UK Stewardship Code
Wellington management manages assets for institutions located around the world. Our expertise is investment management, and we focus our full resources on meeting the needs of our clients.
Our goal when engaging with company managements and when voting proxies on our clients’ behalf is to support decisions that we believe will maximise the long-term value of securities we hold in client portfolios. This document outlines how we implement our approach with respect to each of the core principles presented by the UK Stewardship Code. Our application of the UK Stewardship Code is a global effort and applies broadly across asset classes when applicable and as appropriate.
Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities.
As a firm with a long history of conducting independent fundamental research, direct engagement with company management teams on a range of issues, including ESG, has always been a core part of our investment process. The majority of our company research is the result of direct contact with company management, both in our offices and on site, as well as contacts with company suppliers, customers and competitors. In 2016, Wellington Management participated in more than 10,000 meetings with company management teams from around the world. Portfolio managers, industry analysts and ESG analysts all take part in our ongoing dialogue with companies. Maintaining this ongoing dialogue is central to how we discharge our stewardship responsibilities on behalf of our clients. The goal of our stewardship activities — engaging with company managements and voting proxies on our clients’ behalf — is to support decisions that we believe will maximise the long-term value of securities we hold in client portfolios.
In order to assist analysts and portfolio managers in fulfilling our stewardship responsibilities, we have a dedicated research team of ESG experts. Our ESG Research team, part of the central investment research function, researches and provides company- and sector-specific ESG analysis and engages directly with company management teams on ESG topics. The team analyzes and executes proxy voting for over 5,000 company meetings annually, and performs portfolio reviews with portfolio managers to identify holdings with the greatest ESG risks and opportunities.
Examples of topics on which we engage with companies include:
1. Climate change: Global climate change poses significant long-term risks to companies in many industries, especially those most exposed to increased regulation, extreme weather and food and water disruptions. Our ESG Research team engages with companies in order to gauge their exposure to climate-related events, assess management’s awareness of this topic, evaluate their risk-management approach, and encourage disclosure practices that adhere to emerging industry standards.
2. Supply chain management: Supply chain issues can cause operational disruptions and/or brand damage, both of which can affect a company’s bottom line. Our ESG Research team engages with company managements to better assess their supply chain risks which could include labor strikes, product quality or safety issues, data-security breaches, natural disasters and geopolitical uncertainty.
3. Executive compensation: We strongly agree with the philosophy of pay for performance and believe that company management teams should be incentivised on clear measures that directly drive the long-term performance of their business. Executive compensation is one of the most frequent topics of engagement with our investee companies, and we may meet with management teams multiple times over the course of a year as they consult with us on improving their pay plans.
Our firm is organised as a collection of portfolio teams — each with its own unique investment philosophy, approach and time horizon; there is no “house view”. Consistent with this structure, each of our portfolio teams develops its own investment approach whereby ESG considerations are integrated into its research and decision-making processes to the extent that it believes these issues may affect the long-term success of a company and investment returns. This can manifest itself within the investment thesis or portfolio weighting for a particular security, as well as within our proxy voting and company engagement efforts. While each portfolio team acts as a fiduciary for its clients, differences in investment philosophy and process across teams means that the emphasis on incorporating ESG factors in the investment decision-making process may vary across investment approaches.
Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.
As a fiduciary, we seek to place the interests of our clients first and to avoid conflicts of interest, including those that arise from voting or engagement issues. Our policies and procedures for managing conflicts of interest in relation to corporate governance issues are contained in our Global Proxy Voting Policy and Guidelines.
Our broadly diversified client base and functional lines of responsibility help to minimise the number of potential conflicts of interest in relation to stewardship, though they cannot prevent such conflicts entirely. We have adopted and implemented policies and procedures that we believe are reasonably designed to manage conflicts if they arise. Annually, our Investment Stewardship Committee reviews and sets standards for identifying material conflicts with respect to proxy voting and corporate engagement — including whether a company is a significant client, lender or vendor of the firm — and publishes those to individuals involved in the proxy voting process. In addition, the Investment Stewardship Committee encourages all personnel to contact the ESG Research team about apparent conflicts of interest, even if the apparent conflict does not meet the published materiality criteria.
