UK Stewardship Code
The UK Stewardship Code – Schroders’ Statement of Compliance
As active owners in the companies in which we invest, we regard stewardship as integral to our investment process. Good stewardship is important to understanding the sustainable value of companies and provides a standard of behaviour to protect and enhance the value of our clients’ investments
Our document, Environmental, Social and Governance Policy sets out our approach to ownership and the governance of companies in which we invest. This statement develops on that global policy, detailing our compliance with the UK Stewardship Code.
The UK and Other Stewardship Codes
The UK Stewardship Code (the ‘Code’), first published in 2010 and updated in 2012, sets out the principles for effective stewardship by institutional investors in respect of their equity holdings in UK listed companies. The purpose of the Code is to protect and enhance the value that accrues to the ultimate beneficiaries. The Code is overseen by the Financial Reporting Council, the independent regulator overseeing financial reporting, accounting and auditing and corporate governance.
Schroders fully supports the UK Stewardship Code and complies with all its principles. Although the Code is focused on the UK, it sets a standard for stewardship and engagement for non-UK equity investments and we seek to apply the same principles globally, taking into account local practice and law. We acknowledge the emergence of Stewardship Codes in other jurisdictions in which we invest. We keep these under review and look to this document to be our response to other such Codes.
Principle 1: Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities
At Schroders we see ourselves as long-term stewards of our clients’ capital and this philosophy naturally leads us to focus on the long-term prospects for the companies in which we invest. Schroders manages client assets with the objective of generating returns consistent with clients’ objectives. It is therefore central to our investment process to consider each company's ability to create, sustain and protect value. We believe that analysing a company’s exposure to, and management of, Environmental, Social and Governance (ESG) factors, in addition to traditional financial analysis, will enhance our understanding of a company’s fair value and its ability to deliver long-term sustainable returns.
Effective and responsible active ownership has long been part of Schroders’ fundamental approach to investment. We believe that by engaging with companies we can improve our understanding of the issues they face and their approaches to managing them, helping us to protect and enhance the value of our investments on behalf of our clients.
It is essential to question and challenge companies about issues that we perceive may affect their value. Engagement and actively voting the shares we manage on behalf of clients is integral to our investment process.
Schroders will engage and vote on any issue affecting the long-term sustainable value of a company in which it is invested. Issues may include, but are not limited to, business strategy, performance, financing and capital allocation, management, acquisitions and disposals, operations, internal controls, risk management the membership and composition of governing bodies/boards and committees, sustainability, governance, remuneration, environmental and social responsibility.
Schroders' resources used for each engagement will be managed according to the circumstances and potential impact of each case.
Where the holding in funds controlled and voted by Schroders is a small fraction of a company's capital, there will be proportionately less resource applied to engagement, if only to recognise that shareholders with a minimal holding of a company's share capital are unlikely to have a material influence.
Our engagement activities combine the perspectives of our portfolio managers, financial analysts and ESG specialists in order to form a rounded opinion of each company and the issues it faces. Intervention will generally begin with a process of enhancing our understanding of the company and helping the company to understand our position. The extent to which we would expect to effect change will depend on the specific situation. Our focus will be on issues material to the value of the company's shares.
We generally engage for one of three reasons:
- To seek improvement in performance and processes in order to enhance and protect the value of our investments
- To monitor developments in ESG practices, business strategy and financial performance within a company
- To enhance our analysis of a company’s risks and opportunities
Our mechanism for engagement with company representatives varies but typically involves one of the following methods:
- One-to-one meetings with company representatives (e.g. members of the Board including Board Committee chairs, senior executives, Investor Relations , managers of specialist areas such as a sustainability or environmental manager) either collaboratively with our financial analysts and investors, or focused ESG engagements undertaken by the ESG specialists;
- Written correspondence;
- Phone calls;
- Discussions with company advisers and stakeholders;
- Collective engagement with other investors.
We prioritise our engagement activities based on the materiality of the issue, the materiality of our exposure to the individual company, either by the total size of assets invested on behalf of clients or by the percentage of shares held.
We proactively arrange meetings with any companies which we own that we see as ESG laggards and focus on companies where we have a significant stake in percentage or value terms. We also undertake reactive engagement as a result of any negative incident involving a company, in order to understand why it may have occurred, the actions the company is taking as a result, and what the current and future investment risks may be. Our equity research, fixed income research, ESG and data teams frequently work together to identify areas that warrant discussion with companies.
We also welcome companies contacting us about corporate governance issues. We recognise that many value a dialogue concerning resolutions likely to be tabled at their AGM. Please be aware that because of the concentration of AGMs early engagement is recommended, especially when issues are likely to be contentious, or involve a significant amount of change or new practice.
