Stewardship and institutional investor engagement

4. Exercising rights and responsibilities

Consistent with the G20/OECD Principles, the right to participate in general shareholder meetings is typically a fundamental right for shareholders under applicable law. However, the ease with which institutional investors can exercise their ownership rights across jurisdictions varies. As such, policymakers and regulators should consider when establishing corporate governance frameworks – in line with the G20/OECD Principles – basic shareholder rights, including: the right to secure methods of ownership registration, convey or transfer shares, obtain relevant material information on the issuer on a timely and regular basis, participate and vote in general shareholder meetings, elect and remove members of the board, share in the profits of the issuer, and elect, appoint or approve the external auditor. Shareholders may need to be able to participate effectively in general shareholder meetings, with clear information on meeting arrangements and issues for decision. Voting procedures may consider equitable treatment, shareholders’ ability to vote in person or in absentia, the equal effect of votes cast in person or in absentia, and the avoidance of unnecessary barriers or costs (OECD, 2023[3]).

Jurisdictions should also consider whether there are impediments to cross-border voting as recommended in the G20/OECD Principles. This may include, for instance, the untimely notice of shareholder meetings, restrictions on foreign institutional investors’ ability to exercise voting rights, requirements to vote proxies in person, and share‑blocking practices (where investors who vote must refrain from disposing of their holdings until after the shareholder meeting).

As stated in the G20/OECD Principles, engagement between institutional investors and issuers may be encouraged, although it is incumbent on issuers to treat all investors equally and not to divulge material information to institutional investors that is not at the same time made available to the market. The rules and procedures governing the acquisition of corporate control in capital markets, extraordinary transactions such as mergers, and sales of substantial portions of corporate assets, should also be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class. Corporate governance frameworks should also prohibit insider trading and market manipulation in line with the G20/OECD Principles as these practices undermine public confidence in and the effective functioning of capital markets. These practices may be seen as constituting a breach of good corporate governance as they violate the principle of equitable treatment of shareholders.

4.1. Institutional investors’ exercise of voting rights

The ability and willingness of institutional investors to exercise voting rights varies widely. For some, the exercise of voting rights is a natural part of their business model. Others may offer their clients a business model and investment strategy that does not include or motivate spending resources on voting. In this context, most jurisdictions avoid mandating institutional investors to vote their shares; rather, disclosure of policies explaining how shareholder rights are exercised may be preferred, with due consideration to cost effectiveness. If voting is not part of the institution’s business model and investment strategy, mandatory requirements to vote may not be effective and could potentially lead to a box-ticking approach. Therefore, institutional investors acting in a fiduciary capacity may be encouraged to disclose their policies for corporate governance and voting, including the procedures that they have in place for deciding on the use of their voting rights.

In some jurisdictions, shareholder participation in general meetings has been encouraged by improving shareholders’ ability to place items on the agenda through a simple and clear process for submitting amendments and resolutions, to the extent it is not inconsistent with other applicable laws. It is reasonable, for example, to require that for shareholder resolutions to be placed on the agenda, they need to be supported by shareholders holding a specified market value or percentage of shares or voting rights. Shareholder resolutions that are approved and fall within the competence of the shareholder meeting, if not advisory in nature, may need to be addressed by the board.

Institutional investors may decide to disclose their approach to shareholder proposals, particularly where the exercise of voting rights is an important part of their business model. When determining whether to support shareholder proposals, institutional investors may need to be guided by their fiduciary duty to support the delivery of risk-adjusted returns consistent with their clients’ objectives and risk preferences. Institutional investors may be cautious in supporting shareholder proposals that are viewed as inconsistent with the enhancement or preservation of value creation or that seek to micromanage issuers. Due consideration may also need to be given to the legal effect of the proposal, as shareholder proposals may be advisory or legally binding depending on the jurisdiction.

Pass-through voting is one way of including asset owners more directly in the proxy voting process and may help address concerns that asset owners do not participate in stewardship and voting, or that asset managers adopt engagement approaches that may not align with asset owners’ preferences. Although the specifics can vary, pass‑through voting typically involves asset managers offering asset owners a range of voting policies to apply or enabling them to vote directly, which may require sufficient analytical capability and informational resources on the part of asset owners. Based on asset owners’ preferences, the asset manager executes votes accordingly. For asset owners that have invested in their own stewardship and voting capabilities, and that hold both segregated mandates and pooled fund investments, pass-through voting may also support more consistent voting across their direct and indirect holdings in the same issuer.

While pass-through voting may empower sophisticated asset owners, and may be appropriate in specific circumstances, some asset owners may lack the resources, information, or operational capacity to analyse more complex issues when exercising voting rights. When voting is fragmented among asset owners using pass-through voting, voting strategies may become less cohesive, potentially reducing the influence and effectiveness of the voting bloc compared to centralised decision making by the asset manager. This fragmentation can also affect an asset manager’s ability to present a unified voice in engagements with issuers, possibly weakening their influence over corporate behaviour and reducing their ability to hold management to account through voting decisions as a disciplining mechanism.

