ACSI

This beliefs statement is not exhaustive and it is intended to be reviewed and updated on an ongoing basis.  These beliefs have informed, and also draw upon, the policies contained in ACSI’s member endorsed Corporate Governance Guidelines and ESG Guidelines. 

A unique superannuation fund outlook
“A new member joining the workforce today will expect to work for over 40 years. Over that time the risk and returns on her superannuation investments will be influenced by environmental, social and governance factors. Therefore it is imperative that superannuation funds manage these risks with a view to maximising shareholder value and increasing shareholder returns over the long term”.

Superannuation fund trustees are obliged to maximise investment returns on behalf of members.

Environmental, Social and Governance (“ESG”) factors are relevant to superannuation fund trustee duties to maximise returns and minimise risks to members’ investments.

There are a number of ways that superannuation fund trustees carry out their duties in the context of monitoring the ESG impacts on their investments.  This includes, but is not necessarily limited to:

• Investing or divesting
• Exercising the vote attached to their shareholding
• Engaging with directors and executives on issues arising in a company
• Promoting effective regulation.

Actively monitoring ESG practices provides another way for a superannuation trustees to manage investment risks.

Good corporate governance in a listed company on its own does not guarantee against poor performance.  However having effective tools to apply additional scrutiny enables the trustee to better form an opinion on the level of risk it is prepared to tolerate.

ACSI provides a proxy voting advisory and engagement service to member superannuation funds, as well as advocacy for higher corporate governance standards, participation in the public policy debate and co-operation with international governance organisations.

The overriding responsibility of shareholders
Justice Neville Owen in Chapter 6.3 of the HIH Royal Commission – the Role of Shareholders:

“Shareholder apathy can play a part in undesirable corporate governance. If shareholders as owners are unwilling or unable to exercise their powers or make themselves heard, directors and management will lack guidance or constraint from those whose interests they are supposed to serve. Shareholders have an interest in seeing that a board is properly constituted and in holding it to account for the company’s performance.”

Therefore if superannuation fund trustees and investors don’t ask questions with respect to the particular direction of a company, it is highly unlikely that anyone else will. 

As investors, superannuation funds need to be satisfied that the directors who they elect to govern the companies that they invest in “are on the case” when it comes to identifying, mitigating the risks and maximising the opportunities associated with material environmental, social and governance issues.

As investors, it is an important legal right available under Australian corporate law for shareholders to be able to vote in favour and against the election and re-election of directors and to be able to nominate persons for director elections.  Accordingly, ACSI member superannuation funds must develop a clear and strong voice on key and material environmental, social and governance issues that affect the value of their investments in these companies.

In addition, ACSI supports superannuation fund trustees in promoting company directors who have the requisite skills, capacity, ethics and “independence of mind” to provide effective leadership and stewardship of their respective companies. 

In the management of the risks and opportunities arising in companies that superannuation funds invest in, ACSI believes the following:

Exercising the voting rights arising out of shareholding
In terms of corporate governance, the exercise of voting rights represents the most visible tool available to trustees, and their agents, to exert influence over corporate governance practices of companies in their capacity as shareholders.

ACSI believes that all superannuation funds should be exercising all of the votes associated with their shares, all of the time.

Voting is not an end in itself with respect to raising corporate governance practices in companies, but a tangible first expression of an interest in these companies.  This way superannuation fund investors are clearly regarded by directors and executives of these companies, as interested owners of shares.  This would contrast to being perceived to be behaving like “renters” of shares, with merely a passing interest in the long term direction of these companies.

ACSI believes that superannuation funds, where they are direct investors, should make informed decisions on proxy voting based on clear and transparent, best practice corporate governance guidelines.

Promoting ethical and competent Boards
“No matter how thick you make the rule book, unless you deal with dishonesty and incompetence from the Board room down, you never get a healthy governance regime in any company” Gerry Harvey in telephone conversation with Phil Spathis.

ACSI believes that rules and regulations alone are insufficient to instil high standards of corporate conduct and deliver the best protection to shareholders.

The essential ingredient of a sound governance culture within a company is an ethical, and competent board.  Such a board should promote a healthy management culture throughout all levels across the organisation.

The “glue” that binds any company or organisation to good governance is a strong ethical outlook from the board down and a strong commitment to promoting ongoing competence throughout the company.  Such practices should promote growth in business without having to resort to dishonesty in order to inflate perception of business success both internally and to shareholders.

Promoting effective regulation
ACSI believes that efficient and well informed markets are critical to investors.