We seek to integrate ESG considerations into our research and investment decisions across all of our investment desks and asset classes. We recognise that different asset classes, portfolio strategies or investment universes will require different lenses to most effectively strengthen decision making.
Our integration approach spans the breadth of the ownership lifecycle, from identifying trends and analysing companies through engagement, voting and reporting.
We facilitate the integration of ESG into investment processes through the following:
- Our ESG specialists sit alongside investment teams rather than operating in a silo, which facilitates regular dialogue with our analysts and investors
- Our dedicated ESG specialists have a sector focus, enabling them to gain a deep understanding of sector-specific ESG issues and work in tandem with our analysts and portfolio managers to identify and assess ESG risks and opportunities, and incorporate consideration of these factors into their forecasts. In addition to holding dedicated meetings with company sustainability experts to discuss ESG topics, our ESG specialists attend company meetings with financial analysts, portfolio managers and strategy analysts to discuss specific, material sustainability issues directly with company managements
- The team provides ongoing ESG training to all existing and new investment analysts to ensure that all investment desks are aligned in their efforts to integrate ESG considerations into their analysis. The team also provides detailed sector-specific ESG training and tailored training for individual investment teams
- Our specialists produce regular multi-sector and multi-region thematic research to ensure our analysts and investors keep abreast of the latest ESG trends and how they can impact a company’s valuation and risk profile
- Our equity and fixed income analysts are tasked with analysing relevant ESG risks and opportunities for stocks under their coverage within their research notes. Our ESG specialists review a proportion of these research notes periodically to highlight where ESG analysis can be enhanced and to promote best practice
- As an additional input into the process, each quarter the ESG team screens desk portfolios against third-party ESG ratings from specialist ESG research providers to identify holdings deemed to have poor ESG performance. These ratings are distributed to investment desks so that each desk can assess the potential ESG risks in their portfolios. This may provide the catalyst for further research discussions with the ESG team
Principle 2: Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship which should be publicly disclosed
Schroders accepts that conflicts of interest arise in the normal course of business. We have a documented Group wide policy, covering such occasions, to which all employees are expected to adhere, on which they receive training and which is reviewed annually. There are also supplementary local policies that apply the Group policy in a local context. More specifically, conflicts or perceived conflicts of interest can arise when voting on motions at company meetings which require further guidance on how they are handled.
Schroders’ Corporate Governance specialists are responsible for monitoring and identifying situations that could give rise to a conflict of interest when voting in company meetings.
Where Schroders itself has a conflict of interest with the fund, the client, or the company being voted on, we will follow the voting recommendations of a third party (which will be the supplier of our proxy voting processing and research service). Examples of conflicts of interest include (but are not limited to):
- where the company being voted on is a client of Schroders,
- where the Schroders employee making the voting decision is a director of, significant shareholder of or has a position of influence at the company being voted on;
- where Schroders or an affiliate is a shareholder of the company being voted on;
- where there is a conflict of interest between one client and another;
- where the director of a company being voted on is also a director of Schroders plc;
- where Schroders plc is the company being voted on.
Separation of processes and management between Schroder Investment Management and our Wealth Management division helps to ensure that individuals who are clients or have a business relationship with the latter are not able to influence corporate governance decisions made by the former.
If Schroders believes it should override the recommendations of the third party in the interests of the fund/client and vote in a way that may also benefit, or be perceived to benefit, its own interests, then Schroders will obtain the approval of the decision from the Schroders’ Global Head of Equities with the rationale of such vote being recorded in writing. If the third-party recommendation is unavailable, we will vote as we see is in the interests of the fund. If however this vote is in a way that might benefit, or be perceived to benefit, Schroders’ interests, we will obtain approval and record the rationale in the same way as described above.
In the situation where a fund holds investments on more than one side of the transaction being voted on, Schroders will always act in the interests of the specific fund. There may also be instances where different funds, managed by the same or different fund managers, hold stocks on either side of a transaction. In these cases the fund managers will vote in the best interest of their specific funds.
Where Schroders has a conflict of interest that is identified, it is recorded in writing, whether or not it results in an override by the Global Head of Equities.
Principle 3: Institutional investors should monitor their investee companies
As active investors, we continually monitor a company’s management and performance, including developments which may have a significant impact on valuation or risk profile, as part of our investment process and ownership responsibilities. Our analysts publish their research on our centralised global research platform which is accessible to all investors.
The extent and frequency of monitoring will be partly dependent on the type of investment: a large percentage holding selected by detailed analysis will be monitored more frequently and in greater depth, for example, than a small percentage holding or invested amount. The level of contact will increase where we have specific long term concerns about a company’s performance.
