At its simplest, the principle of stewardship entails the safeguarding of an organization for the future. It covers traditional concepts such as fiduciary loyalty, transparency in corporate governance policies, and sound processes for shareholder voting rights. In broader applications, stewardship principles can apply to long-term benefits for stakeholders, as well as society as a whole.
Stewardship is very closely linked with Environmental, Social, and Governance (ESG) principles, as both are motivated by ideas such as accountability and responsible investing. However, they are different in that stewardship is interested in creating long-term value, while ESG focuses on the impacts on society and the globe as a whole. The two do work hand in hand, though — for instance, investments may not be sustainable in the long run if they are proven to be detrimental to the environment.
Generally speaking, stewardship principles usually address:
- Transparency regarding executive pay and board makeup
- Voting procedures, activity, and disclosure
- Management of conflicts of interest
- Collaboration between investors
- Frequency of stock turnover by portfolio managers
- Balancing tax obligations with cash flow for shareholder benefits
- Public disclosure and reporting of stewardship efforts
These are all factors that can directly affect the longevity and profitability of a fund or organization.
Stewardship Policy Examples
While stewardship principles should be embedded in investor activity as a matter of course, there is much benefit to having specifically articulated stewardship policies in place. Such policies typically are not intended to be coercive in nature, but rather allow investors to adopt conscious decisions and sound investment practices on their own.
Two prominent examples of stewardship policies are those for Singapore and the U.K.:
Singapore Stewardship Principles
In November 2016, an industry-led initiative entitled “Singapore Stewardship Principles (SSP) for Responsible Investors" was launched in Singapore. The SSP was drafted and launched by Singapore Stewardship Principles Working Group and supported by both the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX).
The SSP contains seven core principles that are intended to encourage good stewardship practices and responsible investment. These include principles such as “Take a stand on stewardship,” “Know your investment,” and “Stay active and informed,” as well as guidance on each principle. For a full elaboration of the SSP, click here.
Overall, the Singapore investment community is pleased with the introduction of such guidance. In recent years, Singapore has been on the forefront of important developments in Asia, particularly in the areas of corporate governance and derivative actions.
U.K. Stewardship Code
The U.K. has had its Stewardship Code in place since 2010, with important revisions added in 2012. According to the Financial Reporting Council (FRC), the quality of engagement between investors and large companies has improved overall since the Code’s implementation.
As with the U.K.’s Corporate Governance Code, application of the Stewardship Code is done on a “comply or explain” basis. The near 300 signatories to the code have been required to produce a statement of commitment to the code, or explain why they were not implementing it as a part of their business model. In addition, the signatories have recently been tiered according to the quality of their reporting.
For instance, Tier 1 includes signatories that provide “a good quality and transparent description of their approach to stewardship,” whereas Tier 3 describes signatories that need to make “significant reporting improvements.”
Criticisms and Benefits of Stewardship Approaches
Some criticisms of stewardship approaches include:
- Difficulties in assessing implementation
- Reporting may slow down operations
- Slow responses to actual transgressions
Stewardship policies are generally seen as beneficial because they:
- Promote greater overall transparency and accountability
- Foster a culture of responsibility
- Increase long-term profitability, which is attractive to both investors and the public
Perhaps greatest benefit is the change in overall corporate and investor culture towards a more conscious, active approach towards responsibility.
Most of the current criticisms of stewardship policies have to do with implementation and the introduction of formal reporting mechanisms. As stewardship principles become a more integral aspect of operations, these concerns will likely be resolved as such policies become more commonplace.
As stewardship policies become more prevalent, investors can focus less on policy revisions and more on specific, targeted areas such as corporate culture and succession planning. Likewise, additional implementation strategies such as the tiering with UK’s signatories can help investors achieve a more comprehensive picture of where they stand in relation to others.
Aside from formal stewardship policies, stewardship lectures and forums are becoming more important as investors recognize the need for new strategies. For instance, the role of stewardship in light of increased global investing will be a discussion point at The Rights and Responsibilities of Institutional Investors (RRII) annual conference, hosted by Kessler Topaz. If you have any questions, concerns, or disputes regarding stewardship and its applications, contact us at Kessler Topaz. Our team is committed to promoting shareholder education and protecting investor rights across the globe.