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Looking to improve stewardship

Sustainable investment in action

October 25, 2019

We believe effective stewardship is a key pillar of sustainable investment.

Stewardship can protect and enhance the value of assets and is a critical part of a well-functioning investment system.

We are active industry participants, involved in numerous collaborative initiatives, and are vocal proponents for a robust, effective and fair investment industry. In addition to our own work, we have partnered with Hermes Equity Ownership Services (EOS) for the last five years to leverage our public advocacy impact. The Hermes EOS team of stewardship experts engage with policymakers, key industry bodies and oversight organizations, working to raise important, systemic issues and drive positive investment industry change. These experts work with their clients to give a powerful voice to critical issues.

More recently, we have expanded our relationship with Hermes EOS and appointed them to conduct corporate engagement and provide voting advice. In addition to the stewardship carried out by the fund’s underlying managers, Hermes EOS is able to supplement this with its resources and expertise to further enhance the investment proposition. Given the fund size, we believe this additional layer of stewardship delivers compelling value at minimal cost, and access to stewardship that may otherwise be very difficult for all but the largest asset owners to get.

Hermes EOS Services provided Potential benefits
  • Over $580 billion of assets under advice invested in >10,000 companies worldwide
  • 15+ years of experience
  • Global team of 32 professionals
  • Engaged with 350 companies on 777 issues during Q1 2019
  • Corporate engagement
  • Voting
  • Public policy

    Covers a wide range of issues including:

  • Climate change
  • Human rights
  • Executive remuneration
  • Cybersecurity
  • Protect and enhance performance
  • Align management with investors
  • Drive industry improvements for a better functioning investment system

Note: In the U.S., Willis Towers Watson’s partnership activity is at the public policy level only. Other services mentioned are done by Hermes, but not specifically for Willis Towers Watson clients.

Source: Hermes Public Engagement Report Q1 2019, March 31, 2019

Investor stewardship: one hand on the wheel?

What investment activity, when done well, can mean improved, cost-effective outcomes for everyone: potentially better returns for investors, better run companies and better controlled societal and environmental footprints?

The answer: stewardship, where asset managers or asset owners engage and vote to positively influence assets they invest in.

Arguably, we believe good stewardship is the most useful function the asset management industry performs. Unlike trying to outperform a benchmark where there are winners and losers, our evidence suggests that effective stewardship has broad benefits. Regulators expect stewardship to offset potential conflicts where there is separation of ownership and control. Previous examples of inadequate oversight have led to accounting scandals, excessive executive compensation, value-destructive acquisitions, environmental damage and loss of customer trust. We believe that shareholders, as a key system check, along with boards and regulators, do have a stewardship responsibility.

Unfortunately, based on our experience, stewardship activities account for only a very small fraction of asset management industry activity. Why is this so? It is tricky to measure, can involve uncomfortable conversations with company management and is difficult for asset managers to monetize given the free rider problem caused by fragmented ownership interests.

In 2009, referring to the global financial crisis, Lord Myners1 suggested institutional investors were “asleep at the wheel” when it came to stewardship. Perhaps it is now fair to say investors have one hand on the wheel — at least among some of the biggest asset managers and asset owners.

But there is still more to do. This paper is a call to action for the investment community to redouble its stewardship efforts.

Seeking to improve practice

“Passive management” is a misleading label when it comes to stewardship. Increasingly, we have found index managers actively seek to improve the basket of securities within an index by acting as long-term owners.

It is good to see the transition from a more rules-based corporate governance function to a broader stewardship approach that looks to address key drivers of long-term value creation.

All the managers in our sample acknowledge their responsibility and the opportunity to create value in this area. They contribute to stewardship at the company level and through various policy initiatives such as the Task Force on Climate-Related Financial Disclosures. All are signatories to numerous local stewardship codes.

It is good to see the transition from a more rules-based corporate governance function to a broader stewardship approach that looks to address key drivers of long-term value creation. The processes and areas of strength differ among managers, which adds diversity — there is no single right way.

Here we highlight positive examples from each of the managers:

BlackRock: voice from the top

BlackRock has a clear “tone from the top” from Larry Fink’s well known public annual letters to company CEOs. This has included a public commitment to double resourcing for the stewardship team, which, at the time, was already the largest across the group of managers.2

LGIM: climate impact pledge

This is a well-signposted, multiyear campaign to encourage companies to manage their exposure to climate risk. Launched in 2016, Legal & General Investment Management (LGIM) issued a 2018 progress report naming leaders and laggards. While others note climate risk as a priority, the difference here is the level of coordinated effort and strong communication around a particular theme.3

