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E-MailThis post is a policy statement issued by the Investor Stewardship Group, a collective of some of the largest U.S.-based institutional investors and global asset managers, along with several of their international counterparts.
The Investor Stewardship Group (ISG) is a collective of some of the largest U.S.-based institutional investors and global asset managers, along with several of their international counterparts. The founding members are a group of 16 U.S. and international institutional investors that in aggregate invest over $17 trillion in the U.S. equity markets. 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 Global Asset Management, State Street Global Advisors, TIAA Investments, T. Rowe Price Associates, Inc., ValueAct Capital, Vanguard, Washington State Investment Board, and Wellington Management. The ISG is being led by each member’s senior corporate governance practitioners.
The ISG was formed to bring all types of investors together to establish a framework of basic standards of investment stewardship and corporate governance for U.S. institutional investor and boardroom conduct. The result is the framework for U.S. Stewardship and Governance comprising of a set of stewardship principles for institutional investors and corporate governance principles for U.S. listed companies.
The corporate governance framework articulates six principles that the ISG believes are fundamental to good corporate governance at U.S. listed companies. [1] They reflect the common corporate governance beliefs that are embedded in each member’s proxy voting and engagement guidelines, and are designed to establish a foundational set of investor expectations about corporate governance practices in U.S. publicly-listed companies.
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.
The ISG encourages shareholders’ elected representatives—company directors—to apply the corporate governance principles at the companies on whose boards they serve. The ISG will evaluate companies’ alignment with these principles, as well as any discussion/disclosure of alternative approaches that directors maintain are in a company’s best interests.
The stewardship framework seeks to articulate a set of fundamental stewardship responsibilities for institutional investors.
Listed companies should recognize that some of their largest investors now stand together behind these principles.
As with the corporate governance principles, investors should implement the stewardship principles in a manner they deem appropriate. As guidance, the rationales and expectations that underpin each principle have been articulated. The ISG encourages institutional investors to be transparent in their proxy voting and engagement guidelines and to align them with the stewardship principles. These principles should not restrict investors from choosing to adopt more explicit and/or stronger stewardship practices.
The framework for U.S. Stewardship and Governance is not intended to replace or supersede any existing federal or state law and regulation, or any listing rules that apply to a company or an institutional investor. The framework is also not intended to be static and will be evaluated and revised periodically, with the consensus of its members, as expectations of corporate governance and investment stewardship evolve.
We welcome and encourage other investors to sign up and support the framework for U.S. Stewardship and Governance.
The framework goes into effect January 1, 2018 to give U.S. companies time to adjust to these standards in advance of the 2018 proxy season.
Stewardship Framework 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.
Principle A. Institutional investors are accountable to those whose money they invest.
A.1 Asset managers are responsible to their clients, whose money they manage. Asset owners are responsible to their beneficiaries.
A.2 Institutional investors should ensure that they or their managers, as the case may be, oversee client and/or beneficiary assets in a responsible manner.
Principle B. Institutional investors should demonstrate how they evaluate corporate governance factors with respect to the companies in which they invest.
B.1 Good corporate governance is essential to long-term value creation and risk mitigation by companies. Therefore, institutional investors should adopt and disclose guidelines and practices that help them oversee the corporate governance practices of their investment portfolio companies. These should include a description of their philosophy on including corporate governance factors in the investment process, as well as their proxy voting and engagement guidelines.
B.2 Institutional investors should hold portfolio companies accountable to the Corporate Governance Principles set out in this document, as well as any principles established by their own organization. They should consider dedicating resources to help evaluate and engage portfolio companies on corporate governance and other matters consistent with the long-term interests of their clients and/or beneficiaries.
B.3 On a periodic basis and as appropriate, institutional investors should disclose, publicly or to clients, the proxy voting and general engagement activities undertaken to monitor corporate governance practices of their portfolio companies.
B.4 Asset owners who delegate their corporate governance-related tasks to their asset managers should, on a periodic basis, evaluate how their managers are executing these responsibilities and whether they are doing so in line with the owners’ investment objectives.
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.
C.1 The proxy voting and engagement guidelines of investors should generally be designed to protect the interests of their clients and/or beneficiaries in accordance with their objectives.