Typically, monitoring will occur around financial reporting, general meetings, in connection with news and company announcements. The analysis of publicly reported information makes up the bulk of our monitoring activity. However we will proactively contact management where we think that this information requires more explanation. Globally we meet with thousands of companies a year; it is an important part of our investment process. In one on one meetings with company management and non executive board members we will focus on relevant long and short term performance factors and expect to have a clear articulation of strategy and the creation of ongoing shareholder value.
We record all of our stewardship activities in our in-house database to facilitate the monitoring of companies in which we are invested. To ensure effective monitoring, we define expected timeframes for milestones and goals; track progress against the defined milestones and goals; and revise the goals, if necessary, depending on progress. We review the company’s progress against all engagement asks a year after they have been made, and subsequently on an ongoing basis, recognising that key strategic changes will take time to be implemented into a company’s business process. We recognise that these success factors may be subjective, and that Schroders’ influence may not have been the sole driving force for this change. However, we believe it is important to track companies’ progress and measure the outcomes of our engagement.
As an active fund manager we are generally reluctant to be in receipt of price sensitive information from companies or their advisers. Receiving such information places us ‘inside’ and therefore puts us in a position where we are unable to trade shares in the stock(s) concerned. We make companies aware of our position on being made an insider to ensure we do not inadvertently receive sensitive information without our prior agreement. However, we may agree to be made an insider, typically for only a short period of time.
We rarely attend company general meetings in person as we believe there are usually more effective means of communicating with, and offering support to, companies.
Principle 4: Institutional investors should establish clear guidelines on when and how they will escalate their stewardship activities
Our engagement activity is summarised in the following chart and we detail our escalation process below.
Source: Schroders. For illustrative purposes only.
We operate a joined up approach to engagement with fund managers, financial analysts and ESG specialists participating in engagements and exchanging views. Engagements may be firm wide or collaborative, depending on what we view as the most effective solution given individual circumstances. All of our engagement is tracked on our in-house database and reviewed by our ESG team to see how effective our activities are.
We ordinarily hope to address our concerns through the regular meetings our analysts, investors and ESG specialists hold with company management. However, there may be instances where a company does not respond constructively, our concerns have not been sufficiently addressed or we do not feel confident that the company intends to address these concerns. Under these circumstances, we may decide to extend our engagement activity and/or escalate specific areas of concern in order to effect the change we are seeking.
Intervention will generally begin with a process of holding additional meetings with company management to enhance our understanding of their stance and help the company to understand our position. Should this initial step fail, we may consider further escalation by:
- meeting or otherwise communicating with non-executive directors or the Chairman
- expressing our concerns via company advisers or brokers
- withholding support or voting against management
- collaborative intervention with other institutional investors
- submitting resolutions at general meetings
- requisitioning extraordinary general meetings
- divestment of shares
We do not generally issue statements in the media or campaign publicly on issues in advance of general meetings. Instead we prefer to engage confidentially with company management to discuss issues and concerns, as we believe this is the most constructive and effective approach. Where we plan to vote against, we will ensure management is made aware of our concerns and our voting intention prior to casting our vote.
Principle 5: Institutional investors should be willing to act collectively with other investors where appropriate
There may be occasions when it is more effective to work with other institutional shareholders to influence company management and effect positive change. For example, where our confidential discussions with management have failed to achieve the desired outcome, we may seek to act collectively with other investors to increase our influence.
We review collaborative engagements on a case-by-case basis to ensure that the objectives of such engagements are aligned with our firm wide ESG policy. All of the collaborative engagements we participate in have defined objectives and we monitor the actions companies take following our collaborative engagement. We record all of our engagement activity in our in-house database and review progress.
Where we deem collective engagement to be appropriate, Schroders will work with other institutional investors, either bilaterally or through various industry forums. Our collective engagement may involve meeting companies jointly with other shareholders, via membership organisations or other more informal groupings.
Schroders is a member, participant or signatory to a number of reputable industry organisations which enable us to collaborate with other investors on company specific and industry wide issues. These include:
- Pensions and Lifetime Savings Association (PLSA, formerly NAPF)
- International Corporate Governance Network (ICGN)
- Asia Corporate Governance Association (ACGA)
- Principles for Responsible Investment (PRI)
- Investment Association (IA)
- Investor Forum
- UK Sustainable Investment Forum (UKSIF)
The few institutional shareholders who have not yet had contact with Schroders regarding stewardship of investee companies are encouraged, in the first instance, to contact Jessica Ground, our Global Head of Stewardship.
Principles 6: Institutional investors should have a clear policy on voting and disclosure of voting activity
As active owners, we recognise our responsibility to make considered use of voting rights. It is therefore our policy to vote all shares at all meetings globally, except where there are onerous restrictions – for example, shareblocking. We do not stock lend.
