Last month, the Canadian Coalition for Good Governance (CCGG) published its new Stewardship Principles paper designed to assist institutional investors fulfil their responsibilities to their beneficiaries or clients and enhance the value of their investments. The principles reflect what the CCGG believes are appropriate stewardship responsibilities for institutions investing in Canadian public equities and are directed to both asset owners and asset managers. While it is not the institutional investor’s role to manage the public companies in which it invests, in order to fulfil its role as fiduciary to its beneficiaries and clients, the CCGG believes an institutional investor has a responsibility to exercise voting rights, monitor board oversight and engage with companies on matters that might have an impact on the company’s value. The CCGG intends that the principles be used as a guide only, acknowledging that how the principles are implemented will depend on the nature of the institutional investor’s business model and relationship with its beneficiaries or clients. Below is a summary of the principles:

Principle 1 – Develop an approach to stewardship

It is advised that institutional investors integrate stewardship into its regular investing process, which may include providing a procedure for voting proxies, engaging with companies, reporting to beneficiaries or clients, managing potential conflicts of interest, aligning compensation with stewardship principles and outsourcing stewardship responsibilities. This should be supplemented by disclosure of the stewardship plan to clients and beneficiaries. Disclosing the plan creates accountability and can include reporting results and progress and explaining to clients and beneficiaries how following the stewardship plan leads to enhanced value.

Principle 2 – Monitor companies

It is recommended that institutional investors monitor the companies in which they invest in so as to mitigate risk and enhance value. Monitoring can take a variety of forms, including, reviewing public disclosures, engaging with portfolio companies, obtaining third party research or analysis and sharing research and information with other investors or investor groups.

Principle 3 – Report on voting activities

Institutional investors should adopt and periodically report to beneficiaries and clients their proxy voting guidelines and how voting rights are exercised. Voting decisions should be informed, independent, in line with the institutional investor’s voting policies and ultimately in the best interests of beneficiaries or clients. This may require that institutional investors obtain advice from proxy advisors, which advice should be assessed rigorously.

Principle 4 – Engage with companies

Thoughtful engagement with portfolio companies is strongly encouraged to discuss investor concerns. Institutional investors should consider how and when to escalate engagement activities if a board is unresponsive to any concerns expressed. There is a range of escalation activities that could be undertaken when a concern is not sufficiently addressed, including, speaking at shareholder meetings, making public statements, voting against or withholding votes from directors or requisitioning a special shareholders meeting to address specific concerns.

Principle 5 – Collaborate with other institutional investors

Collaboration is viewed by the CCGG as beneficial to both investors and the companies they invest in as it allows for the globalization of good governance practices and provides a greater understanding of the various viewpoints at play.

Principle 6 – Work with policy makers

It is advised that institutional investors engage with regulators and other policy makers where appropriate, to ensure that the shareholder perspective is considered when new laws and policies are being developed.

Principle 7 – Focus on long-term sustainable value

Institutional investors should focus on a company’s long-term success and sustainable value creation rather than short term considerations. To achieve this, institutional investors should develop an understanding of each portfolio company’s strategy and understand the risks and opportunities associated with the economic, political, social and regulatory environment.

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The author would like to thank Travis Bertrand, Summer Student, for his assistance in preparing this legal update.