C.2 Institutional investors should have clear procedures that help identify and mitigate potential conflicts of interest that could compromise their ability to put their clients’ and/or beneficiaries’ interests first.
C.3 Institutional investors who delegate their proxy voting responsibilities to asset managers should ensure that the asset managers have appropriate mechanisms to identify and mitigate potential conflicts of interest that may be inherent in their business.
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.
D.1 Institutional investors that delegate their proxy voting responsibilities to a third party have an affirmative obligation to evaluate the third party’s processes, policies and capabilities. The evaluation should help ensure that the third party’s processes, policies and capabilities continue to protect the institutional investors’ (and their beneficiaries’ and/or clients’) long-term interests, in accordance with their objectives.
D.2 Institutional investors that rely on third-party recommendations for proxy voting decisions should ensure that the agent has processes in place to avoid/mitigate conflicts of interest.
Principle E: Institutional investors should address and attempt to resolve differences with companies in a constructive and pragmatic manner.
E.1 Institutional investors should disclose to companies how to contact them regarding voting and engagement.
E.2 Institutional investors should engage with companies in a manner that is intended to build a foundation of trust and common understanding.
E.3 As part of their engagement process, institutional investors should clearly communicate their views and any concerns with a company’s practices on governance-related matters. Companies and investors should identify mutually held objectives and areas of disagreement, and ensure their respective views are understood.
E.4 Institutional investors should disclose, in general, what further actions they may take in the event they are dissatisfied with the outcome of their engagement efforts.
Principle F: Institutional investors should work together, where appropriate, to encourage the adoption and implementation of the Corporate Governance and Stewardship Principles.
F.1 As corporate governance norms evolve over time, institutional investors should collaborate, where appropriate, to ensure that the framework continues to represent their common views on corporate governance best practices.
F.2 Institutional investors should consider addressing common concerns related to corporate governance practices, public policy and/or shareholder rights by participating, for example, in discussions as members of industry organizations or associations.
Corporate Governance Framework for U.S. Listed Companies [1]
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.
Principle 1: Boards are accountable to shareholders.
1.1 It is a fundamental right of shareholders to elect directors whom they believe are best suited to represent their interests and the long-term interests of the company. Directors are accountable to shareholders, and their performance is evaluated through the company’s overall long-term performance, financial and otherwise.
1.2 Requiring directors to stand for election annually helps increase their accountability to shareholders. Classified boards can reduce the accountability of companies and directors to their shareholders. With classified boards, a minority of directors stand for elections in a given year, thereby preventing shareholders from voting on all directors in a timely manner.
1.3 Individual directors who fail to receive a majority of the votes cast in an uncontested election should tender their resignation. The board should accept the resignation or provide a timely, robust, written rationale for not accepting the resignation. In the absence of an explicit explanation by the board, a director who has failed to receive a majority of shareholder votes should not be allowed to remain on the board.
1.4 As a means of enhancing board accountability, shareholders who own a meaningful stake in the company and have owned such stake for a sufficient period of time should have, in the form of proxy access, the ability to nominate directors to appear on the management ballot at shareholder meetings.
1.5 Anti-takeover measures adopted by companies can reduce board accountability and can prevent shareholders from realizing maximum value for their shares. If a board adopts such measures, directors should explain to shareholders why adopting these measures are in the best long-term interest of the company.
1.6 In order to enhance the board’s accountability to shareholders, directors should encourage companies to disclose sufficient information about their corporate governance and board practices.
Principle 2: Shareholders should be entitled to voting rights in proportion to their economic interest.
2.1 Companies should adopt a one-share, one-vote standard and avoid adopting share structures that create unequal voting rights among their shareholders.
2.2 Boards of companies that already have dual or multiple class share structures are expected to review these structures on a regular basis or as company circumstances change, and establish mechanisms to end or phase out controlling structures at the appropriate time, while minimizing costs to shareholders.
Principle 3: Boards should be responsive to shareholders and be proactive in order to understand their perspectives.
