UK Corporate Governance & Engagement Policy
1. Introduction
Corporate Governance is the system by which companies are directed and controlled for the long-term benefit of their shareholders. It concerns the arrangements for appointing and remunerating directors and auditors, and the controls in place to enable them to discharge their respective responsibilities with diligence and effect.
Good governance concerns the relationship between shareholders and the companies in which they invest so as to satisfy themselves of the appropriateness and strength of the governance regime in place. To that end, companies are encouraged to provide a transparent account of their governance arrangements in accordance with the accepted principle of “comply or explain”. Investors have a responsibility to engage (individually and collectively) with investee companies to help promote a sense of ownership to protect and enhance value creation over the long-term.
Ecclesiastical Investment Management (EIM) supports the principle of considered voting believing that shareholders have a vital role to play in encouraging high standards of corporate governance from the perspective of being long-term investors.
EIM has adopted a policy of voting in support of company management except where proposals are considered to be in breach of corporate governance best practice, or are viewed as not being in the economic interests of shareholders. As long-term investors, EIM believes a pragmatic approach best fulfils the objective of building shareholder value over time. EIM will engage pro-actively with companies where either existing corporate governance arrangements or management proposals cause concern. A decision either to abstain or oppose will be taken based on the guiding principles below, and if appropriate, on a case by case basis.
EIM supports the Principles set out in the UK Corporate Governance Code1 (formerly the Combined Code on Corporate Governance) as well as The UK Stewardship Code2 introduced by the FRC (Finance Reporting Council) following recommendations made to investors in The Walker Report3.
EIM will support the routine adoption of the Annual Report and Accounts, except where the auditors provide a qualified audit statement.
EIM supports the principle of the Chairman being independent on first appointment and of the roles of Chairman and Chief Executive being separate. Executive Chairs should be supported by a strong independent element at senior level. Boards should comprise an appropriate mix of executive and non-executive members, where the independent element comprises (ideally) at least half of the Board. Membership of the Audit Committee in particular should normally be comprised entirely of independent non-executive directors. EIM reserves judgment on the annual election of directors, but expects the Board to explain any reason for diverting from best practice as set out in the UK Corporate Governance Code.
EIM supports the aspiration to improve Board diversity as set out in the Davies Review, 'Women on Boards'. We look to FTSE100 companies to report progress on how they expect to meet a minimum target of 25% women on boards by 2015, and for FTSE250 companies to disclose their own targets. Where companies make 'boiler plate' statements, or do not appear to be making sufficient headway, we may use discretion to oppose or abstain the re-election of the Chairman (or Members) of the Nominations Committee.
EIM will support routine shareholder capital proposals (share issue authorities and purchase of company’s own shares etc.) so long as shareholder rights are protected and are within ABI pre-emption limits. Other investment related proposals (scrip dividends, capital raising, merger & acquisition, re-structuring etc.) will be considered on the merits of the investment case. Amendment or adoption of company Articles of Association will be supported as long as shareholder rights are protected with EIM supporting the principle of separate resolutions being proposed for each distinct issue; bundled resolutions should be avoided.
The appointment and remuneration of auditors will normally be supported. The Board is expected to monitor and report on the independence and objectivity of the external auditor and to disclose its policy on the payment and provision of non-audit fees and services, especially where the external auditor is the largest recipient of these. We support the rotation of auditors and the audit partner in keeping with best practice, and expect the Board fully to disclose its reason for recommending the appointment of external auditors. We do not support mandatory fixing of rotation, believing the Board is best placed to review audit needs, and explain their decision to shareholders.
Particular attention will be given to executive compensation policies and practice.
Remuneration should be sufficient to recruit, retain, and motivate so as to incentivise long-term superior out-performance without being excessive; it should not be designed to reward undue risk. EIM will take into account the individual circumstances of the company and the sector in which it operates, as well as any accompanying “comply or explain” statements.
EIM supports the principle of variable long-term incentives as the most appropriate means of aligning executive performance with shareholder interests. EIM will consider, as part of its decision making process, the quality of public disclosures so as to allow an informed judgement to be made on the individual and aggregate elements of remuneration; whether performance hurdles are stretching and tiered towards delivering superior performance; and any potential for excess.
The potential for excess is subjective; shareholders may be content to approve significant awards conditional upon the delivery of superior out-performance. EIM subscribes to the view that excessive rewards should be avoided. Factors that might contribute towards potential excess include undemanding or below market consensus performance criteria; criteria linked wholly to share price appreciation; factors generally outside of a director’s control (such as commodity price movements); and long-term incentive schemes that are tiered towards, and reward excessively for, median performance.
In general terms, annual and long-term awards that in aggregate exceed 300% of salary per year, may trigger an excess assessment. However, potential excessiveness may be offset by exceptionally challenging performance hurdles, or unusually low base salaries.
