Improving engagement practices between companies and institutional investors

Transcription

1 20 December 2012 Our ref: ICAEW Rep 190/12 Seamus Gillen Director of Policy ICSA 16 Park Crescent London W1B 1AH By Dear Mr Gillen Improving engagement practices between companies and institutional investors ICAEW is pleased to respond to your request for comments on Good practice guide on stewardship engagement: Improving engagement practices between companies and institutional investors. Please contact me should you wish to discuss any of the points raised in the attached response. Yours sincerely Jo Iwasaki FCA Head of Corporate Governance T +44 (0) E jo.iwasaki@icaew.com The Institute of Chartered Accountants in England and Wales T +44 (0) Chartered Accountants Hall F +44 (0) Moorgate Place London EC2R 6EA UK DX 877 London/City icaew.com

2 ICAEW REPRESENTATION GOOD PRACTICE GUIDE ON STEWARDSHIP ENGAGEMENT: IMPROVING ENGAGEMENT PRACTICES BETWEEN COMPANIES AND INSTITUTIONAL INVESTORS Memorandum of comment submitted in November 2012 by ICAEW, in response to the ICSA consultation paper Good practice guide on stewardship engagement: Improving engagement practices between companies and institutional investors published in October 2012 Contents Paragraph Introduction 1 Who we are 2 Major point 5 Other comments 7 Responses to specific questions 16

3 INTRODUCTION 1. ICAEW welcomes the opportunity to comment on the consultation paper Good practice guide on stewardship engagement: Improving engagement practices between companies and institutional investors ( the Guide ) published by ICSA on 19 October 2012, a copy of which is available from this link. WHO WE ARE 2. ICAEW is a world-leading professional accountancy body. We operate under a Royal Charter, working in the public interest. ICAEW s regulation of its members, in particular its responsibilities in respect of auditors, is overseen by the UK Financial Reporting Council. We provide leadership and practical support to over 138,000 member chartered accountants in more than 160 countries, working with governments, regulators and industry in order to ensure that the highest standards are maintained. 3. ICAEW members operate across a wide range of areas in business, practice and the public sector. They provide financial expertise and guidance based on the highest professional, technical and ethical standards. They are trained to provide clarity and apply rigour, and so help create long-term sustainable economic value. 4. This response reflects consultation with the ICAEW Corporate Governance Committee which includes representatives from the business and investment communities. The Committee is responsible for ICAEW policy on corporate governance issues and related submissions to regulators and other external bodies. MAJOR POINT Support for the initiative 5. ICAEW supports effective stewardship and engagement by way of encouraging dialogue between companies and institutional investors to promote an alignment of their interests. Investor stewardship is an integral part of a market economy which benefits both companies and investors by holding the boards of publicly listed companies to account for the fulfilment of their responsibilities. A long-term relationship between companies and institutional investors should also help them build mutual trust. 6. We support the proposals in the Guide and believe that they should be helpful in achieving effective stewardship and engagement. It fits well with the objectives of the Kay Review and the framework set out by the revised UK Corporate Governance and Stewardship Codes. It also contributes to non-regulatory initiatives that are endorsed by the recent Government response to the Kay Review. OTHER COMMENTS Communication from an institutional investor should be coherent 7. We noted that investors engagement with a company often involves portfolio managers meeting executives while governance experts meet non-executive directors (NEDs) separately. This appears to lead to the groups of directors within the same organisation receiving different messages from a single investor institution. For example, remuneration issues raised by a governance expert with NEDs may not be communicated with the same gravity by a portfolio manager to executives. 8. The importance of internally coordinating information gathering and communication inside a company is in the Guide as Point 4 under Additional considerations. While the board of a company needs to maintain good internal communication, it is equally important for an institutional investor to send a coherent message on matters of significance. This point is 1

