Informing the investor community


Informing the investor community Ethical BoardroomBy Andrew Ninian Director of Corporate Governance and Engagement at The Investment Association



The way that UK companies are being run is under the spotlight more than ever before.

Gone are the days when corporate governance issues – from executive pay to environmental and social matters – were esoteric topics exclusively scrutinised in the pink pages of the national press.

Alongside the media fervour is an increased regulatory and political focus on UK companies post the financial crisis of 2008, to ensure that they are acting in the best interests of their customers, shareholders and wider society.

This pressure has also raised questions about how institutional investors engage with the companies they own on behalf of their clients and whether they actively hold them to account.

The investor’s role

The UK’s investment industry collectively manages more than £5.5 trillion of assets and holds around a third of the UK equity market. Therefore, the fund management industry plays a huge role in ensuring higher standards of UK corporate governance and it is vital that it has all the information it needs to do so at its finger tips.

As the trade association representing the entire breadth of the UK’s investment community, The Investment Association (IA) provides a range of services and products to help our members highlight to companies the issues of importance as well as how companies are responding and operating in this space.

At the heart of this work is the Institutional Voting Information Service (IVIS).

What is IVIS? 

IVIS essentially does what it says on the tin – it provides information to institutional investors, which we believe they should consider prior to voting.

It conducts in-depth research of UK-listed company annual reports, analysing the key issues that investors should be aware of.  It is different to other corporate governance research providers as it does not provide directed voting advice, instead highlighting issues or concerns for subscribers to consider.

Off the back of this research, IVIS produces reports designed to be a ‘one-stop-shop’ –providing investors with all of the information they need ahead of voting at an annual general meeting (AGM) and to help shape their views of the companies they own on behalf of their clients.

The reports are broken down into three key areas: the proxy report, the corporate governance report and the environmental, social and governance (ESG) Report.

The proxy report offers a comprehensive commentary on the resolutions that are to be proposed at a general meeting. This allows investors to have a clear and concise breakdown of what the key areas of consideration are, ahead of them voting at an AGM on issues, such as executive remuneration and share capital management.

The corporate governance report covers board and committee composition, particularly considering issues around director independence and a company’s adherence to the UK corporate governance code. It also outlines information on auditor tenure and the level of audit and non-audit fees.

ESG reports look at whether companies are appropriately reporting on how they are addressing and embracing ESG issues. These reports are given a rating in line with the recommendations of our own guidelines on responsible investment disclosure.

These guidelines outline that boards need to take account of the significance of ESG matters and that annual reports must clearly summarise the ESG-related risks and opportunities that may significantly affect the company’s short- and long-term value and how they might impact on the future of the business.

IVIS upholds the views and expectations that Investment Association members have of UK companies through a set of principles and guidelines. As well as the responsible investment disclosure guidelines, we also publish principles around executive remuneration and share capital management. All of our principles and guidelines are updated yearly to ensure that they continue to resonate with the market.

Along with the Financial Reporting Council’s UK corporate governance code, our principles act as the foundation of every report’s findings and they allow us to be independent and objective in the way that we assess companies we cover.

The scope of the service is not limited to just the big name companies of the FTSE 100, it produces more than 750 reports every year examining all AGMs and general meetings for companies in the FTSE All Share Index as well as the top 50 companies in the FTSE Fledgling Index.

Who is IVIS for?

The service is of most significance to the UK and international investment community as it does the groundwork and helps investors analyse corporate governance disclosures and exercise their voting rights.

It is also available to advisory firms, such as lawyers, consultants and public relations agencies and allows them to keep up to date on market sentiment relating to their clients and their competitors.

The reasoned voice

Through our membership we have an in-depth understanding of the concerns of both shareholders and companies themselves and, therefore, are able to have our finger on the pulse of the key issues that investors are most interested in.

Our principle-based approach enables us to act as the ‘reasoned voice’ in the market by giving unbiased analysis of the issues at play.

Investors quite rightly have differing views on the companies they hold and we wish to inform, rather than impose on them, how they vote at company meetings.

We therefore do not issue direct voting recommendations. Instead, we highlight key issues and breaches of best practice through our unique colour coding system. This gives us flexibility in our dealings with companies and the ability to consider well-reasoned arguments.

The proxy report and the corporate governance code report are each issued with a colour code or ‘top’ which helps to highlight the severity of issues to be considered.

The colour showing the strongest concern is red, followed by amber which raises awareness of particular elements of the report. A blue ‘topped’ report indicates no areas of major concern, while a green coded report indicates an issue that has now been resolved.  Red and amber tops typically account for 40 per cent of the reports published on an annual basis. Some of this year’s most notable examples would include the likes of Shire PLC, Weir Group, CRH and Smith and Nephew. 

Leading change

Voting at AGMs is only one weapon in an investor’s arsenal that can help push for positive change in the governance space. One could argue that voting against proposals or practices is a last resort as it often means that companies have not listened or understood investor concerns.

Alongside the IVIS service, the IA works with both companies and their shareholders to enhance the corporate governance standards in the UK.

“The IA’s productivity action plan outlines how we as investors can play a pivotal role in rebuilding the country’s economic foundations by encouraging more long-term investment”

We have regular meetings with companies of all shapes and sizes to discuss areas of interest to the fund management community.

If our membership feels that our voice is not being heard behind closed doors, we often send an open letter to company chairs to publicly hit home the issues that shareholders wish to see addressed.

For example, last year the industry called for improvements to the way in which bonuses are disclosed by UK companies. We issued a warning to companies that do not provide comprehensive disclosure around the awarding of bonuses that they would receive a red top alert from IVIS and to expect shareholder disapproval.

We are pleased to say that this has resulted in progress this year and investors are now enjoying greater levels of transparency around the performance achieved for the award of variable pay.

We have also embarked on a project to revolutionise the productivity of UK companies and the economy as a whole.

Our productivity action plan outlines how we as investors can play a pivotal role in rebuilding the country’s economic foundations for a better future by encouraging more long-term investment.

One of the major recommendations of the project is that UK-listed companies should no longer report on a quarterly basis.

We believe that this will shift companies’ mindsets from short-term goals and aspirations and refocus company reporting to a broader range of strategic issues that mean the most to long-term investors.

The action plan is a more diverse piece of work than solely concentrating on corporate governance issues, but it seeks to act as a blueprint for how the investment industry can improve how UK companies and the wider economy operate. The investment industry is leading the charge.

About the Author:

Andrew is responsible for representing Investment Association member interests as institutional investors on corporate governance and engagement matters. He has oversight of The Investment Association’s Institutional Voting Information Service (IVIS), corporate governance policy development and company consultations or collective engagement with the companies in which The Investment Association members invest.