On January 31, 2017, the Investor Stewardship Group (“ISG”), a newly-created collective of some of the largest U.S.-based institutional investors and global asset managers (including BlackRock, State Street, TIAA, Vanguard and others) published a set of guiding principles for institutional investors aimed at enhanced investment stewardship, as well as a set of core corporate governance principles for U.S. public companies.
The primary purpose of the ISG framework is to:
• Outline the commitment to accountability that institutional investors are making to their clients/beneficiaries and articulate standards that investors will consider when evaluating the companies in which they invest.
• Codify the fundamentals of good corporate governance and establish baseline expectations for U.S. corporations and their institutional shareholders.
• Affirm investment managers’ responsibility for engagement and proxy voting policies and decisions, regardless of how they may use services offered by third parties.
The ISG framework goes into effect on January 1, 2018 to provide U.S. listed companies time to adjust to the corporate governance principles in advance of the 2018 proxy season. While ISG indicates that the corporate governance framework is not intended to be prescriptive, the founding members are encouraging boards to voluntarily adopt the corporate governance practices. Accordingly, as companies prepare for the 2017 proxy season, they may want to integrate some of the concepts of the ISG framework into their shareholder engagement efforts.
Highlights of the framework are as follows:
ISG Stewardship Framework for Institutional Investors:
• Principle A: Institutional investors are accountable to those whose money they invest.
• Principle B: Institutional investors should demonstrate how they evaluate corporate governance factors with respect to the companies in which they invest.
• Principle C: Institutional investors should disclose, in general terms, how they manage potential conflicts of interest that may arise in their proxy voting and engagement activities.
• Principle D: Institutional investors are responsible for proxy voting decisions and should monitor the relevant activities and policies of third parties that advise them on those decisions.
• Principle E: Institutional investors should address and attempt to resolve differences with companies in a constructive and pragmatic manner.
• Principle F: Institutional investors should work together, where appropriate, to encourage the adoption and implementation of the Corporate Governance and Stewardship principles.
ISG Corporate Governance Framework for U.S. Listed Companies:
• Principle 1: Boards are accountable to shareholders.
• Principle 2: Shareholders should be entitled to voting rights in proportion to their economic interest.
• Principle 3: Boards should be responsive to shareholders and be proactive in order to understand their perspectives.
• Principle 4: Boards should have a strong, independent leadership structure.
• Principle 5: Boards should adopt structures and practices that enhance their effectiveness.
• Principle 6: Boards Boards should develop management incentive structures that are aligned with the long-term strategy of the company.