Morningstar Magazine - December 2017/January 2018 - 40

Spotlight: Abnormal Profitability

of U.S. asset managers, who relative to
their European counterparts, have been historically
more reluctant to challenge the status
quo, especially in relation to environmental
and social issues.
One recent high-profile case was Exxon Mobil
XOM. BlackRock and Vanguard supported
a shareholder proposal seeking greater disclosure
of climate-related risks, against the Exxon
board's recommendation. This was the first
climate-risk disclosure resolution Vanguard had
ever supported. Other asset managers,
including SSgA, Amundi, and LGIM, had already
voted in favor of the proposal in 2016.

that active portfolio managers have in voting
decisions. For example, at BlackRock, Amundi, and
UBS, the policy is for active fund managers
to vote consistently across all funds, but they
retain the authority to vote differently from
the house view. This contrasts with the approach
adopted at Vanguard, SSgA, and LGIM, where the
corporate governance teams have ultimate
authority on the final votes. This is to ensure
consistency and efficacy, as well as to minimize
potential conflicts of interest.

SSgA also made headlines recently after its
opposition to the re-election of directors
at 400 companies for failing to appoint more
female board members.

Index portfolio managers, meanwhile, have
no say in the voting of their portfolio holdings.
Index portfolio management is a highly
automated process where delivering the index
performance is the overriding mandate.
That said, index portfolio managers can be
consulted in some organizations for policy-level
decisions and informed of certain votes.

Meanwhile, in a sign that change is coming
to Japanese corporate culture, Japanese
asset managers are now also opposing company
management more. For example, after the
adoption of more stringent voting criteria in areas
such as election of directors, the number
of Nikko's votes against management doubled
in two years, reaching 17% in 2017.

Our research shows that index managers
are also intensifying their efforts in the area of
engagement. Of the 12 surveyed firms, nine
reported that they undertake direct engagement
activities with companies and expressed
a willingness to increase their engagements
in the future.

Despite a general sense that asset managers may
be increasingly open to using negative votes,
key differences remain in the way these votes are
deployed. For some, voting against management remains a last-resort option. For example,
BlackRock will first try to effect change by
engaging management teams and will only cast
a negative vote if management is unresponsive
or takes too long to address BlackRock's
concerns. At the other end of the spectrum,
Europe's largest asset manager, Amundi,
has a strict voting policy and does not hesitate
to swiftly vote against management
when a proposed resolution fails to comply
with its principles.
Another noteworthy difference among the
surveyed firms lies in the varying level of authority

Increased Commitment Toward Engagement

Of the three that do not engage, two, namely
Fidelity's subadvisor, Geode, and Lyxor, have plans
to formalize an engagement strategy in the
coming months, in line with their commitment
to the U.N. Principles for Responsible Investment.2
These principles require signatories to be "active
owners" and incorporate ESG issues into their
ownership policies. By contrast, Schwab was the
only firm to see no compelling reason to set
up an engagement program, citing cost and what
it sees as a lack of solid evidence about the
benefits of direct engagement.
Despite the emphasis placed on engagement
among nearly all of the surveyed firms, it is difficult
to compare their activities. This is because
there is no standard definition of what constitutes
an engagement. For some, a fact-finding

meeting or call with a company is enough to be
recorded as an engagement; others apply a more
stringent definition, only classifying as
engagement meaningful interactions aimed
at bringing about change through dialogue with
companies. As a result, our research shows
a wide range of numbers of engagements
disclosed in 2016-from 37 by Deutsche AM and
120 by UBS to around 1,000 by Nikko and 1,480
by BlackRock ( EXHIB IT 4 ).
However, irrespective of the definition, our
data revealed an increase in the aggregate number
of direct engagements, with BlackRock and
Vanguard reporting the most significant growth.
Some of the surveyed firms expect the quantity
as well as the quality of their interactions
to rise further in the years ahead. At the same time,
most surveyed firms reported that companies

EXHIBIT 4

Number of Disclosed Engagements
What counts as an engagement differs
from firm to firm, leading to a
wide range of reported interactions.
Asset Manager

2014

2015

2016

Amundi

529

598

481

1,293

1,522

1,480

Deutsche AM

Geode (Fidelity)

LGIM

589

545

500

Lyxor

1,000

200

Schwab

SSgA

610

636

611

UBS AM

115

160

120

Vanguard

617

685

817

4,953

5,346

5,246

BlackRock

Nikko AM
Nomura AM

Total

Source: Asset manager data.

2 https://www.unpri.org/download_report/6309. Active ownership for listed equities includes engagement and (proxy) voting activities.

Morningstar December/January 2018

https://www.unpri.org/download_report/6309

Table of Contents for the Digital Edition of Morningstar Magazine - December 2017/January 2018