4.2. Collaborative engagement

Collaborative engagement refers to co‑ordinated actions undertaken by two or more institutional investors to engage with an issuer. Collaborative engagement may be particularly effective when bilateral engagement has proven unsuccessful, enabling institutional investors with smaller holdings to make their voices heard by issuers. In issuers with controlling shareholders, collaborative engagement can also help safeguard the interests of minority shareholders. More generally, institutional investors should ideally be allowed to communicate with each other without having to comply with the formalities of proxy solicitation.

Where collaborative engagement is an important part of an institutional investor’s business model and investment strategy, they may need to disclose, as appropriate, the nature of collaborations undertaken, their objectives, and outcomes. At the same time, institutional investors must comply with market abuse and competition laws, confidentiality obligations, and their fiduciary duties to clients. If acting in concert, pursuant to an agreement or understanding (whether formal or informal), to exercise voting rights or otherwise influence the control, management, or strategic direction of an issuer in a manner that compromises independent decision making, institutional investors need to abide by applicable securities, takeover, and market conduct laws.

To provide clarity and reduce uncertainty, regulators may consider whitelisting engagement topics that are expected to improve how issuers are run without conferring collective control of the issuer. These topics may be governance‑focused, such as board structure and independence, executive remuneration or cross‑shareholding improvements. At the same time, care may be needed to avoid over‑simplification. Whether co‑ordinated engagement should be considered appropriate ultimately depends on the purpose, context and nature of the conduct, and not solely on the topic itself, and it may therefore require case‑by‑case assessment.

To provide clarity and certainty among market participants, regulators and competition authorities in those jurisdictions may want to consider issuing guidance on forms of co‑ordination and agreements that do or do not constitute acting in concert in the context of takeover, competition and other rules.

4.3. The objectives and costs of policy engagement

Engagement by institutional investors is not limited to issuer-specific engagement; influence can also be exercised through engagement aimed at shaping regulations and policy outcomes, particularly in response to market failures that issuers cannot address individually. An emerging approach adopted by some large institutional investors is macro (or systematic) stewardship (hereafter referred to as “policy engagement”), which seeks to address market-wide risks that may affect the stability and long-term performance of financial markets. Policy engagement may involve engagement with policymakers, regulators, or standard‑setters to help strengthen corporate governance and disclosure frameworks.

Where policy engagement forms an important part of an institutional investor’s business model and investment strategy, they may disclose how such activities are undertaken, including their objectives, outcomes and relevance to managing market-wide or systematic issues that may affect issuers or threaten market efficiency, integrity, and resilience.

For large institutional investors with investments in multiple jurisdictions, maintaining consistent policy engagement on market-wide and systematic issues may present challenges, especially where such risks are cross-border in nature and not confined to a single jurisdiction. To address these challenges, institutional investors may, to the extent possible, seek to pursue consistent policy objectives and engagement on market-wide or systematic issues with policymakers, regulators, or standard-setters across relevant jurisdictions, to help strengthen corporate governance and disclosure frameworks. Where institutional investors adopt different objectives across jurisdictions, these differences may need to be transparently disclosed.

4.4. Disclosure of voting records and engagement activities

Many jurisdictions require or recommend that institutional investors disclose their voting records, although the quality and comparability of disclosures vary across institutional investors and jurisdictions. Requiring disclosure of votes may need to be implemented in a manner that avoids overburdening institutional investors and considers the scope of their voting duties and actual voting policies. At the same time, policymakers and regulators may consider whether to require transparent, complete, and balanced qualitative and quantitative voting disclosures while discouraging selective reporting. Where voting examples are provided, consideration could be given as to whether they are timely, accessible, and representative of the investment strategy, reflecting a range of outcomes – including votes both for and against proposals – and, where relevant, explaining how voting decisions relate to investment decisions across different sectors and geographies.

Institutional investor engagement is often conducted privately through confidential communications with issuer management or boards, with limited public disclosure, making it difficult for clients to assess whether such engagement aligns with their preferences and mandates. While some jurisdictions require or recommend disclosure of engagement activities – particularly where institutional investors have stated policies to vote or engage – the quality and comparability of these disclosures vary widely.

Requiring disclosure of every engagement may create incentives for institutional investors to prioritise the volume of engagement activity over its quality. Policymakers and regulators may need to focus on improving the transparency and quality of engagement disclosures while avoiding unnecessary burdens, encouraging complete and balanced reporting rather than selective disclosure of only successful outcomes. Where engagement examples are provided, they may, where feasible, include information on objectives, progress, and outcomes, reflect a mix of successful, ongoing, and unsuccessful engagements, and demonstrate how engagement relates to investment decisions across different sectors and geographies in a manner proportionate to the investment strategy. Institutional investors may also need to exercise caution when attributing causality to engagement outcomes and to be transparent about the limitations of engagement activities.

4.5. Institutional investors as bondholders

Since the global financial crisis, there has been a surge in the issuance of corporate bonds, particularly in emerging markets. This has represented an opportunity to support issuers’ access to finance and increase the diversification of institutional investors’ portfolios, but it may give rise to new risks if the regulatory frameworks are not fit for purpose.

Institutional investors could ideally disclose their policies for corporate governance and voting with respect to their investments, including the procedures that they have in place for engaging with listed bond issuers. Such engagement is different from the typical engagement conducted by shareholders, and may take place, for instance, at the issuance of high-yield bonds or during bond restructuring negotiations.