Towards Shareholder Stewardship

By Adrian Chan

The Business Times, 7 November 2016

Who should be responsible for the corporate governance of a company?
Invariably, the answers that are given to this question include the board of the company, its management, and maybe even the regulators. Rarely are the shareholders mentioned. This is largely because, whilst they enjoy voting and economic rights as part-owners of the company, they owe no legal duty to act in the best interest of the company. In fact they can (and often do) act mainly in their own personal interests, sometimes at the expense of the interest of other stakeholders.

That position is changing.

The shareholder stewardship movement

Across the world, investors – institutional investors, especially, because they are seen to have the means and clout – are being asked to take up the mantle of responsibility to uphold good governance in the companies they invest in, and to provide stewardship to these boards, the better to secure the latter’s long-term performance.

The United Kingdom was the first to take a step in this direction in 2010 when its Financial Reporting Council released the UK Stewardship Code.

Since then, various jurisdictions in Europe, Africa and North America have gone down the same path. In Asia, Japan followed suit in 2014, Malaysia later that year, Hong Kong in 2016, and earlier this year Taiwan released a public consultation paper on the matter.

The SID was one of the first to call for a stewardship code to provide guidance to institutional investors in Singapore on the matter (Business Times, 4 July 2014, “Time for a Stewardship Code for Singapore”). The good news is that the Singapore Stewardship Principles (SSP) for Responsible Investors was officially launched on 2 November 2016.

Stewardship principles

The SSP is a set of principles intended to encourage investors to voluntarily pursue the spirit of stewardship and good governance vis-à-vis investee companies. In particular, they empower investors to be active and responsible shareholders by articulating the ways in which their stewardship activities can relate to boards and management of investee companies.

The SSP comprise seven broad principles that exhort responsible investors to:

1. Establish and articulate their policies on their stewardship responsibilities.
2. Communicate regularly and effectively with their investee companies.
3. Actively monitor their investee companies.
4. Make known their approach to managing conflicts of interest.
5. Establish clear policies on voting and exercise their voting rights in a responsible fashion.
6. Document and provide relevant updates on their stewardship activities.
7. Be willing to engage responsibly with one another where appropriate.

Institutional investors as stewards

Very broadly, the SSP apply to institutional investors who are asset owners or asset managers. The former group provides capital to investee companies; whilst the latter do not own the assets, yet are, in effect, stewards who are entrusted with the assets under management by their clients. Both groups are instrumental in fostering effective stewardship between investors and investee companies.

Investors may choose to outsource some of their stewardship activities to external service providers such as proxy advisors and investment consultants, but they remain responsible for ensuring that these activities are carried out in a manner consistent with their own approach as embodied by the SSP.

Voluntary principles

The SSP do not constitute an enforceable code, nor rigid rules to be enforced, nor are they prescriptive measures. Instead, they represent a broad set of principles that investors may voluntarily adopt in diverse contexts. Indeed, each investor’s level, and extent, of commitment to the SSP is a personal and voluntary matter.

And unlike the prescriptive approach adopted for the UK and HK stewardship codes, or even the Singapore Code of Corporate Governance that applies to listed companies, the SSP are not intended to have any binding force nor are they to be followed on a “comply or explain” basis.

Stakeholders of the SSP

Whilst both the Code of Corporate Governance, and the Code of Governance for Charities and IPCs are products of government-led initiatives, the genesis of the SSP lies in the combined efforts of a working group of over ten industry associations and stakeholders including the SID, led by the Stewardship Asia Centre, and supported by regulators such as the SGX and the MAS.

Indeed, the SSP are a good example of a grass-roots initiative that demonstrates how the various stakeholders in Singapore can collaborate to effect worthwhile change. Moving forward, a steering committee will be formed amongst the original working group members to continue to promote and administer the SSP.

A timely introduction

There is a trend towards more fragmented ownership of listed companies today, with many shareholders holding a small proportion of shares. Coupled with increasingly shorter shareholding tenures, the value of being an owner is arguably being eroded and replaced by a prevalent short-term view of investment and portfolio management.

These imbalances in the corporate eco-system are partly addressed by the SSP. The SSP represent a timely recognition that shareholders, especially institutional investors, have an important stewardship responsibility to uphold good governance in the companies that they invest in.

Adrian Chan is the Deputy Chairman of the Advocacy and Research Committee of the Singapore Institute of Directors.