Stewardship Code Updated: August 2014

Transcription

1 Stewardship Code Updated: August 2014 Professional Investors only 67

2 Contents 1. Stewardship and the Code Background Responsibilities Disclosure on the Stewardship Principles Principle Principle Principle Principle Principle Principle Principle

3 1. Stewardship and the Code The Financial Reporting Council (FRC) introduced the Stewardship Code to advance engagement between companies and institutional investors in order to improve long-term shareholder returns and the efficient application of governance responsibilities. It encourages investors to publish information on their websites explaining how they meet the Code s responsibilities on a "comply or explain" basis. The Code covers seven main principles for institutional investors including, public disclosure of their responsibilities; a clear policy on voting and disclosure of voting activity; and guidelines to protect shareholder value. This document contains details of how we comply with the seven principles of the Code and how we approach the requirements of the Code. This also forms part of the regulatory FCA Handbook COBS (2.2.3) whereby Aerion must disclose on its website the nature of its commitment to the FRC Stewardship Code. This disclosure has been prepared by Head of Equities at Aerion Fund Management Limited and reviewed by Compliance and Operational Risk. Any requests should be directed to Aerion s Operations team in the first instance with the contact numbers set out below: Direct Line: operations@aerionfm.com 69

4 2. Background The Code is directed in the first instance to institutional investors, which covers asset owners such as pension funds and insurance companies and asset managers who provide investment management services on behalf of asset owners. Institutional investors may choose to outsource to external service providers some of the activities associated with stewardship. However, they cannot delegate their responsibility for Stewardship and they remain responsible for ensuring those activities are carried out in a manner consistent with their own approach to Stewardship. The FRC expects signatories of the Code to publish on their website, or if they do not have a website in another accessible form, a statement that: describes how the signatory has applied each of the seven principles of the Code and discloses the specific information requested in the guidance to the principles; or if one or more of the principles have not been applied or the specific information requested in the guidance has not been disclosed, explains why the signatory has not complied with those elements of the Code. 3. Responsibilities Aerion Fund Management Ltd is wholly owned by its sole client, the National Grid UK Pension Scheme ('the Scheme'), and acts as the Scheme's Principal Investment Manager. The Trustees of the Scheme have delegated to Aerion the authority: i. To exercise votes on behalf of the Trustees in accordance with the Scheme's Responsible Investment Policy; the Trustees have adopted the voting principles recommended by the National Association of Pension Funds (NAPF), of which the Scheme is a member; ii. To determine the circumstances in which meetings should be held with investee companies; iii. To determine the strategy on intervention, and the circumstances in which further action should be taken, and what form that action should take, including how to vote. The Trustees' Responsible Investment Policy generally applies only to UK listed companies. The Trustees require Aerion to vote all UK holdings in line with this Policy, but only expect votes for overseas investments to be cast if failure to do so could adversely impact the value of the investment. 70

5 4. Disclosure on the Stewardship Principles 4.1 Principle 1 Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities. Aerion, as Principal Investment Manager to the Scheme, manages UK and overseas equity portfolios; Aerion have delegated the management of some of the portfolios to external equity managers. Aerion concentrates its direct engagement and stewardship activities on the UK equity investments in accordance with the Scheme s Responsible Investment Policy. Aerion exercises the votes on all UK holdings, in line with the Trustees' Guidelines of supporting the voting principles recommended by the NAPF; Research from ISS is used to support our review and to reach an appropriate conclusion. Aerion s Engagement Policy Aerion's investment process incorporates regular meetings with investee companies, ideally at 'one to one' but otherwise at group meetings, with the objective of maintaining an ongoing dialogue with senior management. Aerion's ability to obtain company management time for such meetings is limited by the modest shareholdings held by the Scheme. The focus of these meetings is to challenge management over corporate strategy and performance, which is monitored by Aerion's investment management team with the primary aim of optimising portfolio returns on the Scheme's behalf. The meetings are also a platform for discussion of corporate governance issues, and a means of communicating to the company any concerns. Thus, Aerion's strategy is to be continuously engaged with those companies in which the Scheme holds investments. The UK Equity managers review portfolios at weekly meeting, in conjunction with the Head of Equities, and should there be companies which require a more pro-active engagement approach, the Head of Equities will oversee the approach of a suitable strategy. Aerion implements the Trustees' Corporate Governance policy by using a research and screening service provided by ISS, incorporating the voting principles adopted by the NAPF, to highlight potentially contentious issues.. Engagement with investee companies on such contentious issues is routinely undertaken by ISS prior to publication of their research in order to seek clarification of the background before they distribute their recommendation. Aerion s website provides details of its voting activity and its commitment to the Stewardship Code. Aerion s quarterly investment report to the Scheme s Funding and Investment Committee (F&IC) updates the Committee on activity including any notable voting issues and votes cast against Board recommendations or NAPF policy. In addition, an annual report with an assessment of the effectiveness of Aerion s voting and engagement activity is prepared for the F&IC. This is produced in September, as the majority of the voting activity in the UK takes place in the middle of the calendar year. 71

