Manifest and strategic partners GES Investment this week submitted their joint Stewardship Code disclosure to the UK’s Financial Reporting Council.

Here is the full text of our Stewardship Code Disclosure, together with a PDF copy:
Manifest Stewardship Code Disclosure 2010

Introduction

Manifest is a UK-based provider of corporate governance research and electronic proxy voting solutions to institutional investors. Through our partnership with ProxyGovernance Inc (PGI) in the United States, and GES Investment Services in Sweden, Manifest and its associates serve the ESG (Environmental, Social & Governance) management needs of some of the world’s largest and most demanding institutional investors.

Since the formation of the business in 1995, Manifest has been committed to best execution in corporate governance. We address this through the provision of straight-through electronic voting solutions from investor desktop directly to the vote tabulator without unnecessary hops through the chain of intermediaries. Combined with our independent, objective and conflict-free research, this enables investors to fulfil their ownership responsibilities on a fully-informed basis. The name of our company, “The Manifest Voting Agency Ltd”, reflects the proposition that our duty to customers is to ensure the accurate translation of their policies into action, in that regard we are not a voting principal. We are a facilitator, not an agitator.

Manifest is unique in that it does not provide “one size fits all” voting recommendations. Instead, we have a very detailed policy model which generates bespoke advice specific to each investor. Our approach is to work closely with customers to ensure that their tailored vote recommendations are consistent with their investment views so that they can take ownership of their voting decisions based on the best possible research and advice.

Manifest has a long-standing commitment to protecting shareholders’ rights and has worked closely with regulators around the world to push back the barriers to informed voting. Manifest has long advocated the need for a radical overhaul of the out-dated voting infrastructures which are a barrier to company/investor communications. Manifest was the first voting service provider to develop open electronic voting standards which we see as an essential enabler of corporate democracy.

While the press may variously describe all proxy voting advisors as “shareholder bodies”, “lobby groups” or “shareholder activists” this is to misunderstand the role of a proxy advisor. Manifest is wholly independent, it is not a trade association, (nor is affiliated to any), nor is it an NGO or lobby group. It is a commercial information business whose fee income is derived solely from customer subscriptions. It is our customers, institutional investors, which own companies – not Manifest.

In recent years there has been increased disquiet about the “undue influence” of proxy advisors. This concern may have been promoted by companies who are uncomfortable under the gaze of increased scrutiny, in which case one would naturally tend to down play those concerns. And in any event, it misses the point. Proxy advisors are not the owners and, like Manifest, should only play a supporting role in the Stewardship process.

Perhaps a more legitimate line of questioning should be why do the views of asset owners appear to be placed below those of proxy advisors? Why have some asset owners preferred not to take a view on stewardship issues? Very importantly, there should, we believe, be greater concern about the lack of diversity of views in the proxy advisory market. Why has that arisen? What are the market factors at play which have encouraged a “one size fits all” conformance? We note that these are not problems solely associated with the proxy advice market; mainstream investment research equally suffers from a lack of analyst coverage and diversity.

We therefore welcome the development of the UK Stewardship Code and look forward to active participation in promoting the underlying principles the Code stands for. No doubt there will be doubters and critics who will see it as promoting a box-ticking, compliance culture rather than embedding Stewardship in the long-term investment horizon. What we have seen since the launch of the Cadbury Code is that this will be an evolutionary process, mistakes will be made, however the intentions of the many committed intrinsic owners will play a part in ensuring that the UK Stewardship Code becomes a model for global investors and regulators. We look forward to participating in the ongoing dialogue.

Manifest’s UK Stewardship Code Disclosure follows the key Principles of the Code and we have answered where we feel that our role directly impacts the operation of the Code.

Principle 1: Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities.

• Although our roots are in the coverage of UK-quoted companies, Manifest has been offering global research since 2005 and now covers in the region of 85% of the world’s free-float adjusted market capitalisation.
•  Irrespective of location, our research policy is to analyse companies with regards to their local listing standards, company law and best practice guidelines. This means that, for example, in the United Kingdom we would take account of inter-alia:

· UK Companies Act
· UK Listing Rules
· The UK Governance Code
· QCA Guidelines
· ISC Principles
· NAPF Guidelines
· ABI Guidelines

• Our customers will have their own specific investment and voting guidelines which we are able to support to the extent that corresponding disclosures are available.
• Manifest is not the owner of the companies under review and so we do not seek to “intervene” in the governance structures. We will, however, request clarification of public disclosures wherever practicable to ensure that our analysis takes account of all pertinent information. We will also support those customers requiring assistance with intervention.
• We strongly encourage our customers to look beyond the AGM season and integrate our research into their wider stock selection and monitoring processes.
• Manifest very much welcomes the inclusion of guidance on the use of voting advisory services in the Stewardship Code. We have long-standing reservations about suggestions of auto-pilot box-ticking by institutional investors and hope that these disclosures will bring much needed transparency and subsequent understanding of how voting decisions are made.
• Some investors have felt a pressure to vote at all costs in order to meet the compliance requirements of underlying clients. In some markets there has been a move towards prescribing mandatory voting. Regrettably such regulations have not necessarily focussed on the need for “quality of voting”. We hope that the Stewardship Code will act as a positive catalyst for wider, global reform which encourages a move away from high volume box-ticking.
• The UK Corporate Governance code is one of the key threads of our UK research policy. We consider company explanations very carefully; however we are disappointed by the boiler plate nature of many disclosures. While the volume of disclosure has increased in recent years, it cannot be said that this has always led to an improvement in the user friendliness of reporting. Rather than accounts of stewardship to the owners, annual reports have become multi-purpose marketing documents where “design values” appear to take precedence over content.
• We will always seek clarification from companies where we think a disclosure is ambiguous. Our research is based on the information made available to all shareholders at the time of the AGM notice and we are concerned about partial disclosures/consultations made to some advisors and not to others. If information is considered sufficiently important to be selectively disclosed it should be disclosed to all interested parties so that they can make an equally informed judgement.
• By the same token, companies must understand that while consultation with some shareholders or their trade association may give them insight from one group, this does not automatically endow universal acceptance by all shareholders. We believe that governance research is no different to sell side research where a diversity of views appears to have greater acceptance.
• In terms of Manifest’s operational relationship with Proxy Governance Inc (PGI), the team at PGI uses Manifest’s research as a basis for a recommendations-based service. As such we feel it is appropriate to incorporate the relevant extract from their Policy and Analysis Methodology:

