The Financial Services Council has released an Internal Governance and Asset Stewardship Standard to promote higher standards of internal governance and stewardship and provide better information to clients and stakeholders.
Another driver behind the introduction of the standard was the concern that failing to take this path risks the quality and standing of Australia’s financial services internationally given the introduction of stewardship codes overseas. Other countries with codes include UK, US, Japan, Hong Kong, South Korea, Malaysia, Brazil and Singapore.
However, most of these countries have stewardship codes driven by asset owners (i.e. pension funds). The FSC represents asset managers. Asset owners trump asset managers when it comes to AGM voting. Yet Australia’s superannuation funds have failed so far to establish a stewardship code. In fact, many of the country’s largest superannuation funds do not even have voting guidelines. Perhaps they are waiting for a stewardship code…..
The FSC standard does not apply to clients of the asset manager or the asset owner (other than currency hedging/overlay and interest rate hedging).
While this means the standard would not apply to many institutional investors and superannuation organisations, the FSC encouraged these entities to make disclosures in accordance with the standard to the extent it applied to them. For example, if a superannuation fund had assumed the voting rights from its asset manager or conducted engagement activities, then the FSC suggests that the superannuation fund should follow the code.
Fortunately, it has been reported that the Australian Council of Superannuation Investors (ACSI) was looking into developing a stewardship code for asset owners, see HERE.
ACSI’s asset owner “competitor, the Australian Institute of Superannuation Trustees, has stated it is considering the development of a stewardship code separate from its governance code.
So, for the moment, Australia just has the FSC stewardship code. The FSC standard requires members to disclose details of their internal governance and asset stewardship. Companies that fail to disclose will have to justify their decision on a comply or explain basis, where they either describe policies and practices, or state why such policies and practices are not relevant.
The standard has three disclosure areas:
1. Organisational and investment approach
Under this heading, the FSC expects disclosures on:
- The distinguishing features of the asset manager and how these features are directed towards achieving client objectives
- The asset manager’s purpose and values (including the underlying investment philosophy or approach) and how the manager aligns its purpose and values with its duty to clients
- The organisation’s ownership, structure, internal governance and experience and competencies of key personnel
- How client assets are managed in accordance with their investment strategies and how conflicts of interests are managed.
2. Internal governance
Rather than implement a pure stewardship code as has been the norm overseas, the FSC has also added internal governance disclosure requirements in an attempt to strengthen consumer confidence in Australian financial services. Disclosure should include but not be limited to:
- ethical conduct and professional practice;
- personal trading;
- management of conflicts of interest to ensure client interests take priority (including gifts and entertainment);
- risk management and compliance;
- error correction policy;
- brokerage and commissions;
- equitable asset valuation and pricing;
- best execution and trade allocation;
- remuneration policy
- whistle-blower protection policy;
- training and development; and
- complaints and dispute resolution.
3. Asset stewardship
The asset manager should disclose its approach and the governance and oversight associated with the following stewardship activities:
- monitoring of company performance on financial and non-financial matters;
- engagement with company management and the board (as appropriate) and escalation of issues in instances where initial engagements have not been adequately responded to;
- approach to considering Environmental, Social and Governance factors (risks and opportunities) and whether these considerations influence investment decision-making and company engagement;
- proxy voting (see FSC Standard 13);
- collaborative engagement with other investors including involvement with industry groups and associations;
- principles used for policy advocacy including participation with industry groups and associations; and
- the approach to client engagement, education and communication regarding asset stewardship.
The Standard is effective from 1 January 2018, although there is a six-month transition period. Full FSC members that are asset managers or are undertaking asset management activities must implement the code by 1 July 2018. The standard replaces the Blue Book Corporate Governance: A Guide for Fund Managers and Corporations.
To read the FSC standard in its entirety, you can download it HERE.
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