SSGA: gender diversity on boards

Stewardship activity has in the past largely been kept behind closed doors. But if the objective is to achieve broad-based change, then we believe sometimes a creative public campaign is powerful. The Fearless Girl sculpture, commissioned by State Street Global Advisors (SSGA) in 2017, got people talking. SSGA identified over 1,200 companies across the U.S., Australia, Canada, EMEA and Japan without a single woman on their board. They voted against the board chair for over 500 companies in both 2017 and 2018 that failed to adequately address this issue. Partly in response to these efforts, 301 companies added a female director.4

UBS: solutions

UBS has created bespoke investment solutions that integrate stewardship, particularly in the areas of climate change and impact. These have been developed by leveraging partnerships with leading asset owners, academics, top universities and in-house intellectual capital.5

Vanguard: team construction

Vanguard established its team and has seen it grow significantly over the last few years, including new joiners with diverse functional experience from a variety of backgrounds. This helps them to engage credibly with directors on relevant topics (such as risk, audit, human capital, finance, legal and investments) to assess board strength and quality of process. Vanguard also appears to effectively leverage its relationship with certain active managers.6

Call to action

We recognize the efforts made by stewardship teams and acknowledge the encouraging momentum in both resources and activities. We think there is a long way for the industry to go given the limited commitment so far and the significant opportunities to add value.

We think there is a long way for the industry to go given the limited commitment so far and the significant opportunities to add value.

Below, we set out topics where progress seems slow and discuss how stewardship tools might be better applied.

Some may view the list as stretching, but we would argue that large index managers have a major opportunity and responsibility to bring robust stewardship with deeper engagement models — leveraging their long horizons, breadth of influence and sizable stakes — rather than allowing a stewardship gap to exist following the diminishing interests of traditional active managers.


Board quality: Boards of corporate or noncorporate entities provide critical oversight. Each of the asset managers in our sample considers this area, but we typically see limited emphasis on the following:

  • The effectiveness of the nominations process
  • The processes of independent directors: skill diversity, time commitment, available resources, range of duties, level of vigilance, and independence
  • Meaningful input on the appropriateness of individuals for board positions

Executive compensation: This area consistently takes up significant bandwidth along with strong shareholder rights, but evolution seems gradual.

Smaller companies: Such companies tend to receive relatively limited attention, particularly if they’re in markets away from the domestic base of the index managers (such as Asia).

Capital structure: Deterioration in corporate balance sheets, for example, due to share buybacks, is rarely discussed. A related issue is the challenge of balancing the interests of bondholders and shareholders.

Climate risk: It’s on everyone’s priority list but, in our view, many progressive initiatives lack sufficient urgency and depth.

Local market norms: We understand that cultural nuances across markets can make pushing against the status quo challenging; however, areas such as the limited gender diversity of boards in Asia or the lack of auditor rotation in the U.S. are often placed in the “too difficult” box.

Sensitive subjects: An underexplored area is how personal or political activities, such as corporate lobbying, affect a company’s financial value. Without full transparency, we feel it is difficult for shareholders to understand the potential financial and reputational risks or determine if the board is adequately overseeing those risks.



It is encouraging to see that the majority of the organizations in our sample have increased internal stewardship resources over time (Figure 1). However, this upward trend is less obvious when compared to total company assets under management (Figure 2) and compared to the total number of investment professionals employed.

Size of stewardship teams over time — the black line shows the average
Figure 1. Size of stewardship teams over time — the black line shows the average

Note: Figures supplied by managers; excludes wider firm resources that may contribute to stewardship activities such as internal active investment teams

Size of stewardship team per $100 billion assets under management — the black line shows the average
Figure 2. Size of stewardship team per $100 billion assets under management - the black line shows the average

Note: For 2018 YTD, data is as at Q2 or Q3 depending on latest availability; assets data sourced from eVestment
Source: BlackRock, Legal & General Investment Management (LGIM), Northern Trust, State Street Global Advisors (SSGA), UBS Asset Management (UBS) and Vanguard, June 30, 2018

So what’s the right number?

The index stewardship team's job specifications are vast given the spread of ownership interests (Figure 3): corporate engagement on dozens of complex issues covering close to 10,000 companies, voting on tens of thousands of resolutions, regionally fragmented public policy engagement, research, disclosure and external communication. We believe this practical task list alone necessitates far bigger teams, and the value proposition further justifies increased resourcing.

If just a quarter of a basis point — often merely a rounding error — of every asset invested was directed to stewardship, it could mean far bigger teams than at present.

This can also allow for hiring people with diverse and highly skilled backgrounds including:

  • Experienced business leaders
  • Technical experts in areas such as the environment or legal
  • Those with traditional active management experience

Currently, we believe this type of expertise is often not present.

