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Investors show that talk isn't cheap

Investor engagement is growing thanks to a little help from a new governance code

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Investor engagement has widened in just one year as more and more shareholders are keen to broaden their focus of questioning and talk to companies about board diversity as well as more traditional areas of voting and remuneration.

The encouraging signs are thanks in part to a new voluntary code - the UK Stewardship code - which encourages investors to engage more vocally and publically in the companies they invest in to effect change.

One year on from the UK Stewardship code becoming effective, the Financial Reporting Council, which oversees the code, found encouraging signs of its impact – but also potential for a little code tweaking.

So far organisations that have published a statement of commitment to the code go "beyond our expectations", the FRC says. As of December there were 234 signatories, including 175 asset managers – the likes of Aberdeen Asset Management, Henderson Global Investors and Scottish Widows. There were also 48 asset owners and 12 service providers.

Signing up to the code - effective since 1 October 2010 - is only "the first step" though. Better engagement is the real objective and this is encouraged through the code's seven principles, which cover the monitoring of investee companies, the escalation of activities taken to protect or enhance shareholder value, collective engagement, voting policy, managing conflicts of interest, and public reporting and reporting to clients.

Though it is early days, signatories to the code believe it is having an impact. "In the past we as an organisation haven't just focused on voting or remuneration, but also engaged on other issues like audit and risk," says Alison Kennedy, governance and stewardship director at Standard Life Investments (a signatory of the code).

"I sense that other investors are broadening their focus as well now and wanting to talk about issues such as board diversity and composition, as well as voting and remuneration. It's been happening over the years, but the code has given it more impetus."

Kennedy also says there is greater depth developing in the dialogue between investors and companies in which they have significant shareholdings. She takes succession planning as an example.

"We have asked companies generally about this issue over the years," she says, "but now if a company is looking for new non-executive directors, we may suggest one or two names the company might want to think about, rather than just the names coming from the headhunters. We are trying to add value at the margin to the nominations process."

Corporate behaviour is also changing, Kennedy says. "A few years back, companies were really only contacting us when they had a specific issue," she says. "It was pretty selective. Now we are seeing increased volume and variety of communication. So from a company perspective, there's a high level of awareness of the code and willingness to engage more." She notes that some companies, such as Vodafone and GlaxoSmithKline, hold an annual governance event, inviting governance experts from their major shareholders to meet the chairman and chairs of their committees for a roundtable session on what is changing, what the committees have been up to and any concerns that shareholders have about governance.

"It's a way of getting a breadth of opinion in an easy format," Kennedy says.

Anita Skipper, corporate governance director at code signatory Aviva Investors, also sees evidence of greater shareholder engagement in their willingness to vote against company resolutions.


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