3.1 Boards should respond to a shareholder proposal that receives significant shareholder support by implementing the proposed change(s) or by providing an explanation to shareholders why the actions they have taken or not taken are in the best long-term interests of the company.
3.2 Boards should seek to understand the reasons for and respond to significant shareholder opposition to management proposals.
3.3 The appropriate independent directors should be available to engage in dialogue with shareholders on matters of significance, in order to understand shareholders’ views.
3.4 Shareholders expect responsive boards to work for their benefit and in the best interest of the company. It is reasonable for shareholders to oppose the re-election of directors when they have persistently failed to respond to feedback from their shareholders.
Principle 4: Boards should have a strong, independent leadership structure.
4.1 Independent leadership of the board is essential to good governance. One of the primary functions of the board is to oversee and guide management. In turn, management is responsible for managing the business. Independent leadership of the board is necessary to oversee a company’s strategy, assess management’s performance, ensure board and board committee effectiveness and provide a voice independent from management that is accountable directly to shareholders and other stakeholders.
4.2 There are two common structures for independent board leadership in the U.S.: 1) an independent chairperson; or 2) a lead independent director. Some investor signatories believe that independent board leadership requires an independent chairperson, while others believe a credible independent lead director also achieves this objective.
4.3 The role of the independent board leader should be clearly defined and sufficiently robust to ensure effective and constructive leadership. The responsibilities of the independent board leader and the executive chairperson (if present) should be agreed upon by the board, clearly established in writing and disclosed to shareholders. Further, boards should periodically review the structure and explain how, in their view, the division of responsibilities between the two roles is intended to maintain the integrity of the oversight function of the board.
Principle 5: Boards should adopt structures and practices that enhance their effectiveness.
5.1 Boards should be composed of directors having a mix of direct industry expertise and experience and skills relevant to the company’s current and future strategy. In addition, a well-composed board should also embody and encourage diversity, including diversity of thought and background.
5.2 A majority of directors on the board should be independent. A board with a majority of independent directors is well positioned to effectively monitor management, provide guidance and perform the oversight functions necessary to protect all shareholder interests.
5.3 Boards should establish committees to which they delegate certain tasks to fulfill their oversight responsibilities. At a minimum, these committees should include fully independent audit, executive compensation, and nominating and/or governance committees.
5.4 The responsibilities of a public company director are complex and demanding. Directors need to make the substantial time commitment required to fulfill their responsibilities and duties to the company and its shareholders. When considering the nomination of both new and continuing directors, the nominating committee should assess a candidate’s ability to dedicate sufficient time to the company in the context of their relevant outside commitments.
5.5 Attending board and committee meetings is a prerequisite for a director to be engaged and able to represent and protect shareholder interests; attendance is integral to a director’s oversight responsibilities. Directors should aim to attend all board meetings, including the annual meeting, and poor attendance should be explained to shareholders.
5.6 Boards should ensure that there is a mechanism for individual directors to receive the information they seek regarding any aspect of the business or activities undertaken or proposed by management. Directors should seek access to information from a variety of sources relevant to their role as a director (including for example, outside auditors and mid-level management) and not rely solely on information provided to them by executive management.
5.7 Boards should disclose mechanisms to ensure there is appropriate board refreshment. Such mechanisms should include a regular and robust evaluation process, as well as an evaluation of policies relating to term limits and/or retirement ages.
Principle 6: Boards should develop management incentive structures that are aligned with the long-term strategy of the company.
6.1 As part of their oversight responsibility, the board or its compensation committee should identify short- and long-term performance goals that underpin the company’s long-term strategy. These goals should be incorporated into the management incentive plans and serve as significant drivers of incentive awards. Boards should clearly communicate these drivers to shareholders and demonstrate how they establish a clear link to the company’s long-term strategy and sustainable economic value creation. All extraordinary pay decisions for the named executive officers should be explained to shareholders.
6.2 A change in the company’s long-term strategy should necessitate a re-evaluation of management incentive structures in order to determine whether they continue to incentivize management to achieve the goals of the new strategy.
Endnotes
1The Corporate Governance principles do not apply to U.S.-registered investment companies and business development companies, because they are not operating companies and have unique corporate governance practices as provided by law.(go back)