The index manager ownership fragmentation challenge
Figure 3. The index manageer ownership fragmentation challenge

Source: MSCI ACWI IMI and MSCI Frontier Markets IMI as of June 30, 2018. Excludes listed companies who do not meet index inclusion rules (free float adjustments, market cap, liquidity, etc.). This number is an approximation, and actual numbers may be more or less than presented above.
For illustrative purposes only


We observe a lack of tangible, specific milestones around what stewardship success looks like, even on prioritized topics such as remuneration, climate risk or board quality. Perhaps related, we feel stewardship seems to lack urgency and accountability is soft.

This may lead to the pursuit and celebration of inadequate initiatives — in terms of timeliness, scope or magnitude — particularly in pressing areas such as climate risk.

Policies, high-level annual voting statistics and selected anecdotal examples of company discussions paint an incomplete picture. We feel clearer objectives coupled with detailed activity and impact reports on key stewardship themes would allow progress to be measured and enable more engaging communication with clients.

Another useful disclosure would be explanations of voting decisions, including related engagement activity, at controversial annual general meetings.

Levels of transparency around stewardship activity currently differ widely by manager.


Care needs to be taken when reading into voting records. Sometimes an asset manager will be making significant engagement efforts behind the scenes with good progress on a particular issue and a dissenting vote is not required.

Still, we feel at times there can be too much reticence to vote against company management in order to protect relationships and perhaps to avoid being associated with an “activist approach.” One example is nonroutine shareholder resolutions where some asset managers appear to have a strong default position of supporting company management. This may act as a barrier to change and send a false signal to other investors and peer companies about the issue in question.

Despite it being one of the tools available for stewardship, none of the asset managers in our sample has ever filed a shareholder resolution, although we understand one plans to do so in future.

Stock lending frequently occurs, but it is very rare to recall stock before a vote. This does not seem ideal as third parties may borrow stock with the intention of gaining voting power.


There are pockets of excellent collaboration across the industry, but collaboration among managers within our sample seems low. Large index managers are used to competing intensely for market share, but stewardship is an area where collaboration not competition is often in the clients’ interests.

Only the three smaller managers in our sample are signatories of Climate Action 100+, the world’s largest collaborative initiative around managing climate risk.


The stewardship challenge calls for leadership-minded thinking and, particularly for large index managers, a universal owner mindset could capture both the responsibility and opportunity. They could more proactively set out their investment beliefs and, consequently, the standards expected of companies across a range of issues including those raised in this article, and more.

The long and winding road ahead

Stewardship is an underappreciated but critical part of corporate oversight. It is showing encouraging momentum across the industry, and index managers are stepping up — with some good signs of progress. Still, there is a lot more to reach for, with structural challenges to cut through given highly-fragmented ownership interests.

For asset managers to put both hands firmly on the wheel, more of their clients and intermediaries need to pay close attention and call for a safe journey. Then there will be reason for optimism.


This document was prepared for general information purposes only and does not take into consideration individual circumstances. The information contained herein should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Towers Watson Investment Services, Inc., and its parent, affiliates, and their respective directors, officers, and employees (“Willis Towers Watson”) to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. The information included in this presentation is not based on the particular investment situation or requirements of any specific trust, plan, fiduciary, plan participant or beneficiary, endowment, or any other fund; any examples or illustrations used in this presentation are hypothetical. As such, this document should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice. Willis Towers Watson does not intend for anything in this document to constitute “investment advice” within the meaning of 29 C.F.R. § 2510.3-21 to any employee benefit plan subject to the Employee Retirement Income Security Act and/or section 4975 of the Internal Revenue Code.
This document is based on information available to Willis Towers Watson at the date of issue, and takes no account of subsequent developments. In addition, past performance is not indicative of future results. In producing this document Willis Towers Watson has relied upon the accuracy and completeness of certain data and information obtained from third parties. This document may not be reproduced or distributed to any other party, whether in whole or in part, without Willis Towers Watson’s prior written permission, except as may be required by law.
Views expressed by other Willis Towers Watson consultants or affiliates may differ from the information presented herein. Actual recommendations, investments or investment decisions made by Willis Towers Watson, whether for its own account or on behalf of others, may differ from those expressed herein.


1. Julia Finch, “Myners in veiled criticism of M&S over Rose's two roles,” The Guardian, June 17, 2010.
2. Larry Fink, CEO, BlackRock, 2019 letter to CEOs, “Purpose & Profit”.
3. Legal & General Investment Management takes action on climate change risks, press release, June 11, 2018.
4. “State Street Global Advisors Guidance on Enhancing Gender Diversity on Boards” May 2019.
5. UBS Climate Aware Strategy, “Our approach to company engagement,” 2018.
6. Drexel University Steinbright Career Development Center, Employer Diversity Spotlight.

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Stephen Miles
Head of Sustainable Investments
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