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Stewardship code

1. Principle – Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities.

Clients which are signatories to the Stewardship Code use PIRC advice to fulfil their stewardship obligations, through by PIRC’s monitoring of companies, provision of voting advice, support for engagement either individually or collectively, provision of advice on voting disclosure and reporting on behalf of clients on engagement processes and outcomes.

Based on feedback from both clients and the wider market, PIRC developed a set of best practice principles that provide a framework for how we operate our business. These thirteen principles include:

·         ‘We seek to produce governance analysis that reflects the long term interests of shareholders and relevant third parties taking into account generally accepted best practice in company governance, recognising operating best practices of leading companies and monitoring risks of poor governance to our clients, shareholders and relevant third parties’

·         ‘We are prepared to act collectively with others who have similar objectives to protect the interests of shareholders and relevant third parties’.

·         ‘We are proactive in highlighting poor governance arrangements and comparative corporate governance best practice so those receiving our research and analyses are well informed’.

·         ‘We facilitate engagement with company senior management on governance issues with the objective of improving governance or addressing significant risks that could damage shareholder value’.

PIRC publishes yearly shareowner voting guidelines for the various markets that we cover. These guidelines set out clearly our views on issues such as board structure, remuneration policy and management of social and environmental issues. We believe that the guidelines give both our clients and the companies we analyse, a clear understanding of our view of best practice and, by extension, how we are likely to recommend shareowners vote on particular issues. PIRC also consults with clients on developing their own voting and stewardship policies.  In some cases, PIRC undertakes engagement with companies and public bodies in relation to the client policies to ensure that the policies are being conveyed and implemented in line with clients’ interests and positions.

2. Principle - Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.

We recognise that PIRC is in a position of trust and should act at all times in the best long terms interests of its clients. One of our principles of best practice is the disclosure of conflicts of interest. PIRC has taken the business decision that, given the inherent conflict of interest, we should not seek to provide service to both issuers and shareowners. Therefore PIRC only provides services to shareowners and does not work for, or consult to companies. This means the potential for conflicts of interest rarely arises with regard to the research carried out on client portfolios. PIRC will declare in its reports to clients if it perceives a conflict to exist (e.g. if PIRC has advised the proponents of a shareholder resolution). PIRC is regulated by the Financial Conduct Authority and all employees are required to complete a declaration of interests.

 

A conflict of interest may arise through business, financial, personal or other interests. PIRC will generally identify any conflicts that may arise if it is selected to provide services contracted for, identify if they are manageable and measures to be taken to avoid the conflict. The same process is carried out for individual company engagements. In practice, in engagement meetings, this is often simply addressed by stating the nature of the connection that may be perceived as a conflict of interest, and if this is acceptable to the company representatives, the meeting can progress. As a matter of course, in engagement meetings, it is clarified that PIRC staff are only there to represent the client’s agenda.

 

As client representatives join engagement meetings, PIRC has worked with some clients to establish a code of conduct for them that covers conflicts of interest. Part of the conflict of interest clause includes when clients must declare conflicts of interest and in which fora.

 

Public disclosure of the conflicts of interest policy is by means of the Stewardship Code Statement and PIRC’s compliance statement with the Best Practice Principles for Providers of Shareholder Voting Research & Analysis, both of which are on the PIRC website.

3. Principle - Institutional investors should monitor their investee companies.

Monitoring of companies on behalf of institutional shareowners is the core of PIRC’s business and function as an organisation. We provide global research and voting recommendations, based on companies’ disclosures and other sources of information. In practice we undertake a daily trawl for information that could inform our view of a given company, ranging from RNS statements to media coverage. This is supplemented with information derived from meeting with companies and their representatives.

 

Increasingly we are working with clients to help them take an ongoing view on corporate governance and social responsibility at companies, rather than considering a snapshot at the time of a given company meeting. We have recently developed a quantitative tool to assist shareowners to more clearly identify where potential risks lie in their portfolios, to enable them to undertake focused engagement.

4. Principle - Institutional investors should establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value.

In PIRC’s case, we do not undertake the decision of whether and how to escalate engagement with companies, rather this is a decision for our clients.

 

We have a number of clients who delegate much responsibility to us for developing and implementing an engagement strategy. In such cases we typically provide advice on which companies in their portfolio might be most in need of focus, and on the type of engagement that might be undertaken. Such advice will be based on our own proprietary research into both the company concerned and the market as a whole, and we will explain to the client the process by which we reached our conclusions.

 

Where companies are recalcitrant we might also suggest how the client could escalate the engagement process. Once again, we will explain the process behind the advice we have provided. However ultimately the decision on what action, if any, to take lies with the client.

 

In advising on escalating issues with companies, PIRC is cognizant of the fact that each situation must be carefully assessed on a case-by-case basis. However, a typical escalation pattern is first to write to the company, second to pursue a meeting with the relevant board director, next, if the company is not responsive to meeting requests, suggest writing to the company indicating voting intent highlighting either poor or good practice. In cases of poor practice, if the company remains unresponsive, attending the AGM to speak to the board directors can often solicit a meeting. If a series of meetings have not provided sufficient progress in the client’s view, the next stage would be to consider filing a shareholder resolution with the company to encourage change. PIRC also keeps clients apprised of relevant opportunities to join collective investor efforts to escalate issues with companies.