Overview

–  Proxy Governance (PGI) was established to bring a new and more constructive perspective to corporate governance and proxy voting. Rather than viewing corporate governance as an end in and of itself, PGI believes corporate governance is better viewed as a set of tools available to boards, management and shareowners to help ensure stronger, long-term corporate performance and responsibility.

–  PGI’s policies are reviewed and updated annually. PGI regularly monitors corporate governance and proxy voting trends, regulatory changes and market developments. In addition, we meet with major shareholder proponents and issuers to discuss new proposals and initiatives — and obtain outside expertise where needed, including from academia, corporations, institutional investors, and law firms.

Recommendations on an Issue-By-Company Basis

–  PGI’s approach to enhancing overall corporate value growth through effective proxy voting relies on analysis and recommendations that are developed on an issue-by-company basis, rather than an issue-by-issue basis.

–  Issue-by-issue analysis assumes that a specific set of corporate governance initiatives is, or is not, inherently beneficial to shareholders and that a specific recommendation for a particular issue should be applied across-the-board. This one-size-fits-all approach, however, frequently results in a lack of focus on issues that genuinely impact long-term shareholder value and, as a result, disadvantages shareholders.

–  Broadly speaking, PGI supports proposals that enhance shareholder value, protect corporate reputations or result in the disclosure of potential risks or liabilities that could have a significant impact on the company or its investors. We believe our case-by-case approach reflects the complexities of the business environment and is more likely to result in sustained strong corporate governance practices that offer long-term shareholder value.

Principle 2: Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.

• Manifest is committed to the concept of voting and stewardship activities as a “Fiduciary Act” and all that entails. Historically the primacy of “The Market” has meant that the expense of buying and selling shares has been seen to offer better value than an engagement strategy. While in the short-term this might be true, in the long term the jury is still out as to whether walking is cheaper than talking.
• Manifest is concerned about the conflicts of interest present in the voting chain of intermediaries and the impact on best execution for investors. High quality engagement, dialogue and voting can be let down at the last minute by processes and systems which are opaque and lack robustness. Despite the introduction of the Shareholder Rights Directive we still find substantial evidence of intermediaries unwilling to facilitate proper exercise of shareholders’ property rights. We look forward to working with the FRC, Department of Business, Industry and Skills and European Commission as well as wider industry groups to address these concerns.
• Manifest does not accept fee income for consultancy or advice from quoted companies – this greatly minimises the opportunity for conflicts of interest. Research on quoted clients is conducted in the same way as non-clients would be.
• Manifest’s research team is required to conduct their research in accordance with the CFA’s Research Objectivity Standards^© [1].

Principle 3: Institutional investors should monitor their investee companies.

• Manifest offers a range of services and support tools to enable investors to meet this Principle.

Principle 4: Institutional investors should establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value.

• Manifest invests considerable time and effort in promoting and enhancing shareholder rights at both the regulatory and operational level – for example by developing an open standards approach to straight through electronic voting. Our voting policies enable customers to choose when and how they escalate use of their share voting rights in a transparent, methodical manner. We actively support customers in any company level engagement that they wish to conduct and have developed a suite of integrated engagement tools to facilitate this.

Principle 5: Institutional investors should be willing to act collectively with other investors where appropriate.

• Not applicable to Manifest except to the extent that Manifest will work with its customers to facilitate their collective engagement requirements as required.
• We are happy to work with others in the investment field on collaborative regulatory consultations.

Principle 6: Institutional investors should have a clear policy on voting and disclosure of voting activity.

• Manifest encourages investors to vote on an informed basis taking a balanced view of all relevant factors and policy issues. We are concerned that increased public expectations about levels of shareholder involvement may encourage some shareholders to prioritise the dispatch of bulk voting instructions, sometimes to meet unrealistic deadlines imposed by intermediaries, over quality of decision making. This can have a harmful dilution effect such that those shareholders taking an informed view may see their views, as expressed through the ballot, over-ridden by automatic “tick the box” votes. The “comply or explain” nature of the Code offers some hope that this will not be the case to the extent that investors can account for their decision making processes.
• Votes withheld from management through against or abstain vote can only be effective if there is a commitment from the company to act on the feedback these votes represent, and if there is commitment from the investor to offer an explanation.
• Due to underlying client confidentiality and investment or engagement strategy reasons, it may not always be appropriate for investment managers to disclose their voting actions at a detailed level.

Principle 7: Institutional investors should report periodically on their stewardship and voting activities.

• Manifest provides a wide range of reporting options to assist asset owners with their disclosure requirements.
• Manifest reports to its customers on a quarterly basis at minimum.
• We welcome the suggestion that voting and engagement should be subject to compliance audit.

For further information please contact:

Sarah Wilson
Chief Executive
Manifest
Telephone: +44 (0)1376 503500
Email: info@manifest.co.uk

Magnus Furugård
President & Managing Director
GES Investment Services
Telephone: +46 8 787 99 10
Email: info@ges-invest.com

[1] http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2004.n2.4006

Last Updated: 25 September 2010