6 4.2 Principle 2 Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship which should be publicly disclosed. Aerion recognises that during the course of its stewardship activities, conflicts of interest may inevitably arise, and places emphasis on ensuring these conflicts can be effectively identified, managed and disclosed. Conflicts of interest may arise from the activities of our client s sponsoring company, National Grid plc and the activities of the companies we invest in, as part of the provision of investment management services to our client. Conflicts will arise on an infrequent basis, which may prevent us on occasion from pursuing all aspects of stewardship activity. In each of these cases, we will seek to raise these issues directly with the other party to the conflict, rather than taking no further action. All proposed stewardship engagement, is reviewed prior to its approval by the fund manager and the Head of Equities and the majority of potential conflicts of interests are identified during this review process. Aerion holds an 'in line' weighting in National Grid shares on behalf of the Scheme, and expects to vote in accordance with the NAPF Voting Policy Guidelines. A conflict of interest inventory is also maintained by Aerion, which covers both Stewardship conflicts and other identified conflicts. 4.3 Principle 3 Institutional investors should monitor their investee companies. Aerion s fund managers monitor company announcements and external research material on all of the companies in which they invest. Meetings with company executives are occasionally held at Aerion's offices or elsewhere, either with Aerion employees alone, or in conjunction with a small number of other in-house pension fund managers. Aerion's managers will also attend group meetings with companies from time to time. Such meetings usually focus on matters of corporate strategy and tactics, but if necessary, items relating to corporate governance will be aired. Should the managers conclude a more active dialogue is required; this will be escalated to the Head of Equities. Aerion's review of potential investments includes a subjective judgment of the suitability of corporate governance practices at the relevant company. In addition, Aerion s UK Equity managers consider research produced by ISS on any resolutions at General Meetings that are contrary to the NAPF principles. 4.4 Principle 4 Institutional investors should establish clear guidelines on when and how they will escalate their stewardship activities. 72

7 Aerion s strategy on intervention will vary on a case-by-case basis, as determined by the Head of Equities. Sometimes engagement can be conducted by Aerion alone, and on other occasions collective engagement (working with other NAPF members, in particular) is more appropriate. The aim is always to ensure that the best interests of the Scheme members are protected. 4.5 Principle 5 Institutional investors should be willing to act collectively with other investors where appropriate. At times collaboration with other investors may be the most effective manner in which to engage. Collective engagement may be most appropriate at times of significant corporate or wider economic stress, or when the risks posed threaten to destroy significant value. Aerion maintains a modest shareholding in most investments, and is therefore eager to participate in collective engagement if, in its managers' judgement, intervention is required. Aerion seeks to support the work of the NAPF on corporate governance and would normally expect to initiate collective engagement via industry trade bodies such as the NAPF. Aerion is open to participating in collective engagement and its fund managers are also prepared to be made insiders providing that information that could affect their ability to deal in the shares of a company is not conveyed to them without their prior agreement. Any requests should be directed to Aerion s Operations team in the first instance who will be able to direct the matter to the appropriate person: Direct Line: operations@aerionfm.com 4.6 Principle 6 Institutional investors should have a clear policy on voting and disclosure of voting activity. Institutional investors should seek to vote all shares held. They should not automatically support the board. Aerion implements the Scheme's Trustees' policy of voting all UK holdings, and do not automatically support the Board of companies. If Aerion has been unable to reach a satisfactory outcome through active dialogue then it registers an abstention or vote against the resolution. Aerion writes to the company explaining the reasons for its decision. Aerion publishes, on its website, votes cast on behalf of the Scheme on a quarterly basis. The Scheme participates in a securities lending programme. Aerion recall securities in order to vote on a case by case basis or when failing to do so may directly impact on Aerion s investment strategy for the Scheme. 73

8 4.7 Principle 7 Institutional investors should report periodically on their stewardship and voting activities. In its quarterly investment report for its client, Aerion provides a list of all votes cast against a Board's recommendation or against NAPF policy. Aerion also provides an annual written assessment of its voting and engagement activity to the Scheme's Investment Committee. A full list of votes cast is published on Aerion s web-site on a quarterly basis. An AAF 01/06, is sometimes produced by asset managers who manage segregated investment mandates on behalf of clients. As custodian for the Scheme for Equities and Fixed Income assets, HSBC complete a ISAE 3402 Report (equivalent to an AAF type report), which includes details on the design of policies and procedures relating to the effectiveness of services provided including but not limited to securities processing, safekeeping and reconciliations. As a result Aerion do not currently undertake a formal AAF 01/06 review. However, Aerion is subject to reviews from Internal Audit on a quarterly cycle and External Audit annually. In addition, the control framework is aligned to AAF 01/06 standards, including the objectives and controls on authorisation and processing of transactions, financial records, compliance monitoring and client reporting. A Compliance Monitoring Programme is also performed on a quarterly cycle co-sourced with a firm who specialise in compliance asset management services. The firm s Risk and Compliance Committee, a formal sub-committee of the Aerion Board reviews and challenges the firms risk management activities including the assurance activities of Compliance and Audit, with updates reported to the Board on at least a quarterly basis. 74

9 This document is provided to you for your information and discussion only. It is not a solicitation or an offer to buy or sell any security or other financial instrument. Any analytical information provided is for information purposes only and is not an impartial assessment of the value or the prospects of its subject matter. Nothing in this document constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your or your clients' individual circumstances, or otherwise constitutes a personal recommendation to you or your clients. Any information in this document (including facts, opinions or quotations) may be condensed or summarised and is expressed as of the date of writing. The information may change without notice and Aerion Fund Management Limited is under no obligation to ensure that such updates are brought to your attention. This document is intended only for the person to whom it is issued by Aerion Fund Management Limited. It may not be reproduced or distributed either in whole, or in part, without our written permission. The distribution of this document and the offer and sale of the investment in certain jurisdictions may be forbidden or restricted by law or regulation. Aerion Fund Management Limited is authorised and regulated by the Financial Conduct Authority, FCA Registration Number, and provide exclusive asset management services to the National Grid UK Pension Scheme. 75