Home > Investor Participation, Trends in Corporate Governance > Engagement: concept, objectives, and phases

Engagement: concept, objectives, and phases

We can think of Engagement as the investors` attitude towards Envoronmental, Social and Governance issues, requiring  companies to improve their related practices.

The objective may be:

  1. Optimising Long-term Value: emphasis relies on alignment of interests, (so that optimal risk adjusted returns are met); in this case, investors focus on governance, strategy and financial aspects.
  2. Other investors concentrate their efforts in companies that might lead them to face reputational risks, (human rights, environment, etc.).
  3. Other institutions, such as unions, employee groups, NGO`s, try to foster their agenda, and although their objectives are different, they may converge.
  4. Complying with regulation forcing investors, fund managers, and so on, to explain their vote practices and policies.

The engagement policy can be aimed at obtaining more information on ESG practices, or at having those practices improved by the target companies.

What are the main activities developed by investors involved in the Engagement policy?

  1. Establishing priority areas, among those cited above: for example if one investor`s focus is governance, he might be interested in independence of directors, board structure, ….
  2. Identify companies: funds, large investors, have usually investments in many companies, so that they need to determine what sectors, industries, tipes of companies, etc., are more likely to be exposed to the priority areas.
  3. Dialogue with company: it usually starts with a direct contact with managers, by phone, letter, etc., so that the investor`s concern is made clear to the company. Then, a medium-long term monitoring process starts, during which the investors puts light into progress being made by the company.
  4. Transparency about the engagement policy, the specific targeted companies and areas involved in each case, their progress,
  5. Exercising voting rights: a responsibility, (in somer cases a legal obligation), this gives visibility to the investor, and consists in a previous dialogue over the General Meeting proposals, voting, and voting policiy disclosure.
  6. Involvement in general meetings: submitting questions, filing resolutions to be included in the GM agenda, (sometimes retirement before the GM is a success story); regulation states who can send those resolutions, (% and permanence of ownership).
  7. Joining forces through neetworks and coalitions: this reduces costs and increases the influence.
  8. Divestment: it is a last resort tool, but it can also behave as a credible threat, as investors divesting usually disclose publicly their action and the reasons below.

In a forthcoming, we will deal with the major challenges that investors face in their effort to have an effective and efficient engagement policy with companies.

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  1. August 4, 2013 at 5:07 pm

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