4 therefore best considered by both companies and institutional investors. A practical way forward may be that portfolio managers and governance experts of an institutional investor meet both groups of directors at the same time, or portfolio managers and governance experts of an institutional investor co-ordinate their message internally. Either way, both groups of directors should have the opportunity to receive a coherent message from an institutional investor. Appendix E makes some references to this point within the guidance for companies, and we suggest that similar reference be made within the guidance for investors and be explained in the main body of the Guide. 9. The importance of coherent messages being delivered and listened to also applies in the context of collective engagement contemplated in Point 2 within Additional considerations (page 5.) It would be beneficial if a group of investors were able to talk to executive directors and NEDs at the same time. It is of particular relevance as the line between management and governance aspects of subjects such as sustainability, governance or remuneration is becoming increasingly unclear. Resources for engagement is finite 10. Resources that institutional investors and companies have for engagement are not limitless. Various proposals in the Guide are likely to result in more time being spent in preparation and meetings than is required now. This would lead to investors becoming more selective in choosing which companies to engage with. Although selective engagement may not be undesirable, we should be mindful that selection is likely to be influenced by the size of the investment and with a potential consequence that investor engagement may concentrate on larger listed companies. Smaller listed companies may not only find the time required for preparation becoming significant but also could find fewer investors interested in engaging with them. 11. Initiatives to improve the quality and understandability of information in the annual report and accounts should help institutional investors prepare for meetings. Changing investor landscape affects stewardship and engagement 12. The profile of those who own UK quoted shares has changed considerably over years: the figures from the Office of National Statistics (Statistical Bulletin: Ownership of UK quoted shares, 2010) show that investors outside the UK owned 41.2 per cent of the UK stock market. This contrasts with a figure of 13.7 per cent of shares owned by insurance companies and pension funds combined: the lowest percentages since the share ownership survey began in These statistics pose an important question as to whom the Guide is applicable. While the focus of the Guide appears to be very much on quoted companies and institutional investors in the UK, we believe that the importance of stewardship and engagement is unaffected by the capital structure of an organisation or geographical borders. The principles of the Guide should therefore be useful to wider audiences including private equity and foreign investors. 14. It is important to improve the quality and quantity of stewardship and engagement with institutional investors. However, by itself this is unlikely to change the practices and behaviours of the market as a whole. While we also support the robust interpretation of duties of intermediaries that the Kay Review supports and endorse the UK Stewardship Code s extended application to service providers, it is important to recognise that the effect of these initiatives in improving the behaviours of the market is essentially long-term. We therefore support continued efforts to monitor the behaviours and practices of the market and to explore ways to improve stewardship and engagement in particular in the light of the changing investor landscape. 2

5 Terminology should be streamlined 15. We note that the paper uses various terms to refer to those who own shares in companies: for example, investor, institutional investor, shareholders, asset managers, asset owners, shareowners, and owners of companies. We found that the definition and clarification of the role of asset owners and asset managers in the Stewardship Code was useful, and it would also be helpful if the terms used in the Guide were clearly defined and streamlined. RESPONSES TO SPECIFIC QUESTIONS Q1: Do respondents agree that guidance in this area will help strengthen engagement practices? If they do not agree that guidance will have that effect, what else do they believe can be introduced to strengthen engagement practices? 16. Yes. Q2: Do respondents agree with the need to develop a new conversation. Are there any other considerations that should be included in this new conversation? 17. We agree that effective engagement between institutional investors and companies that is continuous and covers both governance and performance matters is important. We set out practical suggestions under Major points and Other comments above. Q3: Do respondents agree that the measures outlined in Appendix E would significantly improve the quality of engagement meetings, and are there any other steps which could be taken? 18. Yes, Appendix E should be useful. Q4: Should companies and institutional investors seek feedback on the quality of meetings as an integral part of the engagement experience? 19. Yes. It should facilitate follow-up meetings and also help improve the quality of subsequent meetings. Q5: Do respondents consider that receiving feedback on meetings directly from investors might lead to more effective engagement compared to receiving the feedback from the company s brokers or advisers? 20. We think that useful feedback on meetings must be honest and fulsome regardless of who is providing the feedback. On this basis, we do not believe that receiving feedback directly from investors or from the company s brokers or advisors should make any difference. Q6: Do respondents consider the questionnaire format, and the content, outlined in Appendix F would constitute an acceptable basis for providing feedback on investor meetings? Might any other mechanism be used? If using the questionnaire format, should any content be added (or removed)? 21. The questionnaire may be useful in preparation for subsequent discussions but would unlikely to be sufficient on its own. E jo.iwasaki@icaew.com Copyright ICAEW 2012 All rights reserved. This document may be reproduced without specific permission, in whole or part, free of charge and in any format or medium, subject to the conditions that: 3

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