Regulations that underpin disclosure should strike an appropriate balance between the objectives of companies and shareholders and be effective in their objective of promoting a well informed market. 

It is important that regulation is effective and promotes good governance and is not an unnecessary burden on companies and other relevant stakeholders.

Therefore there is a place for rules and regulations in promoting effective governance that ensure sensible disclosure and transparency.

As superannuation fund investors must have information to make assessments to manage risk, effective transparency and disclosure are important and should be improved and encouraged.

ACSI does not regard governance “box ticking” as an effective guarantee against company failure however it can provide a useful indicator and starting point for understanding the extent of any structural governance deficiency in a company. 

Maximising Returns and Minimising Investment Risk
Connecting fiduciary investor responsibilities with improved ESG practices.

“If we do not ask, then who will” - Quote collectively devised by ACSI management.

A significant proportion of a typical superannuation fund’s investments are held in domestic and overseas equities. Therefore, the success and long-term viability of these publicly listed companies has a direct impact on the value of superannuation funds’ investments and, ultimately, members’ retirement income.

ACSI believes that poor ESG practices pose a threat to corporate performance, thus potentially destroying shareholder value and jeopardising members’ financial interests.

Effective governance structures and processes decrease risk and potentially increase returns because they create stability that assists the development of long term investment strategies.

Companies that best manage environmental, social and governance risks, impacts and opportunities are more financially sustainable in the long term and will deliver better long-term financial performance.

Addressing environmental, social and governance issues in company analysis and investment decisions is consistent with superannuation funds’ fiduciary duties and their objectives as long-term investors.

While the monitoring of ESG risks does not prevent corporate failure or collapse, it can reduce the risk of corporate failure and thereby potentially protect and enhance members’ wealth in the long-term.

ACSI will always take an informed position on ESG issues
“Walk softly and carry a big stick” Theodore Roosevelt 

Every position that ACSI takes must be informed and supported by analysis and research.

All ACSI research, analysis, engagement and public advocacy must always be driven by the overriding obligation of trustees to act in the best financial interests of all members by maximising investment opportunities and minimising investment risks.

This way ACSI and its member superannuation funds are able to effectively inoculate themselves from claims that governance activism is a “front” for an agenda not related to promoting improved company performance.

Given the significant size of superannuation fund holdings in the Australian stock market, there is a heavy responsibility on trustees to be effective stewards of these significant shareholdings.

ACSI believes that super fund interests are best served by trustees who are properly equipped to address ESG issues that arise in companies they invest in, without seeking to ‘micro-manage’ these issues that arise in these companies.

Promoting constructive dialogue and engagement with companies
“Successful engagement, however, requires more than considered voting. It should also include: maintaining dialogue with the board on governance policies in order to address concerns before they become critical; supporting the company in respect of good governance; and consulting other investors and local investment associations where appropriate.”

ICGN Statement of Principles on Institutional Shareholder Responsibilities
Engagement both privately with companies, and at a public and policy level, should be undertaken by ACSI on behalf of its members.  ACSI does not seek to make a profit from its activities but aims to mitigate risks and improve market practice and performance as a whole.  At all times, ACSI will ensure that it is not conflicted in its engagement work.

Any engagement that ACSI undertakes will be “even handed” and ACSI should not be seen to be targeting any particular company.

ACSI’s engagement activities will be undertaken with the objective of maximising shareholder value, minimising risks and increasing shareholder returns.

ACSI prefers to hold “behind the scenes” discussions with companies wherever possible.  
It would be ACSI’s preference not to signal to the market an intention of engaging on a particular issue, as it may unintentionally affect the share price.

At all times, ACSI will ensure that its engagement work does not breach any relevant legislative conditions such as insider trading or continuous disclosure provisions.

Aligning incentives to better performance
“Boards are like sub-atomic particles, they behave differently when they know they are being observed”
Bob Monks, US shareholder activist and corporate governance expert.

The interests of a CEO and senior management may not always be aligned with that of shareholders, in this situation opportunities for conflicts of interest can arise.  Aligning the incentives of executives with those of owners is the most direct way to mitigate this agency problem.

Investors, particularly institutional investors, rely heavily upon executive incentive arrangements as a tangible insight into the effectiveness, or otherwise, of boards in attracting, retaining and motivating key management personnel.

CEO’s and senior executives influence the direction of companies, which ultimately affects shareholder return as such executive remuneration should promote superior performance of a company. The absence of stretching performance hurdles is an indication that a board is ineffective in its oversight of company executives.

ACSI believes that Boards should always be encouraged to put in place remuneration arrangements that reward success and not mediocrity or failure.

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