Factors that may determine how remuneration will be voted include:
| Support | Abstain | Oppose |
|---|
| Clear & full disclosure on all aspects of remuneration policy to allow informed judgement | Good level of disclosure; but some transparency / completeness issues; generally allows informed judgement | Poor or inadequate disclosure that prevents informed judgement being made |
| No evidence of excess (short term bonus and long term incentives generally less than 300% salary pa) | Some potential for excess e.g. ratcheting of base salaries and / or bonus without clear explanation or justification. Awards in aggregate generally no more than 300% salary pa | Remuneration potentially execessive in aggregate - evidence of over-paying e.g. base salaries pitched above peer or index group; awards in aggregate generally more than 300% salary pa |
| Clear alignment of shareholder and executive interests through robust remuneration structure | Alignment of shareholder and executive interests may not be clear or apparent | Little or no structural alignment between remuneration policy and shareholder interests |
| Performance targets structured to incentivise and deliver superior out-performance (modest or no vesting at median). Broad vesting scale | Performance targets may reward unduly for median performance (over 30% of salary). Vesting scale is generally broad | Performance targets unchallenging and structured to reward excessively at median or changed mid-year to allow easier pay out; cliff vesting |
| Performance targets are structured to align with business strategy | Use of specific targets may lack clarity in context of business strategy | Performance targets are not structured to align with business strategy |
| No evidence of over-paying or rewards for failure; service contracts one year or less; mitigation and claw-back applied | Some evidence of over-paying e.g. on recruitment; service contracts two years or 18 months reducing; claw-back and mitigation may not apply | Transaction bonus; rewards for failure; service contracts more than one year; awards with no performance criteria; evidence of over-paying; no evidence of mitigation or claw-back |
The policy for remunerating non-executive directors should be clearly disclosed, and should reflect the time commitment and responsibilities attached to the role without being excessive. EIM accepts that payment of a fee may be made in shares, but a performance related element will not be supported. Increases to the aggregate level of non-executive fees should be approved by shareholders, and be reasonable.
The direct payment of party political donations within the EU will not be supported; precautionary mandates for legitimate political expenditure as defined under the Companies Act 2006 will be deemed acceptable, subject to their appearing reasonable and not excessive (which is usually taken to mean no more than £100,000 pa). EIM will usually vote to abstain supporting political expenditure where this is over £100,000 but less than £150,000, and oppose in excess of this.
EIM applies these guiding principles and those issued by the AIC (Association of Investment Companies4) to the governance arrangements of investment companies, accepting that the main function of the Board is to monitor the activities of the Fund Manager. To that end, a majority of the Board should be independent of the manager to ensure objective scrutiny of investment strategy, performance and internal control; EIM views length of service to be a determinant of independence for any non-executive appointment.
EIM supports the principle of shareholder democracy as playing an important part in the governance regime of public companies. Given the diversity of issues that may inspire a shareholder resolution, EIM will seek to engage with the proponents and the Board before exercising a judgement on how to vote. Each proposal will be considered case by case with regard to its reasonableness, the materiality of any business risk, cost implications, or whether the proposal supports EIM’s wider ESG aims and objectives. Decisions taken by EIM on shareholder resolutions will be disclosed on the website.
We will routinely engage with company management on corporate governance issues especially as a part of the annual proxy voting cylce. Where we have concerns, or require governance clarification, this is communicated, in the first instance, to the Company Secretary.
15. EIM Commitment to the Stewardship Code and Engagement
EIM fully subscribes to the concept of active ownership as long-term investors and considers itself compliant with the principles asked of institutional investors in The Stewardship Code and the UK Corporate Governance Code (Schedule C) as exercised through:
the publication of this policy (and the accompanying voting template), and the guiding principles for engagement set out within it
EIM’s policy of engaging routinely with companies on material financial, ethical and governance issues as part of the investment management process
the publication of client materials detailing how EIM engages with investee companies on material financial, ethical and governance issues, and
the publication of EIM’s quarterly proxy voting record at www.ecclesiastical.com
EIM voting decisions are informed by the ABI (Association of British Insurers) Institutional Voting Information Service (IVIS); by engagement with the companies concerned; and by active monitoring of any “comply or explain” statements issued by the investee company.
MARCH 2013
1 The Combined Code on Corporate Governance, FRC July 2003
2 ISC Code on the Responsibilities of Institutional Investors, ISC November 2009
3 A Review of Corporate Governance in UK Banks & other Financial Industry Entities (Walker), H M Treasury, November 2009
4 The AIC Code of Corporate Governance, AIC May 2007
5 This policy was first published in September 2010, and amended in March 2013
This policy Statement is primarily aimed at voting decisions exercised within the UK market. Voting is routinely exercised in other territories in accordance with established cultural and market best practice, always with the intention of ensuring shareholder rights are protected and in pursuit of delivering long-term shareholder value.