There are two critical aspects to governance. One is the role of boards. In this regard Australia has done much to ensure they are held to account. The other is the role of institutional investors and their advisers. In this regard Australia probably has room to improve.
One of the criticisms Australian boards have with institutional investors is that many fail in their stewardship by not devoting sufficient and competent resources to consider the strategy, remuneration policy and governance situation of their investments.
Unfortunately, Australia does not have a stewardship code to ensure the interests of beneficiaries are adequately protected by their institutional investor stewards. About the best that can be managed is the Australian Financial Services Council proxy voting standard (see HERE).
The main purposes of this standard in relation to listed Australian investments are:
- to require the formulation of an institution’s voting policy (including proxy voting) for each Scheme it operates;
- whether or not an institution engages the services of a voting or proxy consultant in exercising its voting rights, and;
- to require disclosure of the above matters and details of the exercise of such voting rights by the institution (on an ‘entity and resolution level’ basis) in respect of each financial year for each Scheme it operates.
This falls short of a code that protects beneficiaries’ interests. For that, there is a sole reliance on laws and regulations administered by APRA and ASIC.
This is in contrast to the UK’s Financial Reporting Council (FRC) Stewardship Code, which was implemented in 2010, that aims to get institutional investors more actively involved with fund managers and the companies in which they invest to promote the interests of their members.
The FRC’s Stewardship Code also enshrines the objective of maximising long-term, risk-adjusted returns rather than a focus on short-term relative performance. See HERE.
The FRC Stewardship Code has seven clearly defined principles. Asset managers and investors should:
- publicly disclose their policy on how they will discharge their stewardship responsibilities.
- Have a robust policy on managing conflicts of interest in relation to stewardship which should be publicly disclosed.
- Monitor their investee companies.
- Establish clear guidelines on when and how they will escalate their stewardship activities.
- Be willing to act collectively with other investors where appropriate.
- Have a clear policy on voting and disclosure of voting activity.
- Report periodically on their stewardship and voting activities.
This requires institutional investors to operate on a ‘comply or explain’ basis. For this purpose, the FRC expects signatories to the Code to publish on their website, or if they do not have a website in another accessible form, a statement that:
- describes how the signatory has applied each of the seven principles of the Code and discloses the specific information requested in the guidance to the principles; or
- if one or more of the principles have not been applied or the specific information requested in the guidance has not been disclosed, explains why the signatory has not complied with those elements of the Code.
Again, in contrast to Australian stewardship, the FRC has teeth. Investment groups are facing a corporate governance crackdown as pressure mounts on the way asset managers vote on pay and monitor issues such as remuneration, board independence and company strategy.
Regulators will remove asset managers and pension funds from the UK Stewardship Code if they fail to meet certain standards on the reporting of a wide range of governance issues. Groups such as Franklin Templeton Investments, Toscafund Asset Management, Neuberger Berman Europe and UK wealth manager, Brewin Dolphin, face being axed as signatories to the code if they fail to improve reporting standards.
The FRC says that this is a significant move in an effort to encourage asset managers and owners to raise standards and report in a better way. This will give clients a better idea of what asset management groups and owners are doing on stewardship, how they are disclosing the way they vote, whether they use proxy advisers and how they are dealing with any potential conflicts of interest.
The FRC has created three tiers for its nearly 300 signatories to the Code, which includes asset managers, pension funds and proxy advisers. This is based on the quality of reporting on the seven principles of the code.
Compliance among UK larger institutional investors outstrips that at smaller rivals.
Groups that have not achieved at least Tier 2 status after six months will be removed from the list of signatories. Those in Tier 3, the worst offenders, include Franklin, Toscafund, Neuberger and Brewin.
There are 120 groups in Tier 1, which include the likes of Aberdeen Asset Management, Aviva Investors, Axa Investment Managers, BlackRock, Columbia Threadneedle, Hermes Fund Managers, Henderson Global Investors, Investec Asset Management, Jupiter, Legal & General Investment Management, M&G Investment Management, Old Mutual Global Investors, Schroders and Standard Life Investments.
But some big institutions were placed on Tier 2 including Pimco Europe, Ashmore Investment Management, Baillie Gifford and T Rowe Price. Australian listed entities with these investors on their register can expect them to be more responsive to engagement sessions in future.
While the UK is upping the ante on institutional investors, the US has also moved to make proxy advisers more accountable, with a law requiring, among other things, that proxy advisers inform companies of their assessments for review prior to distribution. See HERE and HERE.
These initiatives in the US and UK respond to various shortcomings in ensuring investors and their advisers live up to standards equal to those imposed by them on listed entities. Many would say that Australia was heading down the right path with CAMAC’s review of the role of the AGM and associated issues (see HERE). Unfortunately, this was shelved with the abolition of CAMAC in 2014 (see HERE). Some would say that there is a need to revive this initiative.© Guerdon Associates 2020 Back to all articles