Originally published in Investment Magazine (December 2017) 

In late November, we published a new edition of the ACSI Governance Guidelines. The Guidelines represent our members’ expectations of governance practices at the companies they invest in. Although primarily directed at listed companies, the Guidelines are an important resource for asset managers and owners.

Good governance matters

It is well-established that good governance correlates with stronger financial returns and reduces exposure to risk. You don’t have to look much further than Australia’s scandal plagued banking sector to see the impact of governance failures on company sustainability and community sentiment.

So it’s vital that asset managers are familiar with and apply a framework for evaluating corporate governance. Equally, if you’re an asset owner or institutional investor, it’s important to have a conversation with your asset managers about how they integrate governance considerations into their investment decisions.

ACSI Governance Guidelines

The ACSI Governance Guidelines articulate the issues we focus on in our engagement work and the factors we consider in determining our voting recommendations. Every two years we revise them to reflect the evolving governance landscape. Since March, we have been working with our members to update the Guidelines and have also sought feedback from other stakeholders.

Our members rely on internal and external asset managers to make investment decisions for them. They expect these decisions to reflect their organisation’s overall values and strategy. Among these, is their commitment to upholding good governance standards – the standards set out in our Guidelines.

Using the Guidelines

We think the Guidelines are an important resource for all asset managers, whether associated with an ACSI member or not. We have been publishing the Guidelines since 2003, and they incorporate more than fourteen years’ accumulated governance expertise from ACSI and our members.

The Guidelines offer a unique insight into how large investors reach their voting decisions. They focus on governance issues which are of the greatest material concern to our members. These are likely to be relevant to most large investors with long-term horizons. Break-out boxes within the text highlight factors we consider when making our voting recommendations.

As a guide, when assessing an individual company’s performance against the Guidelines, we take a pragmatic and commercial approach that considers specific circumstances of the company. We consider a broad range of factors including the materiality of the issue, the context in which the issue arises and the size of the company. We also consider the length of time over which shortcomings occurred, any history of dialogue with the company, and whether there have been any improvements in company behaviour.

What’s new in this edition

In this edition of the Guidelines, we have spelled out increased responsibilities on directors for ESG oversight. To assist directors with meeting these, we have included a new chapter on managing ESG risks and opportunities which provides practical guidance on four key themes:

  • climate change
  • labour and human rights
  • corporate culture
  • tax disclosure

We identify sources of investment risk and opportunity for each theme and state what we expect companies to do to manage these impacts. This analysis may also be helpful for asset managers and owners.

Throughout the Guidelines, we have expanded on the factors we consider when making our voting recommendations. Other new or expanded topics include:

  • Remuneration: added factors to consider in the design of remuneration arrangements.
  • Gender diversity: how we will progress our voting policy to support a 30% target for women on boards.
  • Shareholder resolutions: factors we consider when evaluating shareholder resolutions.
  • Chairperson workload: our expectations for managing the chair’s capacity and other commitments.
  • Director tenure: encouraging companies with long serving directors to disclose their renewal process.
  • Audit firm services: our expectations for audit firm rotation and other audit firm services.

The ACSI Governance Guidelines can be downloaded from www.acsi.org.au/publications.

 

Louise Davidson, CEO, Australian Council of Superannuation Investors