Stewardship entails the responsible supervision and administration of assets, aimed at serving the ultimate beneficiaries or clients of institutional investors. These institutional investors function as both asset owners and asset managers, holding equity and debt stakes in Public Listed Companies.
Asset owners refer to collective investment vehicles that pool funds on behalf of their beneficiaries or clients and manage those funds either internally or externally. This category includes pension funds, private pension scheme providers, insurance companies, takaful operators, and investment funds.
On the other hand, Asset Managers act as representatives of asset owners, offering fund management and various investment services on a commercial basis under an investment management agreement or the governing documents of individual investment funds. Often, asset managers also serve as stewards or nominees for the asset owners.
Application of the code
The Code aims to reinforce the implementation of the Corporate Governance Code to ensure listed companies comply with corporate governance requirements. In cases of controlling foreign ownership by multinationals, the controlling owner plays a crucial role in stewardship discussions to balance the interests of the global multinational with those of minority shareholders through a licensed exchange in Kenya.
Stewardship, in the investment context, involves institutional investors (both asset owners and asset managers) actively and responsibly exercising ownership rights as part of their fiduciary duty to their clients. The Code codifies key responsibilities of institutional investors with ownership rights and provides guidance on how they act as responsible stewards overseeing issuers. It also highlights the commitment of institutional investors to address these responsibilities.
While listed companies are not Code signatories, they play a role in making the Code effective by cooperating with institutional investors, especially in the engagement process, and respecting shareholder rights.
For the “apply or explain” system to be effective, issuers’ explanations for not applying the Corporate Governance Code must be well-reasoned, convincing, and provide acceptable governance arrangements. Institutional investors are responsible for monitoring issuer non-application and using ownership rights to challenge issuers when necessary. The Code serves as a market-based system for holding issuers accountable for their corporate governance practices.
The signatories of the Code commit to either applying its principles in their investment practices or providing explanations for non-adherence. These statements must be publicly displayed on the institutional investor’s website and the Authority’s website.
Principles of the Stewardship Code
The Stewardship Code is built upon seven fundamental principles that guide institutional investors in their role as responsible stewards of the assets they manage. These principles aim to enhance the overall effectiveness of the investment process while considering the interests of clients and beneficiaries. Let’s delve into each of these principles:
(a) Stewardship or Responsible Investment Policies:
This principle emphasizes the importance of having well-defined and transparent stewardship or responsible investment policies in place. These policies outline the investors’ commitment to act responsibly, exercise ownership rights diligently, and consider environmental, social, and ethical factors when making investment decisions.
(b) Monitoring Companies Held in Investment Portfolios:
Institutional investors are expected to actively monitor the companies in which they hold investments. This involves conducting regular assessments of the companies’ performance, governance practices, and adherence to sustainable and ethical standards. Monitoring enables investors to stay informed about the companies’ activities and make informed decisions.
(c) Active and Informed Voting Practices:
Voting is a crucial aspect of stewardship, as institutional investors often have voting rights in the companies they invest in. This principle emphasizes the importance of active and informed voting during shareholder meetings. Investors should exercise their voting rights responsibly, considering the best interests of their clients and beneficiaries.
(d) Engagement, Escalation, and Collaboration with Other Institutional Investors:
Stewardship goes beyond passive investment; it involves proactive engagement with the companies in which investors hold stakes. This principle encourages institutional investors to engage in constructive dialogues with company management to address governance concerns, sustainability issues, and other relevant matters. If necessary, investors should escalate their concerns and, when appropriate, collaborate with other like-minded investors to amplify their impact.
(e) Conflicts of Interest:
Conflicts of interest can compromise the objectivity and integrity of stewardship practices. This principle stresses the need for institutional investors to identify and manage potential conflicts of interest effectively. Investors must act in the best interests of their clients and beneficiaries, ensuring that conflicts are appropriately disclosed and mitigated.
(f) Focus on Sustainability Issues, Including Environmental, Social, and Ethical Factors:
Sustainability has become a significant consideration in the investment landscape. This principle urges institutional investors to integrate environmental, social, and ethical factors into their investment analysis and decision-making processes. By focusing on sustainability issues, investors can promote long-term value creation and contribute to positive societal and environmental impacts.
(g) Public Disclosures and Client Reporting:
Transparency is a key element of responsible stewardship. This principle calls for institutional investors to provide clear and comprehensive public disclosures regarding their stewardship activities, policies, and voting practices. Additionally, investors should communicate relevant information to their clients and beneficiaries, keeping them informed about the actions taken on their behalf.
By adhering to these core principles, institutional investors can foster responsible and sustainable investment practices, contributing to the overall health and stability of the financial markets and supporting the interests of their clients and beneficiaries.