A share market rally and the Royal Commission report

2019 has started with a rally in share markets in January and the Final Report of the Royal Commission* being handed down on 4 February. Global shares bounced back in January by around 7%, buoyed by signals from the US Federal Reserve that it would be more patient in raising interest rates further. However, US-China tensions and the Brexit outcome remain key risks for global markets. Australian shares rose 3.9%, although softer house prices and anticipation of the Royal Commission final report weighed on bank sentiment.

Bank stocks have since rallied, with the Final Report of the Royal Commission providing greater clarity for investors. Nevertheless, the Commission’s recommendations may have far-reaching effects on the financial services industry over the longer term, if adopted.

In his Final Report, Commissioner Kenneth Hayne stated that "Failings of organisational culture, governance arrangements and remuneration systems lie at the heart of much of the misconduct examined in this Commission." ** Legislation is one way these shortcomings can be addressed. Engagement by institutional investors more concerned with long-term returns than quick profits is another. As a long-term investor we agree with Commissioner Haynes’ that enterprises should be focused on long-term outcomes:

"The duty is to pursue the long-term advantage of the enterprise. Pursuit of long-term advantage (as distinct from short-term gain) entails preserving and enhancing the reputation of the enterprise as engaging in the activities it pursues efficiently, honestly and fairly."***

"But to preserve and enhance a reputation for engaging in…activities efficiently, honestly and fairly, the enterprise must do more than not break the law. It must seek to ‘do the right thing".***

A share market rally and the Royal Commission report

2019 has started with a rally in share markets in January and the Final Report of the Royal Commission* being handed down on 4 February. Global shares bounced back in January by around 7%, buoyed by signals from the US Federal Reserve that it would be more patient in raising interest rates further. However, US-China tensions and the Brexit outcome remain key risks for global markets. Australian shares rose 3.9%, although softer house prices and anticipation of the Royal Commission final report weighed on bank sentiment.

Bank stocks have since rallied, with the Final Report of the Royal Commission providing greater clarity for investors. Nevertheless, the Commission’s recommendations may have far-reaching effects on the financial services industry over the longer term, if adopted.

In his Final Report, Commissioner Kenneth Hayne stated that "Failings of organisational culture, governance arrangements and remuneration systems lie at the heart of much of the misconduct examined in this Commission." ** Legislation is one way these shortcomings can be addressed. Engagement by institutional investors more concerned with long-term returns than quick profits is another. As a long-term investor we agree with Commissioner Haynes’ that enterprises should be focused on long-term outcomes:

"The duty is to pursue the long-term advantage of the enterprise. Pursuit of long-term advantage (as distinct from short-term gain) entails preserving and enhancing the reputation of the enterprise as engaging in the activities it pursues efficiently, honestly and fairly."***

"But to preserve and enhance a reputation for engaging in…activities efficiently, honestly and fairly, the enterprise must do more than not break the law. It must seek to ‘do the right thing".***

At a glance
At a glance

  • Global and Australian shares rallied strongly in January.

  • The Final Report of the Royal Commission* found that failures of governance, culture and remuneration enabled the misconduct identified through the Royal Commission.

  • We believe that governance, as well as social and environmental factors, can have a significant impact on investment risk and return.

  • Over 12 months we engaged with more than 600 companies on more than 1,700 issues (including governance, culture and remuneration). We also voted at company AGMs to express our views to management.

  • We will continue to hold to account all companies in which we invest for their governance, culture and remuneration for the benefit of our members and the wider community.

  • Global and Australian shares rallied strongly in January.
  • The Final Report of the Royal Commission* found that failures of governance, culture and remuneration enabled the misconduct identified through the Royal Commission.
  • We believe that governance, as well as social and environmental factors, can have a significant impact on investment risk and return.
  • Over 12 months we engaged with more than 600 companies on more than 1,700 issues (including governance, culture and remuneration). We also voted at company AGMs to express our views to management.
  • We will continue to hold to account all companies in which we invest for their governance, culture and remuneration for the benefit of our members and the wider community.

Engaging for positive change
Engaging for positive change

As a responsible investor, we believe that governance (including culture and remuneration) as well as social and environmental factors can have a great impact on investment risk and return. In fact, history has shown that corporate misconduct can have serious consequences for shareholder value through damage to stakeholder relationships and brand reputation, as well as legal liabilities and financial costs.

By engaging with companies and voting at company AGMs on matters such as director elections and remuneration reports, we seek to influence corporate behaviour in ways that protect and enhance long-term value. Our engagement and voting at these AGMs is focused on five Board-approved priority objectives (see diagram below).

In relation to governance and culture, we seek that companies in which VicSuper invests put their customers first, treat their key stakeholders fairly, implement best practice codes of conduct and whistleblowing system that prevent bribery and corruption, and demonstrate an ethical culture with clear values and a supporting ‘tone from the top.’

Investment strategy table

VicSuper is a member of the Australian Council of Superannuation Investors (ACSI) and we have appointed ACSI to undertake engagement across our Australian investments. In 2018, ACSI released a report comparing company codes of conduct and whistleblowing systems among ASX 200 companies. As a result of that research, corporate culture has been a particular recent focus of ACSI’s company engagement, targeting companies with identified gaps in their practices and setting clear expectations of companies.

ACSI logo 
VicSuper was one of the first signatories to the Australian Asset Owner Stewardship Code, developed by the Australian Council of Superannuation Investors (ACSI).

 

Case study: VicSuper's active engagement

Over a recent 12 month period we engaged with more than 600 companies on more than 1,700 issues (including governance, corporate culture and remuneration). As a shareholder in most of the top listed companies in Australia and overseas, we are also entitled to vote on resolutions proposed at shareholder meetings. We are committed to voting on all resolutions, and during this period we voted on more than 26,000 items at more than 2,200 company meetings.

