UK - The Institute of Directors (IoD) believes the proposed Stewardship Code needs to do yet more to encourage institutional investors to engage with companies.

Responding to the consultation on a Stewardship Code for Institutional Investors, the Institute of Directors (IoD) has suggested:

Institutional investors making an investment in a listed company beyond 1% of the market capitalisation should write directly to the chairman of that company and provide details of the policy and mechanics of their stewardship activities in respect of investee companies, and -    Institutional investors with more than 1% of market cap should provide an indication of their initial thinking on the main engagement issues to the company's chairman.


The IoD also believes securities lending and borrowing issues need more attention, so has proposed the following be included in the code:

It is bad practice to borrow shares for the purpose of shareholder voting; Institutional shareholders should have a clear and disclosed policy with respect to the lending of shareholdings; Lending policy should be mandated by the ultimate beneficial owners of the shares; Where lending activity may alter the risk characteristics of a portfolio, the investor's investment policy should state the extent to which this is permitted, and The returns from lending should be disclosed separately from other investment returns when reporting to clients or beneficiaries.

Independent partnership Governance for Owners (GO) has also come up with proposals for the Stewardship Code which suggest good stewardship should be rewarded. On top of that, it suggests the Code should be reviewed periodically, perhaps every 12-15 months, to incorporate and disseminate emerging best practices and other best practices in the first years of operation and every two to three years thereafter.

The Stewardship Code - which addresses arrangements for monitoring investee companies, intervention strategies and voting policies - is developed and overseen by the Financial Reporting Council (FRC).

Elsewhere, independent corporate governance research firm The Corporate Library has advised investors and UN PRI signatories in particular to carefully consider how to vote on labour standard resolutions as it claims poor standards can give rise to potential investment risk.

"Proxy voting is an important means of exercising active ownership but can also be challenging to execute," said Kimberly Gladman, director of research and risk analytics at the Corporate Library and author of the new voting guide ‘Proxy Voting on Labor Standards: A case-by-case guide for PRI Signatories'. "Investors must not only understand the topic of the resolution, but also determine whether it deserves support at a particular company."

The National Association of Pension Funds (NAPF) has meanwhile revealed pension fund members are now more inclined to keep triennial elections of company board directors, instead of a proposed switch to annual elections.

In its latest submission to the FRC's consultation on the Combined Code on Corporate Governance, the NAPF said member views had changed from an earlier inclination towards annual re-elections. It noted: "Our latest sample of member views points towards a balance in favour of retaining the status quo and reserving annual re-elections for specific circumstances, such as after a major capital-raising."

David Paterson, head of corporate governance at the NAPF, said the straw poll of a relatively small number of members had resulted in a majority favouring the current three-year cycle of elections. However, he noted there was a "pretty clear distinction" between the choices of asset managers and pension funds, with the latter supporting the status quo and asset managers preferring annual elections.

While he admitted it wasn't a "strong majority" and the results of the sample were finely balanced, "we have listened to our members and reflected that in our response to the FRC consultation", said Paterson.

Reasons for staying with the three-year cycle include continuity and not having to review the entire board every year, while Paterson pointed out "there is no evidence that the three year cycle doesn't work", as most shareholders have sufficient access to board accountability. That said, he noted boards that have already adopted annual elections, such as BP and Astrazeneca, do not seem to have provoked more shareholder reaction to particular director appointments.

Paterson added: "The present system seems to work reasonably well, so why change it. And if individual boards like the idea of annual elections, they can adopt it."

He also warned the impact of annual elections could be felt more keenly by small- to medium-sized companies where the shareholdings are more concentrated.

"We don't want to encourage actual, or a feeling, of instability among directors. We want accountability, but we still want them to take a longer term view and that might not happen if they are insecure about their jobs," he added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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