The Investor Stewardship Group (link), a collective of some of the largest U.S.-based institutional investors and global asset managers, along with several of their international counterparts, announced the launch of the Framework for U.S. Stewardship and Governance, a historic, sustained initiative to establish a framework of basic standards of investment stewardship and corporate governance for U.S. institutional investor and boardroom conduct.
My own impression is that this group has been carefully constructed, probably stemming from many discussions at ICGN and CII. They have certainly started with an impressive group. Although most of the principles are relatively ‘safe,’ I am delighted to see their position that “shareholders should be entitled to voting rights in proportion to their economic interest.” That one recommendation alone is huge. I hope they continue to build on their initial consensus items.
Of course, the internet changes everything. Companies used to go public to raise money for factories, staff, etc. Now, they raise funds from private equity funds and scale all the way because they can build out through the internet with coding and algorithms. They go public only when founders and initial supporters want to cash out a portion of their investment.
Investors face a dilemma — forgo likely profits, ignoring the fact that they will have no voice when corporate governance problems inevitably arise, or plunge in with a short-term focus. Of course, this problem will be especially acute for indexed funds like BlackRock, Vanguard and increasingly all large funds that invest in all companies or all within a given market segment.
In 1988, the SEC adopted Rule 19c-4, which prohibited self-regulatory organizations (stock exchanges) from listing and trading stock of any company that issued new shares carrying more than one vote per share. Like the SEC’s proxy access Rule 14a-11, that rule was overturned by the same court (Business Roundtable v SEC, 1990). Funds will either need to seek changes in state laws, where corporations are incorporated, or in Congress.
Investor Stewardship Group: $17 Trillion in Assets
The Investor Stewardship Group represents some $17 trillion in assets under management, largely comprising the retirement and long-term savings of millions of individual investors around the world, and is being led by the senior corporate governance practitioners at institutional investor and investment management firms. At launch, the Investor Stewardship Group comprises BlackRock, CalSTRS, Florida State Board of Administration (SBA), GIC Private Limited (Singapore’s Sovereign Wealth Fund), Legal and General Investment Management, MFS Investment Management, MN Netherlands, PGGM, Royal Bank of Canada (Asset Management), State Street Global Advisors, TIAA Investments, T. Rowe Price Associates, Inc., ValueAct Capital, Vanguard, Washington State Investment Board, and Wellington Management.
Investor Stewardship Group: Quotables
Said Anne Sheehan, Director of Corporate Governance at the California State Teachers’ Retirement System:
In markets around the world, there are well-established governance and stewardship codes. The Investor Stewardship Group’s goal is to codify the fundamentals of good corporate governance and establish baseline expectations for U.S. corporations and their institutional shareholders. The Group brings all types of investors together and enables us to speak with one voice on these fundamental issues.
The initial standards focus on corporate governance principles for listed companies and investment stewardship principles for institutional investors. Taken together, the standards form a framework for promoting long-term value creation for U.S. companies and the broader U.S. economy.
Said Rakhi Kumar, Managing Director and Head of Asset Stewardship at State Street Global Advisors.
This initiative reveals the depth and breadth of agreement amongst institutional investors. The stewardship principles encourage all investors to take responsibility for owning the stewardship process and being accountable to those whose assets they manage. We encourage all institutional investors to join the Investor Stewardship Group to further these corporate governance and stewardship principles.
The Framework is the result of a two-year effort by a broad range of investors. As an ongoing, dynamic effort, the Investor Stewardship Group is calling on every institutional investor and asset management firm investing in the U.S. to sign the Framework at www.isgframework.org.
Noted Glenn Booraem, Principal & Fund Treasurer at Vanguard,
We believe that the principles detailed in the Framework will further the productive dialogue and, most importantly, continue to drive positive change among institutional investors and the companies in which they invest. By articulating this set of shared behavioral expectations, we seek to promote our common objectives to create sustainable, long-term value for all shareholders.
The Framework goes into effect January 1, 2018 to give U.S. companies time to adjust to its standards in advance of the 2018 proxy season.
The Framework’s principles are as follows (for additional information on these principles, please visit www.isgframework.org):
Investor Stewardship Group: Stewardship Principles for Institutional Investors:
Principle A. Institutional investors are accountable to those whose money they invest.
Principle B. Institutional investors should demonstrate how they evaluate corporate governance factors with respect to the companies in which they invest.
Principle C: Institutional investors should disclose, in general terms, how they manage potential conflicts of interest that may arise in their proxy voting and engagement activities.
Principle D. Institutional investors are responsible for proxy voting decisions and should monitor the relevant activities and policies of third parties that advise them on those decisions.
Principle E: Institutional investors should address and attempt to resolve differences with companies in a constructive and pragmatic manner.
Principle F: Institutional investors should work together, where appropriate, to encourage the adoption and implementation of the Corporate Governance and Stewardship principles.
Investor Stewardship Group: Corporate Governance Principles for U.S. Listed Companies
Principle 1: Boards are accountable to shareholders.
Principle 2: Shareholders should be entitled to voting rights in proportion to their economic interest.
Principle 3: Boards should be responsive to shareholders and be proactive in order to understand their perspectives.
Principle 4: Boards should have a strong, independent leadership structure.
Principle 5: Boards should adopt structures and practices that enhance their effectiveness.
Principle 6: Boards should develop management incentive structures that are aligned with the long-term strategy of the company.
Investor Stewardship Group: Take Action
The corporate governance principles are not intended to be prescriptive or comprehensive in nature. There are many ways to apply a principle. However, as guidance, the ISG has provided the rationale and expectations that underpin each principle. Collectively, the members of the ISG are supportive of the corporate governance principles, though members of the group may differ on specific standards (as outlined in their public-facing voting policies/guidelines) regarding corporate governance practices that are expected of companies.
I encourage all asset managers and institutional investors to sign on. Remember, these principles are just a base. Hopefully, the Investor Stewardship Group will build from this initial base, which not all agreed with, as indicated in the above quote. As I understand, the following signatory and endorsement forms are available. They were initially linked but the links were broken. Now they are seeking sign-on via email. Will the group be willing to devote adequate resources to the effort or will this be another good idea that gets little traction? The more sign on, the more likely progress will be made.
From Global Proxy Watch (Feb 3)
Missing are three of the five largest US funds— CalPERS, the New York State Comptroller, and the New York City Comptroller, whose office has led the influential US campaign for proxy access (GPW XXI-02). They and other asset owners may be wary of endorsing ISG principles that are weaker on some issues than their own or than the policies of the Council of Institutional Investors. The CII, for instance, is more insistent on independent board chairs, now found at 52% of large US firms according to new Willis Towers Watson data. This reflects the diversity of ISG, which includes three US funds that are not CII members: MFS, Wellington and Vanguard. CII, for its part, welcomed the ISG as a “conversation starter.”
The Council of Institutional Investors seeks co-signers for a letter asking Snapchat co-founders to reconsider plans to retain 100% voting rights in its IPO, whose terms finally were made public yesterday (GPW XXI-03). Non-CII members can sign by writing Kylund Arnold at Kylund@cii.org.
 Institutional investors include asset owners and asset managers.