Voting provides us with the opportunity to express our views to management, which may in some cases involve voting against management. At company AGMs over the past few months we abstained or voted against Director re-elections at the major banks pending release of the Royal Commission findings and the Banks’ responses, and voted against remuneration reports for NAB, ANZ and Westpac in response to their proposal to award significant executive bonuses.

25% Proportion of the portfolio engaged on environmental, social and governance (ESG) issues

11% Votes against management

26,000 Resolutions voted on per year

As a responsible investor, we believe that governance (including culture and remuneration) as well as social and environmental factors can have a great impact on investment risk and return. In fact, history has shown that corporate misconduct can have serious consequences for shareholder value through damage to stakeholder relationships and brand reputation, as well as legal liabilities and financial costs.

By engaging with companies and voting at company AGMs on matters such as director elections and remuneration reports, we seek to influence corporate behaviour in ways that protect and enhance long-term value. Our engagement and voting at these AGMs is focused on five Board-approved priority objectives (see diagram below).

In relation to governance and culture, we seek that companies in which VicSuper invests put their customers first, treat their key stakeholders fairly, implement best practice codes of conduct and whistleblowing system that prevent bribery and corruption, and demonstrate an ethical culture with clear values and a supporting ‘tone from the top.’

Investment strategy table

VicSuper is a member of the Australian Council of Superannuation Investors (ACSI) and we have appointed ACSI to undertake engagement across our Australian investments. In 2018, ACSI released a report comparing company codes of conduct and whistleblowing systems among ASX 200 companies. As a result of that research, corporate culture has been a particular recent focus of ACSI’s company engagement, targeting companies with identified gaps in their practices and setting clear expectations of companies.

ACSI logo 
VicSuper was one of the first signatories to the Australian Asset Owner Stewardship Code, developed by the Australian Council of Superannuation Investors (ACSI).

 

Case study: VicSuper's active engagement

Over a recent 12 month period we engaged with more than 600 companies on more than 1,700 issues (including governance, corporate culture and remuneration). As a shareholder in most of the top listed companies in Australia and overseas, we are also entitled to vote on resolutions proposed at shareholder meetings. We are committed to voting on all resolutions, and during this period we voted on more than 26,000 items at more than 2,200 company meetings.

Voting provides us with the opportunity to express our views to management, which may in some cases involve voting against management. At company AGMs over the past few months we abstained or voted against Director re-elections at the major banks pending release of the Royal Commission findings and the Banks’ responses, and voted against remuneration reports for NAB, ANZ and Westpac in response to their proposal to award significant executive bonuses.

25% Proportion of the portfolio engaged on environmental, social and governance (ESG) issues

11% Votes against management

26,000 Resolutions voted on per year

Culture is important for all organisations

The importance of governance and corporate culture and the relevance of the Royal Commission’s recommendations extend well beyond the big banks and super funds. All companies rely on individual members of staff to make decisions. By establishing a strong, ethical culture which focuses staff on a purpose and set of corporate values, this culture will encourage employees to act cohesively for the long-term success of the company. Over the coming 12 months we will continue to hold to account all companies in which we invest for their governance, culture and remuneration for the benefit of our members and the wider community.

We will continue to act in the best interests of our members at all times. As a profit to member fund, this has always been and will continue to be our focus.

— Discover more about how we engage with companies
— Use our Proxy Voting Dashboard to analyse our company voting activities
— Read our Stewardship Statement that explains how we adhere to the Australian Asset Owner Stewardship Code
— Read other articles in Investment News
— Discover how to get more of the future you want as a VicSuper member

Important information

*The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was tabled in the Australian Federal Parliament on 4 February 2019.
**Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry page 409.
*** Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was tabled in the Australian Federal Parliament on 4 September 2018 page 55.
This advice has been prepared without taking into account your objectives, financial situation or needs. You should therefore consider the appropriateness of the advice in light of your individual circumstances before acting on the advice. You should also obtain and consider a copy of the relevant Product Disclosure Statement available at www.vicsuper.com.au before making any decisions. VicSuper Pty Ltd ABN 69 087 619 412, AFSL 237333, Trustee of Victorian Superannuation Fund ABN 85 977 964 496.

Culture is important for all organisations

The importance of governance and corporate culture and the relevance of the Royal Commission’s recommendations extend well beyond the big banks and super funds. All companies rely on individual members of staff to make decisions. By establishing a strong, ethical culture which focuses staff on a purpose and set of corporate values, this culture will encourage employees to act cohesively for the long-term success of the company. Over the coming 12 months we will continue to hold to account all companies in which we invest for their governance, culture and remuneration for the benefit of our members and the wider community.

We will continue to act in the best interests of our members at all times. As a profit to member fund, this has always been and will continue to be our focus.

— Discover more about how we engage with companies
— Use our Proxy Voting Dashboard to analyse our company voting activities
— Read our Stewardship Statement that explains how we adhere to the Australian Asset Owner Stewardship Code
— Read other articles in Investment News
— Discover how to get more of the future you want as a VicSuper member

Important information

*The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was tabled in the Australian Federal Parliament on 4 February 2019.
**Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry page 409.
*** Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was tabled in the Australian Federal Parliament on 4 September 2018 page 55.
This advice has been prepared without taking into account your objectives, financial situation or needs. You should therefore consider the appropriateness of the advice in light of your individual circumstances before acting on the advice. You should also obtain and consider a copy of the relevant Product Disclosure Statement available at www.vicsuper.com.au before making any decisions. VicSuper Pty Ltd ABN 69 087 619 412, AFSL 237333, Trustee of Victorian Superannuation Fund ABN 85 977 964 496.