We vote on both shareholder and management resolutions. Where in aggregate the amount of a company controlled by Schroders, is less than 0.5% of the share capital we vote in accordance with the recommendations of a third party (currently ISS).
All proxy vote instructions in all markets are submitted using the ISS global voting platform. ISS carry out the individual processing of vote instructions with the custodians and/or company/company agents. We may attend annual or extraordinary general meetings to submit our votes in person.
The overriding principle governing our approach to voting is to act in the best interests of our clients. Where proposals are not consistent with the interests of shareholders and our clients, we are not afraid to vote against resolutions.
We vote on a variety of issues; however the majority of resolutions target specific corporate governance issues which are required under local stock exchange listing requirements, including but not limited to: approval of directors, accepting reports and accounts, approval of incentive plans, capital allocation, reorganisations and mergers.
We evaluate voting issues arising at our investee companies and, where we have the authority to do so, vote on them in line with our fiduciary responsibilities in what we deem to be the interests of our clients. Our Corporate Governance specialists assess each proposal, applying our voting policy and guidelines (as outlined in our Environmental, Social and Governance Policy) to each agenda item. In applying the policy we consider a range of factors, including the circumstances of each company, performance, governance, strategy and personnel. Our specialists may draw on external research, such as the Investment Association’s Institutional Voting Information Services and ISS, and public reporting. Our own research is also integral to our process; this will be conducted by both our financial and ESG analysts. For contentious issues, our Corporate Governance specialists consult with the relevant analysts and portfolio managers to seek their view and better understand the corporate context.
Any UK company which in our opinion meets the spirit of the UK Corporate Governance Code should, in the absence of other factors, expect to be supported on corporate governance issues covered by the Code. Where a company does not comply with the spirit of the Code, we will consider the company's explanation and circumstances, and then react accordingly in a manner we deem most appropriate. If the company provides a convincing justification and/or the issue is not material to the value of its shares, we would ordinarily expect to support the company. Where we are not satisfied with the explanation and we view the departure from the Code as material, we will engage further with the company and or non-executive directors, and may vote against management.
Why do we vote against company management?
We are not afraid to oppose management if we believe that doing so is in the best interests of shareholders and our clients. For example, if we believe a proposal diminishes shareholder rights or if remuneration incentives are not aligned with the company’s long term performance and creation of shareholder value. Such votes against will typically follow an engagement and we will inform the company of our intention to vote against before the meeting, along with our rationale. Where there have been ongoing and significant areas of concerns with a company’s performance we may choose to vote against individuals on the board.
Why might we abstain?
We may abstain where mitigating circumstances apply, for example where a company has taken some steps to address shareholder issues.
Disclosure of our voting activity
It is our policy to disclose our voting activity publicly. On a quarterly basis, we produce our voting report which details shareholder proposals for companies during the period and how the votes were cast, including votes against management and abstentions, along with the rationale behind these decisions. The reports are publicly available on our website: http://www.schroders.com/responsibleinvestment.
We also disclose portfolio specific voting activities to clients on request.
We continue to review our voting practices during our ongoing dialogue with our portfolio managers. This has led us to raise the bar on what we consider ‘good governance practice’.
Principles 7: Institutional investors should report periodically on their stewardship and voting activities
We believe transparency is an important feature of effective stewardship. We are cognisant however, that some disclosures may be counterproductive. It is our view that ongoing engagement is most effective on a confidential basis, with results reported on after engagements have come to a close.
We produce a quarterly Responsible Investment Report which highlights our engagement and voting activities over the period. The Engagement section includes detailed case studies as well as the total number of engagements, the companies engaged with broken down by region, type and sector, and progress. The Voting section summarises our voting activities, including the number of companies we voted, the percentage of our holdings voted, votes per region and the direction of our votes. These reports are publicly available on our website: www.schroders.com/responsibleinvestment.
Institutional clients receive a more specific report which includes their personal voting activity and more detailed information on the progress of company engagements that are ongoing. In addition, we produce quarterly voting reports which detail all votes over the period, including votes for, against and abstentions. Where we have voted against management or abstained, we will provide the rationale for such decisions. These reports are publicly available on our website: www.schroders.com/responsibleinvestment.
We also publish an Annual Responsible Investment Report which provides more details on our stewardship activities, more specifically, our integration efforts, thematic research reports, engagement topics, examples of engagement successes, voting categories, our ESG shareholder resolution voting record, along with detailed case studies, our involvement in industry initiatives and collaborative engagements. These reports are also available on our website: www.schroders.com/responsibleinvestment.
Schroders obtains an independent opinion on our engagement and voting processes based on the standards of the AAF 01/06 Guidance issued by the Institute of Charted Accounts in England and Wales.