5. Principle - Institutional investors should be willing to act collectively with other investors where appropriate.

PIRC has a long-standing relationship with the Local Authority Pension Fund Forum (LAPFF), to which it was reappointed as research and engagement partner in the summer of 2010. Since its formation in 1990, LAPFF has been an exemplar for collaborative engagement, and, in our role as research and engagement partner, PIRC has played a central part in this.

 

PIRC regularly facilitates and/or participates in collaborative engagement with companies on behalf of clients over a range of governance and social responsibility issues. In doing so, PIRC will consider whether action could be leveraged by collective engagement. Examples include engagement on carbon risk and on diversity. On carbon risk, PIRC facilitated LAPFF being the first investor (group) to join the founder of the ‘Aiming for A’ initiative in 2011 and on diversity, PIRC facilitated LAPFF’s participation in the 30% Club Investor Group in 2012.

 

In PIRC’s experience, engagement through smaller, focused investor groups has led to more positive outcomes, where the circumstances or principles for engagement are agreed at the outset. With the Aiming for A initiative for example, the small core group undertook the collective engagement, but then was able to leverage greater voting and co-filing participation by other investors over time.

 

PIRC is also a signatory of the UN Principles for Responsible Investment, and participates in activity organised through the PRI collaboration platform.

6. Principle - Institutional investors should have a clear policy on voting and disclosure of voting activity.

PIRC issues shareowner voting guidelines on an annual basis in order that both clients and companies understand how we reach decisions on voting recommendations.

 

PIRC’s guidelines rely heavily on the corporate governance code for their voting criteria. This guidance is shared with clients and is supported with voting recommendations based on the guidance. Once a report with voting recommendations is complete, it is sent to the relevant company for comment. If the company reverts with information that can be considered in relation to voting outcomes, the information is assessed to determine if a vote should be changed. Information considered in changing a vote must be fact-based and sufficient to demonstrate compliance with the PIRC voting guidelines. Opinions and strenuous objections not rooted in fact are not used to change votes. Where a company is demonstrating good practice and compliance with the UK corporate governance code and with best practice and is aligned with PIRC shareowner guidelines, PIRC will advise supporting the board.

 

For some clients, voting alerts are issued in relation to egregious issues or behavior by companies. In these cases, clients are provided with detailed background information explaining the issue, the context and the reason behind the vote recommendation. Voting alerts are used to highlight issues of concern, by advising an oppose vote on particular resolutions, or advising voting in favour of a shareholder resolution not supported by the board. They are also used to support boards, for example through advising voting in favour of a shareholder resolution supported by management or when a company has demonstrated progress on a particular issue over which engagement has occurred.

 

In terms of disclosure, PIRC publicly reports its voting recommendations, post-meeting, via its website. In practical terms we disclose our ‘house’ recommendations, not those where clients have their own voting guidelines. Our disclosure also provides a brief rationale behind recommendations to abstain on or vote against a particular proposal.

 

PIRC discloses its recommendations because we believe that organisations which provide advice on ownership issues must demonstrate the same level of accountability that we expect of others. In practice we have found this to be a very straightforward process, so we believe that it could be easily adopted as standard industry practice.

 

PIRC is also developing a service to help our clients who wish to publicly disclose their voting records to do so. As noted above, a number of clients have developed their own voting policies, which PIRC assists them in implementing. We believe that we are therefore well placed to assist these clients in disclosing their voting record, if they choose to do so, thus further increasing market transparency.

7. Principle - Institutional investors should report periodically on their stewardship and voting activities.

PIRC publicly discloses its voting recommendations, post-Annual General meeting, via its website. We also provide detailed updates to clients of our research and voting services on activity undertaken on their behalf on a regular basis, typically in the form of a quarterly report. This includes highlights of our voting advice at particular companies, and statistics on actual voting outcomes at company meetings.

 

Engagement activities are recorded in a database and reflect a range of metrics including the companies engaged, the type of engagement (letter, AGM attendance, voting alert, for example), engagement topic, outcome (whether there was merely dialogue of some sort of tangible progress, for example), domicile of companies engaged, and a range of other metrics that assist both clients and future engagement with the companies by PIRC. Detailed meeting notes from engagement meetings are also maintained.

 

For clients of our engagement services we also provide a regular update on activity, outlining the objectives behind particular initiatives and the results achieved. Once again, detailed reports are provided to clients on a quarterly and annual basis, however these are supplemented for some clients with more regular updates. Both the database and meeting notes are used to compile reports that outline engagement activity and progress with companies in fostering good corporate stewardship over the relevant time frame. This reporting also allows clients to report to their own constituents.

Date of last review: 11 August 2016


Contact for further information and for those interested in collective engagement: Alan MacDougall, AlanM@pirc.co.uk