The future of US investor stewardship looks good

The Investor Stewardship Group, a large coalition of global investors that includes State Street, CalSTRS, BlackRock and Vanguard, recently announced that 22 new firms had joined since it launched in January this year. Membership more than doubled since its launch, with a total of 38 organisations it brings combined assets to more than $20 trillion. Many of the new members are ‘endorsers’ rather than ‘signatories’; endorsers are non-US investors, while signatories are US-based firms.
The new firms are from a range of countries and comprise very large and smaller funds: Addenda Capital; Andra AP-Fonden; Barrow, Hanley, Mehwhinney & Strauss; Comgest; Cove Street Capital; Fjarde AP-Fonden; Forsta AP-Fonden; HSBC Global Asset Management; Illinois State Board of Investment; J.P. Morgan Asset Management; Northern Trust Asset Management; Ohio Public Employees Retirement System; Oregon State Treasury; RAM; Robeco; School Employees Retirement System of Ohio; Standard Life Investments; The Christopher Reynolds Foundation, Inc.; Tredje AP-Fonden; Trian Fund Management, L.P.; University California Regents; and Walden Asset Management.
The Framework by the group goes into effect 1 January 2018, to give companies time to adjust to its standards by the 2018 proxy season, with the initial standards focusing on corporate governance principles for listed companies and investment stewardship principles for institutional investors.
I spoke to Aeisha Mastagni, CalSTRS’ Portfolio Manager of Corporate Governance about the expansion. As well as the endorsers, Mastagni noted that a number of state funds had joined, including Illinois and Ohio, some large asset managers, such as J.P. Morgan Asset Management, and some activist funds like Trian, and SRI fund Walden, that run the full gamut of investors. “We are very excited at the expansion of membership, that is keeping the momentum going, especially given the political environment, it’s all the more reason for long-term investors to join together and speak with one voice.” I noted that the Connecticut Treasurer’s Office, for one, was not a member yet, though, on enquiry, it transpires that the fund had recently been in touch with Mastagni to enquire about joining the group.
Asset managers who are also corporations should abide by both sides of the code. For instance, I asked BlackRock how compliant it was with the corporate governance principles of the code; it referred me to its proxy statement, noting its newly-appointed lead director and one-share-one-vote structure. However, some shareholders in Europe have raised eyebrows at the 17-year tenure of the new lead director, though his responsibilities are very close to that of an independent chairman.BlackRock’s disclosure on its board governance is more extensive than most; and its structures and practices appear to support the relevant principle, as do its management incentives. Similarly, State Street and Vanguard have lead independent directors and clearly-stated board governance. However, there are two principles regarding board accountability and responsiveness to shareholders that are part of the code. For all three firms, while shareholders may write to board members, outreach is conducted by management which ‘shares’ feedback with the board. This is not the same at all as being “responsive”, “accountable” and “proactive” to shareholders. If you require this of the companies you are investing in, they should be standard practice at your own firm.

“I think the asset managers,” said Mastagni, “are really looking at this through the lens of long-term investors and their place in the market as that. The focus of their work is on proxy voting and stewardship, as well as engagement, that is part of this process. From the investor standpoint, having so-called mainstream investors as part of the group is very important: like other funds, they own the whole market and are an integral part of how investment markets operate. Trying to influence the market without them would almost be impossible.” I asked whether she thought that having the largest asset managers in the market as part of the code would bring along the second tier, or whether she could give details as to how firms are recruited to the group. “It’s been a lot of just word-of-mouth, it’s more a grassroots recruitment. Though definitely with some of the asset managers, when they see that Blackrock and State Street are already part of the group, it gives them a sense of comfort and definitely makes them want to look at what we’re doing.”
She noted that developments were occurring in the governance of the organisation, because they wanted to make sure of its long life. They are also looking to find a permanent home and people to manage the website and new signatories. But its main focus for the rest of this year is to decide how to update the ISG framework itself and how it will evolve. Mastagni said we could expect to see additional principles in the future. “We all looked at our own internal policies, and looked for all the things that we agreed upon. The current principles represent a very strong consensus among the original signatories and endorsers. As the signatories update their policies, including the asset managers, it is likely that more consensus has developed.”
As opinions and actions converge among the membership, there may be additional principles developed because there is more common ground.