Responding to the Consultation on a Stewardship Code for Institutional Investors, the Institute of Directors (IoD) says that it is broadly supportive of the concept of the Stewardship Code as a means of promoting engagement between shareholders and boards. However, the IoD suggest the following improvements:
- Institutional Investors with more than 1% of market capitalisation must boost their engagement with company boards.
- While it is right that there should be a strong emphasis in the code on disclosures being made by institutional investors for the benefit of beneficial owners, there is currently too little emphasis given to getting investors to engage directly with company boards.
- To correct this flaw, the IoD proposes that 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.
- The IoD also proposes that 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.
Securities lending and borrowing issues need more attention
Currently the Code does not discuss the securities lending and borrowing practices of institutional investors. This concerns the IoD because such practices may exert a negative impact on the ability of investors to exercise a stewardship role over their investee companies.
The IoD proposes that the Code should state the following:
- 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.
- The returns from lending should be disclosed separately from other investment returns when reporting to clients or beneficiaries.
Miles Templeman, director-general of the IoD, said: “We are supportive of the concept of the Stewardship Code as a way of boosting shareholder engagement with company boards. However, we think that there is still not enough emphasis given to getting large investors to engage directly with company boards. This should be addressed in the Code by encouraging investors with stakes in excess of 1% under to build a direct dialogue with company chairmen.”