to engage more effectively.
No, but it is potentially very costly to do so and that is a cost to the underlying client
Some do, the majority don't - though to be fair, the human resources aren't yet available.
No – frankly some of them take their clients’ money but don’t do the work
Judging by the quality of some reporting probably not
In most cases, no
What proportion of your share register do you regard as good stewards?
Less than 10% 10%
10-25% 38%25-50% 17%50% + 19%Do not know 2%
Is this an appropriate level? Please explain
What characterizes in your view, good and bad stewardship?
In summary …………….
A lot of whether it is good or bad depends on an investors willingness to actually listen to a company's explanation rather than just blindly applying their policy decisions.
All of the above takes time and effort, which is why it would be perverse to expect all investors in all companies all the time to demonstrate good stewardship behaviours - it should apply only to those who have a meaningful stake in the company's future
Has engagement with investors helped you make better decisions?
Not at all 10%
Some of the time 77%Most of the time 12%All of the time 2%
What are the issues on which investors wish to focus engagement?
Remuneration is always top of the list. We have an unusual structure so they also wish to get a better understanding of how things work …….. Beyond that it is usually succession planning and then general governance
Remuneration remains an important and sensitive area, particularly on the linkage to performance, but there is broader focus on risk management, audit and social / environmental issues
Performance and remuneration
What are the issues on which you want to focus engagement with investors?
We would like to ensure that investors have a clear understanding of our structure and how this works and importantly how this affects decisions we make
Understanding the implementation of our strategy is key and how our governance structure supports this
Performance and broader governance issues
Strategy
Long term issues / Longevity of investment horizon
I am surprised how few investors are interested in audit
Pay and strategy
Since the publication of the Kay review of UK equity markets and long-term decision making (July 2012), are your investors focusing more on the long term?
Yes 21%
No 13%The same 65%
How many of your top 20 shareholders reply to your requests for consultations/meetings/dialogue?
All 23%
75% + 27%50-75% 21%Less than 50% 29%
Do you ever approach investors and get no response? If so, what reasons may account for this?
Invitations for meetings with executive management nearly always get a reply. However, there is often no reply when invitations are sent to engage with Chairmen and / or NEDs.
We chase a lot and still find about 25% don't reply - not aware of the reason for this as we are sure they are being directed at the right people
Regularly. In part this is a jurisdiction issue ie South African culture on such engagement is very different to the UK. Others, if they don't have any issues with our company and don't have resources to focus on us, they just don't seem to bother responding despite follow ups from us
Seldom, they normally say we are adequately up to date (a cop out for I'm too busy or not interested)
Response rates tend to be lower with 'tracker' funds that active managers
Yes x 6
No x6
How do you rate the overall quality of engagement by your institutional investors ?
Very poor 2%
Poor 8%
Average 40%
Good 46%
Excellent 4%
Do you have any further comments on investor stewardship? Please elaborate:
Dialogue is better, driven by us
No one size fits all. All investors are different
It should not add further to pointless bureaucracy or box ticking which adds no value to any party.
Having too many obligations on all parties stifles business....the question is ,,,what is the issue and how best to resolve....not via binding rules in my view
We should be publishing something in our ARA about whom we approached and the responses we received! Also some disclosure about what people wanted to discuss!
It is one amongst many important things that people are focused on.
Policy Update
The PSC Register
‘The register of persons with significant control’
Persons with significant control
PSC Register: implementation
Small Business, Enterprise & Employment Bill
Out put from the Red-tape challenge
The primary legislation is currently being debated in Parliament.
BIS aim to consult on draft secondary legislation over summer.
Companies will start keeping their own PSC Register from January 2016.
They will need to start filing this information at Companies House from April 2016.
PSC Register: policyThere are five core elements to new Part 21A of the Companies Act 2006 (CA06):
1.The definition of a ‘person with significant control’
2.The legal entities in scope of requirements
3.Obtaining the information
4.The register
5.Disclosure of and access to the information
BIS have replicated or extended existing company law criminal offences to deal with those who fail to provide information or provide false information.
PSC Register: definitionBIS have used the existing definition of ‘beneficial owner’ in the EU anti-money laundering context as the basis.
New Schedule 1A to the CA06 sets out five ‘specified conditions’. An individual meeting one or more of these conditions is a Person with Significant Control (‘PSC’):
1. Ownership of more than 25% shares
2. Ownership of more than 25% voting rights
3. Ownership of right to appoint or remove a majority of the board of directors
4. Right to exercise significant influence or control
5.Right to exercise significant influence or control over a trust or firm which trust or firm would be a PSC, were it an individual)
In certain circumstances a legal entity must be noted in the register (‘relevant legal entities’ or ‘RLEs’).
PSC Register: scope
All UK companies, except companies listed on UK regulated or prescribed markets, will have to keep a PSC register.
BIS will apply reform to Limited Liability Partnerships through secondary legislation.
BIS are considering:•Whether to exempt other types of companies subject to stringent disclosure requirements
•How to implement the wider scope of the EU AML Directive
PSC Register: obtaining informationCompanies must take reasonable steps to find out if they have any PSCs or RLEs and identify them.
In some cases the company will already have this information.
In others the company will need to serve notice on individuals and others. A person in receipt of such a notice is required to reply. Failure to do so is a criminal offence. Shares may also be subject to restrictions by the company.
PSCs and RLEs are also required to disclose their interest in the company to the company in certain circumstances.
PSC Register: obtaining information
PSC Register: the company’s registerCompanies must hold and keep available for public inspection a PSC register. This will contain information on the PSCs’:
•Full name
•Service address
•Country or state of usual residence
•Nationality
•Full date of birth
•Usual residential address (not publicly available)
•Date on which PSC obtained control
•The nature of his or her control over the company
Register must be kept up to date as information changes.
People may access the register on request.
PSC Register: the central registerCompanies must provide all the information in their PSC register to Companies House on incorporation and then at least once every 12 months as part of the new confirmation statement.
All information will be made available on the public register except:
• The full date of birth (only the month and year will be shown on the public register, except where the company elects to keep its PSC information solely on the register at Companies House)
• The usual residential address
PSC Register: the central registerIndividuals at serious risk of harm will be able to apply to the registrar of companies to prevent their information being publicly disclosed on the company’s register and the central register.
Specified public authorities will have access to protected data on request.
BIS have recently consulted on this regime - https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/437974/bis-15-315-register-of-people-with-significant-control-consultation.pdf
Covers the scope, nature and extent of control, fees, the protection regime and warning and restrictions notices
PSC Register: guidance
Two types of guidance:
•Statutory
•Non-statutory
The legislation requires the Secretary of State to publish guidance on the meaning of ‘significance influence or control’ in the context of the PSC register.
This statutory guidance has legal effect and will be produced by BIS.
PSC Register: guidance
Non-statutory guidance will be produced by a working group acting on behalf of BIS and will address issues like:
•What is a PSC or an RLE and what do they need to do
•What information is being collected and why
•Who can access it and how
•Which companies are affected and what they need to do
•What ‘reasonable steps’ means
•What to do if you don’t receive the required information
•How to manage your PSC Register
•What to do if you are a PSC
PSC Register: guidance
The plan is to publish the guidance in October, well in advance of when statutory duties kick in in January.
Feedback on what you would like to see included in the guidance welcome.
Thought leadership from ICSA
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