Importantly, we do not automatically vote proxies either with management or in accordance with the recommendations of third-party proxy providers. While we employ a third-party vendor to perform administrative tasks related to proxy voting, we vote according to our own Global Proxy Voting Policy and Guidelines. Votes that could have a financial or strategic impact on a company’s performance are analyzed by our ESG Research and investment teams, and each portfolio manager examines and votes each proposal with the goal of maximising the long-term value of securities held in their clients’ portfolios. In 2016, we voted against management on one or more proposals at 34% of the annual general meetings in which we voted on behalf of our clients.
Institutional investors should monitor their investee companies.
As mentioned above, Wellington Management is a firm with a long history of conducting independent fundamental research. Monitoring our investee companies and engaging directly with company managements on a range of issues, including ESG matters, has always been a core part of our investment process. The majority of our company research is the result of direct contact with company management, both in our offices and on site, including contacts with company suppliers, customers and competitors. In 2016, Wellington Management participated in more than 10,000 meetings with company management teams from around the world. Portfolio managers, industry analysts and ESG analysts all take part in our ongoing dialogue with companies and we share information from these engagements with one another using a common research platform. This internal platform allows us to share specific company ratings from our fundamental, credit, quantitative and ESG research teams, along with engagement notes from meetings with company managements. Providing this level of transparency and information sharing across the firm facilitates our ongoing monitoring of, and dialogue with, investee companies and helps us prioritise and focus our monitoring and engagement activity.
Examples of engagement topics include business strategy, capital structure and material ESG issues relevant to the company’s long-term success such as environmental regulation, employee training and development and senior-level succession planning. During our conversations with company managements, we learn about their perspectives and approaches, provide them with feedback on how they can improve and incorporate our findings into our research and ratings. We assess each company relative to its industry and home market peers, and we pay particular attention to its adherence to regional corporate governance codes in our analysis. For example, if a company fails to comply with the UK Corporate Governance Code, we assess the potential impact on the long-term success of the company and may choose to employ our engagement efforts and proxy voting to address the issue with management.
Institutional investors should establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value.
We have not developed prescriptive guidelines for when and how we will escalate our activities. Rather, decisions to escalate are made on a case-by-case basis by our portfolio management and ESG Research teams. The decision to escalate depends on the materiality of the issue, the responsiveness exhibited by the company to past communications and our assessment of whether such engagement is in the best interests of our clients. Our escalation activities can include meeting with company boards, participating in stakeholder dialogues or submitting proxy votes against company management on behalf of our clients. Our Global Proxy Voting Policy and Guidelines describe our practices around voting.
As an example of our escalation activities, we’ve repeatedly engaged with a pharmaceuticals company whose board appeared to be entrenched. The majority of directors had served on the board for more than 10 years and half had been directors for more than 20 years. We explained that the risk to shareholders is that a number of directors could retire in a short period of time, taking with them their deep knowledge and experience. The company responded that it appreciates this risk and has therefore added one director in the last year and will seek others going forward to gradually refresh the board. When we raised the issue of this company’s long-tenured board to our investment teams, they agreed to incorporate it into their analysis and future meeting agendas, since management and board quality are an important piece of the investment thesis on this stock.
Another recent example of escalation is when we supported a management-opposed shareholder proposal after repeated engagements with an energy company proved ineffective. We chose to support a shareholder proposal requesting climate change stress testing after considering our internal ESG research and ratings, results from past engagements with management, and the company’s own greenhouse gas reporting, emissions reductions targets and related management systems and policies. Based on the company’s lack of disclosure on this issue — especially relative to its peers — we view carbon regulation as a potentially unaddressed risk by the board.
Our Global ESG Research Update report, published quarterly and made publicly available on the Insights section of our web site, includes a list of company engagements conducted by our ESG team and statistics summarising proxy voting activity from the previous quarter. The report also includes engagement case studies that provide additional examples of circumstances in which we would be likely to escalate our activities with the intention of protecting and enhancing shareholder value.
Institutional investors should be willing to act collectively with other investors where appropriate.
We are signatories to the UN Principles for Responsible Investment (PRI), the UK Stewardship Code, the Hong Kong Principles of Responsible Ownership, the Japan Stewardship Code, and the Investor Stewardship Group’s Framework for US Stewardship and Governance. We are also members of the International Corporate Governance Network, the Asian Corporate Governance Association, GRESB and the Global Impact Investing Network (GIIN). In addition, Wellington Management engages with a number of other ESG-related initiatives such as the Investor Network on Climate Risk and the UN Global Compact (UNGC).
