Corporate Governance

The high profile collapses of large US firms such as Enron, Worldcom, and the Italian company Parmalat have led to a rapid growth in interest in corporate governance in recent years. Institutional investors have recognised that, in order to avoid such scandals in future, they must play a more active role in ensuring that companies are run well. However, corporate governance is not just about preventing corporate collapse. It is also about creating successful companies that deliver sustainable, long-term value to their shareholders.

Corporate governance is not a new concept to UK shareholders. Many UK institutional shareholders have long been active as owners. The Association of British Insurers’ Committee, which represents major investors in the UK stockmarket, has minutes from company meetings that date back to the 1930s. Best practice in corporate governance in the UK was first formalised in the Cadbury Report in 1992, which was subsequently amended in 1998 to form the Combined Code on Corporate Governance (commonly referred to as the Combined Code). The Code was revised in July 2003 to incorporate the Higgs and Smiths reviews. The Combined Code, which relies on a ‘comply or explain’ principles-based philosophy (in contrast to the Sarbanes Oxley rule based US regulation), has set the global standard for corporate governance.

For over 30 years, Insight (and Clerical Medical Investment Management, prior to being re-branded as Insight Investment in 2002) has actively encouraged the companies in which we invest to uphold high standards of corporate governance. We believe that we have a duty to our clients to ensure that directors run companies in their interests, and that these directors are fully accountable to shareholders. In our view, to be well-governed, a company must have the right structures, the right people and the right processes in place. It is particularly important that there are adequate controls to safeguard shareholders’ assets and that no single individual wields too much influence.

Our aim is to help to create and encourage successful and sustainable businesses. We actively monitor companies to ensure that their board structures and processes meet the principles set out in the Combined Code. We proactively engage with company boards on a wide range of issues including succession planning, board composition, strategy, finance/capital structure, executive remuneration, internal controls, and corporate responsibility. We also work with other investors – through organisations such as the Association of British Insurers – to encourage higher standards of corporate governance across the market as a whole.

Corporate governance: the Insight approach

Insight pursues its objective of encouraging high standards of corporate governance in the following ways:

• Routine company meetings: We regularly discuss corporate governance, strategy and relevant corporate responsibility issues with company board directors and executives. This dialogue occurs during regular meetings with fund managers, as well as at issue-specific meetings with our Investor Responsibility team. We also have a rolling programme of meetings with company chairmen to discuss succession, remuneration, strategy and finance.
  
• Non-routine meetings: In addition to our routine meetings with companies, we meet with companies to discuss and resolve specific governance concerns as they arise.
  
• Indirect engagement: We engage with other key opinion formers, such as company advisers, investment consultants, brokers, remuneration consultants and government officials, both to ensure that our knowledge on key issues is up-to-date, and with a view to influencing debates.
  
• Proxy voting: Insight votes shareholdings on behalf of clients. In exceptional circumstances, we will take further steps, such as requisitioning meetings and proposing resolutions.
  
• Investment integration: We consider companies’ governance arrangements as an integral part of our investment decision-making process.
  
• Standard setting: Insight aims to ensure that UK companies comply with the Combined Code and that European companies comply with relevant local codes. Where companies do not comply with the Combined Code, we encourage them to explain any non-compliances in their annual report and accounts. In the UK, The Responsibilities of Institutional Shareholders and Agents - Statement of Principles adopted by the Institutional Shareholders’ Committee sets out best practice for the monitoring of and engagement with companies by investors. Insight played a key role in drafting the Statement of Principles and we endeavour to comply with the principles through encouraging high standards of corporate governance and corporate responsibility.
• Collaboration: Insight works with other investors, industry bodies and relevant associations such as the Association of British Insurers, the National Association of Pension Funds, the International Corporate Governance Network and the Investment Management Association to try and achieve common goals on a variety of governance issues. We also form or participate in informal groups with other investors on specific corporate governance causes.
  
• Influencing opinion formers: We also regularly discuss topical governance issues with trade bodies, the press and executive recruitment firms who have an interest in, and influence over, corporate governance practice.