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June 2020

Engagement Policy

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Our purpose, strategy and culture

Charles Stanley has developed a strong and distinctive corporate culture, underpinned by our company values:

  • Fair
  • Caring
  • Progressive

These values apply to all facets of our operations and services as a firm and speak implicitly to the sustainability of our business model and the benefits our investment offering provides to our clients.

Our express purpose is to create long term value for our clients and stakeholders, including staff and shareholders. All Charles Stanley policies and procedures are reviewed frequently in light of this, with references where appropriate to ESG, Stewardship and Engagement principles.

We pride ourselves on providing personalised investment management and advice, assuming responsibility for helping our clients to grow their wealth and achieve their financial goals. Historically a stockbroking firm, we retain many clients who still wish to operate in that manner, so whereas our investment services are now significantly wider we face challenges in balancing the varying Stewardship and Engagement needs of our clients.

Whilst some clients may want to retain investment control, only requiring Charles Stanley to assist them in executing their investment decisions, approximately half of our total assets under management and administration comprise of discretionary managed clients, this now being the core of our business. For these clients our investment managers are entrusted to make investment decisions based on each client’s specific needs, considering their objectives, time horizon, risk appetite and any ethical views. In order to provide this truly bespoke service to clients, our investment managers operate under an autonomous business model, whereby they have operational independence over investment decisions.

Charles Stanley is a responsible investor and has policies and procedures that enable our investment managers to integrate Environmental, Social and Governance (ESG) metrics into the construction and monitoring of managed client portfolios. We believe that this better enables our investment managers to assess the non-financial risks and opportunities to which investments and overall portfolios are exposed. 

In addition to ESG integration, we also encourage our investment managers to vote on behalf of their client holdings at shareholder votes. Under our client terms, we are only able to exercise the votes of our discretionary managed clients. For our largest 100 aggregate discretionary client shareholdings by value, we use the services of ISS as our proxy voting adviser for when individual investment managers choose not to exercise voting rights on behalf of their discretionary clients. We take this proxy voting service as guidance and it is subject to the oversight of our Research Team. We believe its voting recommendations and engagements with investee companies are in line with our values at Charles Stanley, however we have the right under our agreement with ISS to exercise votes contrary to its recommendation where we deem this appropriate. Where we receive voting instructions on behalf of our execution-only and advisory clients, we will seek to exercise client votes on their behalf.

Charles Stanley is a signatory to the UN Principles for Responsible Investment (UN PRI). Under its reporting principles, our firm is provided with review and assurance that our approach to Stewardship and Engagement continues to service our client needs effectively.

The Shareholder Rights Directive as amended (SRD II) aims to promote effective stewardship and long-term investment decision making, by enhancing the transparency of asset manager investment and engagement strategies. As an investment firm providing portfolio management services to clients, Charles Stanley is considered an asset manager. This document sets out our engagement policy, in line with the requirements of SRD II.

ESG in our investment process

Charles Stanley believes that an active approach to managing client portfolios – both in terms of asset allocation and stock selection - is the most appropriate means of generating the type of returns our clients expect, whilst allowing for the flexibility that their personal circumstances may require.

We empower our investment managers to construct client portfolios that take into account client return expectations, risk appetite and a whole range of individual requirements, which can include cherished holdings and known future liabilities, including potential Capital Gains Tax liabilities. As a result, our managers require a high degree of flexibility in the investment approach they adopt and the range of investments they can use. Nonetheless, we ensure that all client portfolios are managed within the appropriate risk parameters and in line with clients’ investment time horizons.

Research sits at the heart of Charles Stanley’s investment activities and we have a well-resourced Research Team, which provides the full range of investment support and guidance covering asset allocation, active and passive third-party investments, direct equity and portfolio construction. 

Charles Stanley takes a broad approach when evaluating the merits of an investment. In addition to financial considerations, we recognise that non-financial risk factors – including environmental, social and governance (ESG) factors - can bear just as much influence as financial factors on the performance of a company. We take a multi-faceted approach to incorporating responsible investment into our investment process, which includes observing the principles of Stewardship and Engagement as outlined herein, considering ESG in our investment analysis and voting relevant client holdings where we deem it appropriate.

We believe employing a combination of these methods helps us better to achieve our central purpose, which is to maximise risk-adjusted returns for our clients by seeking out companies with sustainable business models that can deliver long term growth. We take a bottom-up approach to ESG analysis and the incorporation of ESG into the investment process is carried out by our research analysts and investment managers. In keeping with the services, we offer, however, investment managers are not bound to follow the recommendations of research analysts and it is recognised that ESG is one of many factors an analyst or investment manager needs to consider in forming a view of the risks and opportunities to which individual companies and their respective industries are exposed. Where an investee company has serious ESG issues which are believed to have a potentially material impact on the company’s performance, this will be expressed in an analyst’s research output made available to all investment managers. Engagement actives can be resource intensive and, in some circumstances,

it is more appropriate to sell investments that have material adverse ESG issues, rather than engaging with the company in question.