We cultivate relationships with other asset management firms and broader industry organisations to share insights on corporate governance trends and local market considerations. Due to our firm’s significant presence and long-term track record in nearly all sectors of the global securities markets, we often have direct access to company management teams. We believe this access is highly valuable, given the number of meetings we conduct, the breadth of our contacts and the quality of the dialogue. We often prefer to engage privately with our portfolio companies as we have found this encourages openness and a productive engagement dialogue. When private engagement proves ineffective, however, we are willing to collaborate with other investors when such action would be in our clients’ best interests and is permissible under applicable laws and regulations. Questions related to specific collaboration opportunities can be directed to Carolina San Martin, Director, ESG Research at [email protected].
Institutional investors should have a clear policy on voting and disclosure of voting activity.
Clients often give us discretion to vote proxies on securities held in their accounts. We take the responsibility of proxy voting seriously. We have policies and procedures designed to ensure that we collect and analyse all relevant information for each meeting, apply our proxy voting guidelines accurately and execute the votes in a timely manner. Our policies and procedures are contained in our Global Proxy Voting Policy and Guidelines.
We vote proxies in the best interests of our clients as shareholders and in a manner that we believe maximises the economic value of their holdings. Importantly, we do not automatically vote proxies either with management or in accordance with the recommendations of third-party proxy providers. We vote according to our own Global Proxy Voting Policy and Guidelines, and we employ a third-party vendor to perform administrative tasks related to proxy voting. While our proxy voting guidelines set forth general guidelines for voting proxies, we evaluate each proposal on its merits. The ESG Research team examines each proxy proposal and recommends voting against proposals that we believe would have a negative effect on shareholder rights or the current or future market value of the company’s securities. While the ESG Research team provides proxy voting recommendations, the portfolio manager for the client account has the authority to decide the final vote, absent a material conflict of interest. Each portfolio manager examines and votes each proposal with the goal of maximising the long-term value of securities held in their clients’ portfolios. In 20165, we voted against management on one or more proposals at 34% of the annual general meetings in which we voted on behalf of our clients.
In addition, there is no “house vote”. Our proxy voting system allows different votes to be submitted for the same security. Our firm is organised as a collection of portfolio teams — each with its own unique investment philosophy, approach and time horizon. Consistent with this structure, various portfolio managers holding the same securities may arrive at different voting conclusions for their clients’ proxies.
We do not disclose information about specific proxy votes publicly, but do provide the relevant data to support public disclosure by those clients that are required to do so by law. Our actual votes on behalf of a given client or pool are a matter of record for that client or pool, and are disclosed to the respective party in the reports they are entitled to receive. Summary reporting of our proxy voting activity is included in our Global ESG Research Update, which is published quarterly and made publicly available on the insights section of our web site.
In certain instances, Wellington Management may be unable to vote or may determine not to vote a proxy on behalf of one or more clients. For example, we may be unable to vote proxies when the underlying securities have been lent out pursuant to a client’s securities lending program. In general, Wellington Management does not know when securities have been lent out and are therefore unavailable to be voted. In some circumstances, Wellington Management may recommend that a client attempt to have its custodian recall the security to permit voting of related proxies. However, efforts to recall loaned securities may not always be successful. Another instance when we may refrain from voting is when the cost of voting outweighs the value of the vote. For example, we typically do not vote in share blocking markets, where countries impose trading restrictions or requirements regarding re-registration of securities held in omnibus accounts in order for shareholders to vote a proxy. The consequences of such requirements — including the potential impact on liquidity — are evaluated on a case-by-case basis when determining whether to vote such proxies.
Institutional investors should report periodically on their stewardship and voting activities.
To facilitate our research, engagement and proxy voting activities, the ESG Research team maintains detailed records of our ESG company ratings, engagement notes from meetings with management teams, notifications of recent public controversies and historical proxy voting decisions. Summary metrics regarding our proxy voting and engagement activities, including examples of recent engagements, are published quarterly in our Global ESG Research Update. This report is made publicly available on the insights section of our web site.
We also provide to clients regular reporting of the proxy voting activity we conduct on their behalf. Our record of proxy votes includes the name of the security, meeting date, number of shares voted and how we voted on behalf of each client.
Day-to-day administration of the proxy voting process is the responsibility of the ESG Research team. Annually, Wellington Management engages an independent accounting firm to perform an assessment of controls surrounding our proxy voting process. This assessment is made available to clients.