Chapter 5 Guidelines for Compliance with Principles
The following guidelines are references for signatories to comply with the six principles set forth under Chapter 4.
Principle 1 Establish and disclose stewardship policies
When establishing stewardship policies, an institutional investor is advised to contemplate its role in an investment chain, its nature of business and how to protect rights and benefits of its clients and beneficiaries.
Disclosure of stewardship policies is advised to at least include the following:
- A brief introduction of business;
- Duties to clients or beneficiaries;
- Stewardship activities, e.g. frequency and methods of monitoring investee companies, interaction with management, participation in shareholders' meetings and voting;
- Status and management measures of outsourcing stewardship activities;
- Manner and frequency of status disclosure of stewardship fulfilment.
Principle 2 Establish and disclose policies on managing conflicts of interest
A policy on managing conflicts of interest aims to ensure that an institutional investor operates in the interests of its clients or beneficiaries.
A policy on managing conflicts of interest is advised to at least include the following:
- Possible situations of conflicts of interest;
- How conflicts of interest in each situation are managed.
Situations of conflicts of interest may include the following:
- Where an institutional investor, for its own benefits, makes a decision or carries out an activity to the disadvantage of clients or beneficiaries.
- Where an institutional investor, for benefits of certain clients or beneficiaries, makes a decision or carries out an activity to the disadvantage of other clients, beneficiaries or stakeholders.
Measures of managing conflicts of interest may include training, delegation of duties, information security, firewalls, control mechanisms regarding detection and monitoring, reasonable remuneration policies, and remedial measures.
An institutional investor is advised to consolidate and explain to clients or beneficiaries, either regularly or when considered necessary, about causes and handling measures for major incidents of conflicts of interest which have taken place.
Principle 3 Regularly monitor investee companies
The purpose of monitoring investee companies is such that impacts of relevant information on long-term values of investee companies, clients or beneficiaries may be assessed, so that an institutional investor's manner and time of further dialogue and interaction with the investee companies can be determined. It may also form a reference for future investment decisions.
In determining the content, extent and frequency of monitoring investee companies, an institutional investor is advised to consider its purposes of investment, cost and benefits. Information such as industry profile, opportunities and risks, shareholding structure, operational strategies, business profile, financial position, results of operation, cash flow, stock price, environmental impacts, social issues and corporate governance may be monitored.
Principle 4 Maintain an appropriate dialogue and interaction with investee companies
The purpose of an institutional investor's dialogue and interaction with investee companies is such that it may better understand the views of management of the investee companies regarding material issues and obtain mutual feedback, so as to strengthen corporate governance.
An institutional investor is advised to determine the manner and time of dialogue and interaction with investee companies by taking its purpose, cost and benefits of the investment and significance of particular issues of concern to it into account. The manners of dialogue and interaction between an institutional investor and its investee company may include the following:
- Written or verbal communications with management;
- Public statements on specific issues;
- Expression of opinions at shareholders' meetings;
- Submitting motions at shareholders' meetings;
- Casting votes at shareholders' meetings.
Under circumstances where an institutional investor judges it necessary to take action, it may act collectively with other institutional investors, so as to protect the rights and interests of clients or beneficiaries.
Principle 5 Establish clear voting policies and disclose voting results
The purpose that an institutional investor exercises its voting right is to express opinion on each motion at a shareholder's meeting of investee companies. Specifically, the institutional investor is advised to carefully exercise voting rights of stocks it holds or manages in relation to motions which have significant impacts on rights and benefits of its clients and beneficiaries.
Voting rights shall be exercised based on information obtained from investee companies by taking long-term joint interests of clients, beneficiaries and investee companies into account. An institutional investor shall not always vote in favor of, against or abstain from motions, but shall judge each motion individually. Voting rights shall be exercised objectively even in the case where a voting recommendation report has been obtained from a proxy advisory firm.
A voting policy may include the following:
- Threshold for exercising voting rights as determined in contemplation of cost and benefit. For instance, voting rights will only be exercised if shareholding reaches a certain percentage or amount;
- To the best of an institutional investors' ability, prudently evaluate each motion of a shareholders' meeting before casting votes and communicate in advance with the management of an investee company when necessary;
- Define types of motions which an institutional investor may support, oppose to or may only deliver its abstention from in principle;
- A statement that an institutional investor does not necessarily support motions proposed by management;
- Extent to which an institutional investor obtains and adopts voting recommendation reports made by proxy advisory firms;
An institutional investor is advised to carefully record and analyze voting rights exercised in accordance with relevant policies, so as to facilitate disclosure of the voting activities, which may be disclosed in aggregate. For instance, votes cast in favor, against or abstaining from various types of motions made by investee companies.
Principle 6 Periodically disclose to clients or beneficiaries about status of fulfilment of stewardship responsibilities
An institutional investor is advised to carefully record its stewardship activities to form a basis of assessment and improvement for its stewardship policy, action and disclosure.
When regularly disclosing to its clients or beneficiaries a status of its fulfilment of stewardship duty according to agreement with or request of its clients or beneficiaries, an institutional investor may disclose relevant information may be made in written, electronic or any other form which can be easily accessible and readable.
Under a situation where clients and beneficiaries are vast in number or the provision of status of fulfilment of stewardship duty is not specified in an agreement, an institutional investor is advised to disclose its stewardship activities annually on its website or in its reports such as business report and annual report. The content is advised to include:
- A statement on "Stewardship Principles for Institutional Investors" and explanations for non-compliance with certain principles;
- Attendance in person or by proxy at shareholders' meetings of an investee company;
- Voting activities (as specified under Guideline 5-4);
- Contact channel for stakeholders such as clients, beneficiaries, investee companies or other institutional investors to reach a signatory;
- Other material events (e.g. dialogue and interaction with an investee company or relevant opinions and actions on special events).
If investment or stewardship activities are not directly performed by a signatory, for instance where management of a fund is fully entrusted to an asset manager by an asset owner, measures taken to ensure the trustee's compliance with a stewardship policy is advised to be explained when disclosing the stewardship activities to the clients or beneficiaries.