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12 Best Practices for Investment Stewardship

How investors can assess if their asset managers are meeting a high standard

Hortense Bioy


Investment stewardship has been a key focus for asset managers over the past few years. We’ve seen it with the adoption of many stewardship codes across the world, including the introduction of the Framework for U.S. Stewardship and Governance. Most large asset managers in the U.S. are now signatories to the Principles for Responsible Investment, which commits them to being active stewards through voting and engagement, along with incorporating environmental, social, and governance (ESG) factors into their investment process. In my last post, I explained how index managers are taking an active approach to investment stewardship.

Recently, BlackRock’s chief executive Larry Fink noted in his annual letter to CEOs that just as the responsibilities that companies face have grown, so too have the responsibilities of asset managers. Asset managers must be active, engaged agents on behalf of their clients.

Investment stewardship activities can vary significantly across asset managers, depending on their values, scale, investment style, and history. But investors should have a clear understanding of what their managers are doing, and they also should expect them to meet the highest standards.

12 best practices that investors can use to see how asset managers stack up

Here’s a list of what Morningstar considers best practice, based on various stewardship codes and our own survey of the largest providers of index funds and exchange-traded funds—12 in total—across the U.S., Europe, and Asia. Our aim in providing this list is to help investors assess the stewardship practices of the asset managers they partner with. An asset manager should:

  1. Have a comprehensive, responsible investment policy and make it publicly available on the firm's website.
  2. Cast votes on the shares held by all funds, including passive funds.
  3. Make the voting policy and voting records of all funds—including passive funds—publicly available on the firm’s website.
  4. Publicly disclose rationales for key votes (that is, votes against management, abstentions, and contentious votes). By providing reasons behind a vote, stakeholders can assess whether the asset manager has voted in line with its policy and in the best interest of shareholders.
  5. Consider recalling lent stocks or restricting lending for important votes and when it is believed the benefit of voting shares outweighs the forgone lending income.
  6. For those relying on third-party governance providers for voting and/or engagement activities, monitor and audit recommendations and services closely to ensure they comply with the asset managers’ policies.
  7. Be an active owner and engage with investee companies either directly or collaboratively, or ideally both. Emphasis should be put on the quality of engagements, not the quantity.
  8. Disclose the number, topic, and outcome of direct engagements with companies, as well as the full list or a sample of companies engaged with over the year. Providing names of companies engaged will allow asset managers to improve public awareness and understanding of their engagement activities.
  9. Do not limit company dialogues to governance matters alone. Address environmental and social issues, too, because they’re a source of operational, reputational, and regulatory risk that can affect a company’s bottom line.
  10.   Engage with regulators, policymakers, and other stakeholders to help improve markets, and  disclose the parties to and topics of some or all of these conversations.
  11.   Use the firm’s scale by consolidating active and passive equity portfolios for voting and all  asset classes, including fixed income, for engagement.
  12.   Communicate with clients and stakeholders through regular investment stewardship reports.

Corporate governance isn’t a black-and-white topic. While asset managers strive to ensure that the companies in which they invest act in the best interest of long-term investors, there isn’t always agreement about what that looks like in practice. Still, it’s legitimate for investors to expect their asset managers to meet the highest standards. These best practices can serve as a guide.

Read the full research paper “Passive Fund Providers Take an Active Approach to Investment Stewardship."

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