Paul Hodgson: The new Investors’ Stewardship Code: it’s just investors and just US for now

Tuesday’s piece on the new US investor stewardship code in RI provided the full list of investors – touting some $17trn in combined assets – who are members of the brand new investor stewardship group, as well as the stewardship principles for investors and the corporate governance principles for companies. Conspicuously absent from the list of signatories or supporters – I understand that it is an ‘investor stewardship group’ – are any corporations. I spoke to CalSTRS’ Aeisha Mastagni who said that corporations had not been invited to participate – though made the point that the likes of BlackRock and SSGA, who are in the group, are corporations as well as asset managers. “We wanted it to be specifically from an investment perspective. There was an attitude out there that the investment community could not agree on principles, with asset owners and asset managers seeking different ends, and the Framework was put together in part to dispel that belief.”
While the stewardship group contains five non-US investment organisations, including GIC Limited from Singapore, MFS from Canada and PGGM from the Netherlands, the call to sign up to the Framework at www.isgframework.org does not appear to have gone out to non-US investors with holdings in the US. Mastagni said that the group had very much welcomed the support and input of the non-US investors but that the principles were specifically applicable to US companies and that other countries had their own stewardship codes. “We, of course, welcome their support and endorsement of the Framework, but would not want to create any conflicts of interest with their home country codes.” There are some large active managers who are surprisingly absent from the list, such as CalPERS. While CalPERS did not respond to requests for comment, other signatories felt that the fund’s lack of involvement was due to timing rather than any disagreement with the principles.
I asked Mike McCauley of the Florida State Board of Administration how the initiative got started: “A small group of institutional investors—initially led by SSGA, CalSTRS, and ValueAct—formed in 2015 to address shared concerns with the corporate governance practices of US corporations.” McCauley said that the Investor Stewardship Group (ISG) primary objective was to develop a framework for US stewardship and corporate governance. “To my knowledge,” he continued, “the Framework is the only investor-led effort in the world to develop a structure for both corporate governance and stewardship for a specific market, and is also the first code developed for the US equity market.”There are other stewardship codes out there – such as in Japan – but these do not address precisely the same aims as the Framework.

I was also interested in the overlap with the Commonsense Principles I covered last July, which included several of the same signatories as the Framework, such as Vanguard, BlackRock and SSGA. Mastagni said that the Commonsense Principles (link) were written very much from the corporate side. “Also there was no call to action,” she said. “We want this to take on a life of its own, and this is very much version 1.1. It will evolve as it gathers signatories and support.”
“The Florida SBA meets or exceeds all six of the Framework’s Stewardship Principles for Institutional Investors,” said McCauley. “As a principles-based document, the Framework is intended to improve the accountability of institutional investors to their clients (beneficiaries) and also to articulate fundamental standards that investors consider when evaluating the companies in which they invest. A few of the key elements for investors are the responsibility to conduct company engagement, develop adequate corporate governance policies, and make informed proxy voting decisions—regardless of how they may use services offered by third party consultants or proxy advisors.”
Key principles for companies, noted McCauley, include accountability – he gave annual election of directors as an example – and effective incentives – that is, compensation plans aligned with investors. Mastagni added that the accountability principle was intended to have an overarching effect – boards should be accountable to their shareholders. “The Framework is intended to avoid an overly prescriptive approach,” said McCauley, “and is structured to provide individual companies with the flexibility to decide how best to meet individual principles. The SBA strongly encourages shareowners’ elected representatives — company directors — to apply the corporate governance principles at the companies on whose boards they serve.”
McCauley pointed out that the Florida SBA’s corporate governance principles and proxy voting guidelines include extensive coverage of all six of the Framework’s Corporate Governance. Mastagni also said that the corporate governance principles were largely already embedded in the principles of each of the initial signatories, but that the delay in the effective date – the Framework goes into effect January 1, 2018 – is not just so that US companies have time to absorb the standards for the 2018 proxy season, but also so that smaller investors who have been invited to sign on to the code can put the processes in place for compliance.