February 3, 2017

Activism: Major Institutions Sign Up to Fight “Short-Termism”

This Wachtell memo discusses the establishment of the “Investor Stewardship Group” – a formidable coalition of institutions that have agreed on stewardship principles to combat activist pressure to focus on short-term results.  Here’s an excerpt discussing the principles underlying ISG’s Framework for US Stewardship & Governance:

Focused explicitly on combating short-termism, providing a “framework for promoting long-term value creation for U.S. companies and the broader U.S. economy” and promoting “responsible” engagement, the principles are designed to be independent of proxy advisory firm guidelines and may help disintermediate the proxy advisory firms, traditional activist hedge funds and short-term pressures from dictating corporate governance and corporate strategy.

Importantly, the ISG Framework would operate to hold investors, and not just public companies, to a higher standard, rejecting the scorched-earth activist pressure tactics to which public companies have often been subject, and instead requiring investors to “address and attempt to resolve differences with companies in a constructive and pragmatic manner.” In addition, the ISG Framework emphasizes that asset managers and owners are responsible to their ultimate long-term beneficiaries, especially the millions of individual investors whose retirement and long-term savings are held by these funds, and that proxy voting and engagement guidelines of investors should be designed to protect the interests of these long-term clients and beneficiaries.

The ISG Framework also sets forth a corporate governance framework for public companies. The governance principles incorporated into the ISG Framework include board accountability, proportionate voting rights, independent board leadership and incentive structures that align with long-term strategy.

US institutions that have signed on to ISG’s Framework include BlackRock, Vanguard, State Street, T. Rowe Price, CALSTRs, Florida State Board of Administration & The Washington State Investment Board.  Foreign institutions include Singapore’s Sovereign Wealth Fund & The Royal Bank of Canada. Ultimately, ISG seeks to have “every institutional investor and asset management firm investing in the U.S.” sign the framework and incorporate the stewardship principles in their proxy voting, engagement guidelines and practices.

The ISG Framework is intended to apply to the 2018 proxy season, but Wachtell recommends that companies incorporate its themes into their investor communications and benchmark their disclosures and practices to the Framework now.

John Jenkins