UK Stewardship Code
We regard stewardship as integral to our investment process. Good stewardship is important to understanding the sustainable value of the companies in which we hold equity on behalf of our clients and provides a standard of behaviour that encourages the protection of the assets of our clients.
Our policy document, Environmental, Social and Governance Policy sets out our approach to ownership and the governance of companies in which we hold equity investments. This note develops on that global policy and explains our compliance with the UK Stewardship Code.
Ownership and the UK Stewardship Code
The UK Stewardship Code is overseen and published by the Financial Reporting Council, the independent regulator overseeing financial reporting, accounting and auditing and corporate governance. The Code, first published in 2010, sets the benchmark in the UK for institutional investors to meet ownership obligations in respect of their holdings of UK equities.
Schroders complies with the Code in the UK. Taking account of local practice and law, the Code sets a standard for stewardship and engagement for Schroders' non-UK equity investments.
Principle 1: Policy on operation of stewardship responsibilities
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. 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 should therefore be seen as integral to our equity 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.
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.
Principle 2: Conflicts of interest
Schroders' policy regarding conflicts of interest is set out in Environmental, Social and Governance Policy. In summary, where there is a conflict of interest between a client and Schroders, we will either a) follow the recommendation of our voting service provider or b) obtain approval from the client or c) exceptionally, where we are not following the recommendations of the voting service because we believe the advice is not in the interests of our clients, we will obtain approval, with written justification of the reasons why it is in the interest of our clients not to follow the third party recommendation, from our Global Head of Equities.
Where the director of an investee company is also a director of Schroders plc or where we are asked to vote at an investment company where Schroders is the investment adviser, we will always vote in accordance with the recommendation of the voting service. Schroders will always vote and act in the best interests of its clients.
Principle 3: Monitoring
Typically, monitoring will occur around financial reporting, general meetings, in connection with news and announcements and when, for whatever reason, Schroders might be conducting research into investment ideas or reviewing holdings.
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.
The issues covered in monitoring any company will include those identified under principle 1, above as the issues with which we may engage with any company.
For companies in the UK, it is not intended that our policies conflict with or materially add to the UK Corporate Governance Code. 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 react accordingly. If the company provides a convincing justification and/or the issue is not material to the value of its shares, we would expect to support the company.
We generally look to support the management of the companies in which we invest. Where proposals are not consistent with the interests of shareholders we will vote against resolutions. We may abstain where mitigating circumstances apply, for example where a company has taken steps to address shareholder issues.
As an active fund manager acting in the best interests of our clients, it will be understood that we are reluctant to be in receipt of price sensitive information from companies or their advisers. Receiving such information places us inside and therefore unable to trade shares in the stock(s) concerned. Much of the value created for clients arises from active stock selection and therefore we must retain the ability to trade. In exceptional cases, however, we may agree to be taken inside for a temporary period only.
We rarely attend company general meetings in person – there are usually more effective means of communicating with and offering support to companies.
Principle 4: Implementation
Engagement will normally be conducted through regular meetings with company management. It may include further contact with executives, meeting or otherwise communicating with non-executive directors or the chairman, voting, communicating via the company's advisers, submitting resolutions at general meetings or requisitioning extraordinary general meetings. We may conduct these additional engagements in connection with specific issues or as part of the general, regular contact with companies. Thus, for example, it is common to meet company directors outside the regular 1-to-1 meetings, particularly when the directors are first appointed.
If there are issues relating to the company which the executives of a company cannot answer, alternative methods, depending on the issue, may be employed.
Principle 5: Working with other shareholders
There are occasions when it is better to work with other shareholders to effect change. This may involve sharing views and ideas with other institutions. It may also involve meeting companies jointly with other shareholders or using the services of third-party membership organisations or other collaborative or informal groups). The few institutional shareholders which have not yet had contact with Schroders regarding stewardship of investee companies are encouraged, in the first instance, to contact our Head of Corporate Governance.
Principles 6 & 7: Voting & Reporting
It is the policy of Schroders' UK equity business to vote all shares at all meetings except were there are onerous restrictions – for example, where trading is restricted prior to a meeting in shares committed to vote (share blocking), we will usually only vote where the benefit of voting outweighs the benefit of the ability to trade.
It can be in the interests of our clients (and the requirement of some clients) to lend stock. We will recall stock from loan in order to vote it in accordance with the policy in ‘Investment and Corporate Governance: Schroders’ Policy’, namely where a) the benefits of voting outweigh the benefits of stock lending; b) the subject of the vote is material to the value of the company; and c) there is a realistic chance that voting the shares under our control would affect the outcome of the vote.
In determining how to vote, Schroders will either:
- apply the voting policy set out in Environmental, Social and Governance Policy. In applying the policy, we consider a range of factors, including the circumstances of each company, performance, governance, strategy and personnel. We may also take advice from third parties and in particular whoever may be appointed to provide voting services (at present ISS); or
- where a fund has widely diversified holdings that, in aggregate with other funds controlled by Schroders, would only represent a minimal percentage of a company's share capital the interests we control will be voted in accordance with the recommendations of a third party (currently ISS). Where the holdings form part of a larger, material percentage interest controlled by Schroders, the shares concerned will be voted directly according to Schroders' own policy.
The voting record of Schroders' own funds which are voted according to our policy are published on this website for periods covered by the Code, after a suitable period has elapsed between voting and publication. A delay is considered appropriate to ensure that the publication of voting will not influence the outcome of discussions with companies.
For institutional clients, voting reports are available quarterly and notes on engagement are also available. It is Schroders' view that effective engagement must usually be confidential, with public exposure more likely to entrench positions than resolve issues.
Schroders obtains an audit opinion on engagement (in addition to the opinions already obtained for voting processes) having regard to standards in AAF 01/06.