Stewardship and institutional investor engagement

5. Stewardship policies by institutional investors

Where stewardship is an integral part of an institutional investor’s business model and investment strategy, effective governance structures and processes may be essential to ensure the successful delivery of stewardship-related objectives. For asset owners that delegate investment decision-making and stewardship to asset managers, governance arrangements are typically focused on strategic oversight rather than day-to-day execution, supported where appropriate by market service providers advising on stewardship-related matters. For institutional investors that invest directly, stewardship governance centres on internal organisational arrangements, including how stewardship is resourced and integrated into portfolio management decisions, the allocation of decision-making authority, and clarity over who within the organisation has ultimate responsibility for stewardship activities.

For the broader governance arrangements of insurers, private pensions and SWFs, policymakers and regulators may wish to consult the OECD Guidelines on Insurer Governance, OECD Core Principles of Private Pension Regulation, and the OECD Guidelines on the Corporate Governance of State‑Owned Enterprises.

5.1. Material conflicts of interest

Conflicts of interest can undermine the trust and accountability required when institutions manage investments on behalf of their clients. Conflicts of interest can occur at multiple levels in the investment chain, particularly when an institutional investor is a subsidiary or affiliate of another financial institution or part of an integrated financial group. For example, conflicts may arise when a bank provides corporate finance advisory services, such as capital raising, while its asset management subsidiary buys and sells securities.

Stewardship frameworks may be designed to increase transparency from institutional investors about how actual or potential conflicts of interest are identified and managed, often through the disclosure of a conflict‑of‑interest policy. Where a conflict between the interests of the institutional investor and its clients arises, consideration should be given regarding the appropriate disclosure to clients.

5.2. Disclosure of policies for corporate governance

Institutional investors acting in a fiduciary capacity may disclose whether and how they engage with issuers, exercise ownership rights, or engage with policymakers, and outline their key stewardship objectives and the expected benefits for clients. Such disclosure enhances accountability by enabling clients to understand how rights and influence are exercised on their behalf. Transparent information on engagement priorities, escalation approaches, collaborative engagement, and voting policies, including in relation to securities lending, can allow current and potential clients to assess whether an institutional investor’s stewardship approach aligns with their preferences and supports the delivery of risk-adjusted financial returns consistent with their objectives.

Transparency and disclosure by institutional investors may also support market integrity and confidence. By clearly communicating their approaches to engagement, collaboration, escalation, and voting, institutional investors enable issuers and other market participants to better understand and anticipate their expectations and actions, thereby improving market efficiency and promoting more constructive and informed engagement.

Where institutional investors set expectations, objectives, or targets for issuers on corporate governance or sustainability-related issues, they may decide to disclose the basis on which those expectations are formed. For example, whether they are grounded in national corporate governance codes, jurisdiction‑specific requirements, or in internationally recognised standards such as the G20/OECD Principles. Institutional investors may report on how these expectations are applied in their stewardship and engagement activities and the extent to which progress against them is monitored and assessed.

Where institutional investors disclose stewardship-related policies, consideration may need to be given as to how they are made available in an accessible format for their primary users and reviewed regularly to ensure continued relevance. Where institutional investors choose not to develop or disclose such policies, they may need to provide a clear and reasoned explanation.

5.3. Disclosures on resources, expertise and incentives

Where active stewardship activities and engagement are a significant component of an institutional investor’s business model and investment strategy, they may need to explain to clients how these policies are delivering in their best interests. Some institutional investors may prioritise cost minimisation over resource‑intensive engagement activities, particularly where they are expected to bear the associated costs and therefore have incentives to limit engagement, even though such engagement may help enhance and preserve value in some circumstances.

Targeted and proportionate disclosure requirements may help clients and issuers assess whether institutional investors have sufficient resources to implement their corporate governance and stewardship policies effectively. Such disclosure‑based requirements may enhance quality, objectivity and accountability, while avoiding unnecessary burdens.

Stewardship frameworks may require or recommend that institutional investors disclose headcount and senior staff qualifications to help assess their expertise and capacity for implementing stewardship-related policies. Additional disclosures may cover organisational and workforce structures; staff seniority, experience, training, and diversity; investments in systems, processes, research, and analysis; and how performance management or remuneration incentivises the integration of stewardship and investment decision making.

Stewardship frameworks may need to avoid prescribing how institutional investors allocate their human resources. Some investors may have portfolio managers lead engagement and voting, while others may use dedicated teams. What matters is not the chosen structure but its effectiveness in fulfilling obligations under mandates. Policymakers and regulators may therefore encourage institutional investors to explain why their resourcing approach is appropriate and how it best serves the interests of their clients.

5.4. The use of capital market service providers by institutional investors

The investment chain from ultimate owners to issuers involves not only multiple intermediary owners but also a range of market service providers that offer advice and services to intermediary owners. Proxy advisors who offer analysis and recommendations to institutional investors on how to vote and provide services that facilitate the process of voting are relevant from a direct corporate governance perspective.

Institutional investors who use the services of proxy advisors may consider stewardship frameworks that encourage transparency regarding whether and how such services are used, the extent of reliance on them, including on default voting recommendations, and the identity of the proxy advisor. Institutional investors may need to disclose whether they apply custom voting policies or use proxy advisors’ benchmark policies as a basis for their voting guidelines, and how these are operationalised in voting decisions. Stewardship frameworks may consider whether institutional investors retain sole responsibility for voting decisions and whether institutional investors should provide clear instructions to proxy advisors on the extent to which votes are to be cast in line with the investor’s voting guidelines. Institutional investors may be encouraged to use proxy advisory services based on an informed understanding of the proxy advisor’s methodology, analysis and recommendation processes, and conflicts of interest, and after periodically assessing the effectiveness of the services provided.

Other important market service providers for institutional investors may include engagement providers, investment consultants, and data providers. Engagement providers are entities appointed to engage with issuers on behalf of institutional investors. Stewardship frameworks may need to clarify that the use of engagement providers does not remove institutional investors’ responsibility for stewardship. Investment consultants advise their clients, most notably but not exclusively asset owners, on which funds, asset classes and asset managers to invest in. Stewardship frameworks may encourage asset owners to be transparent regarding how they use investment consultants in relation to investment decision making and stewardship activities, and the extent to which they require investment consultants to monitor the stewardship activities asset managers are undertaking on their behalf. Stewardship frameworks could ideally reinforce that the use of investment consultants cannot constitute a substitute for an asset owner’s responsibility to ensure their stewardship priorities, and that preferences are implemented efficiently by their asset managers.