To assist with the incorporation of ESG analysis into their investment analysis and decision making, our research analysts and investment managers are provided with data from a leading ESG rating provider. It should again be emphasized that ESG is not an investment objective in its own right and is just one of the factors we may consider when determining the potential risks and returns of an investment. We have conducted extensive due diligence on the provider of our ESG data and are satisfied with its policies and procedures, which we keep under review.

As a wealth manager our clients are predominantly retail clients, who do not have their own policies on stewardship and engagement. Where our clients are institutional investors however, such as charities and pensions funds, we take heed of any stewardship and investment policies.

Negative and positive values-based screening is client-led and is not imposed on clients unless they wish to construct a portfolio using these approaches.

We do not engage in securities lending with client holdings.

Our approach to Stewardship

The Stewardship Code is overseen and published by the Financial Reporting Council, an independent regulator overseeing financial reporting, accounting and auditing and corporate governance. The Code sets the benchmark for institutional investors to meet ownership obligations in respect of UK companies, and the FRC requires it to be applied on an “apply and explain” basis, meaning that in order to be a signatory firms must apply all principles and explain how they have done so. Whilst Charles Stanley is not a signatory of the FRC Stewardship Code, we endeavour to use its principles to help shape and inform our stewardship approach.

Charles Stanley primarily manages the assets of retail investors; we have a limited number of institutional investor clients. However, we think it is in the interests of all our clients that we disclose our policy on how we exercise voting rights relating to investments held on their behalf. For such clients, as appropriate, Charles Stanley may seek to engage and vote on any issue affecting the long-term value of a company in which we have invested on our clients’ behalf. Our position in relation to the Stewardship Code and the requirements of SRD II is set out on the following pages.

Discharging our stewardship responsibilities

As a financial services organisation, our primary responsibility is to maximise the investment returns of our clients in accordance with our contractual relationships, and in our view this is always best achieved through the consistent identification of quality investment opportunities for our clients’ funds, and to dispose of investment holdings where we are dissatisfied with that investment’s prospects for share price appreciation. In this way, we see stewardship of investee companies as an integral part of the wider investment process and employ various methods of engaging and monitoring to achieve this. 

Under Charles Stanley’s terms of business, our firm has the contractual right to vote only on behalf of clients where we have a discretionary investment management mandate. We do not have a similar contractual right to vote on behalf of investments held by our advisory and execution-only clients, where they are solely responsible for exercising their right to vote. As Charles Stanley is a whole of market firm, offering a broad range of investment services and asset classes, the typical aggregate holding size tends to be smaller. This reduces the scope for direct engagement with the governance of investee companies. Our favoured approach, therefore, is based on the identification of high quality investment opportunities, and the disposal of investments where there is dissatisfaction with their prospects for share price appreciation.

However, Charles Stanley recognises that the maximisation of client investment returns may sometimes require a greater level of engagement with investee companies, including entering into an active dialogue with investee company management, and the resources used for such engagement will be managed according to the circumstances of each case.

We do not outsource our stewardship responsibilities, albeit our voting decisions may be based on the research and recommendations of external proxy voting service providers, as set out in this policy.

Whilst Charles Stanley is one of the UK’s top ten wealth management firms as measured by assets under management, we are not considered to be systemically important. We do however recognise that no matter how big or small, each firm has a role to play in contributing towards the effectiveness of the financial systems. By ensuring our business is solidly financed and conservatively run, with a strong risk control culture we are able to continually ensure that Charles Stanley does not pose undue risk to the financial system given our assets under management. We also participate in industry bodies such as the Investment Association and The Investment and Savings Association (TISA), to ensure we are able to cooperate where appropriate on regulatory and financially systemic issues. In addition, Charles Stanley is a signatory to the UN PRI and is committed to publicly reporting its adherence to them, working in tandem with our Stewardship Code responsibilities.

Our guidelines on when and how we escalate our stewardship activities

Where we have significant direct holdings in individual companies, we may seek to act in the best interest of the clients by exercising any votes controlled by our firm; we may meet company management on an ad hoc or regular basis and would use these opportunities to ascertain that the company has satisfactory policies and governance arrangements in place. If we consider that a company has environmental, social or governance arrangements that are not in the best interests of shareholders, we may seek to inform the company management of this fact or disinvest from the company.

 Where we wish to escalate matters, we can exercise the rights to vote on behalf of our discretionary clients.

We employ the services of a proxy voting service provider, ISS; however, due to the wide range of securities available to our discretionary clients, we only vote routinely those shares in our 100 holdings by aggregate value. For these shares we will tend to vote in accordance with the recommendations of the proxy voting service provider, although we reserve the right to vote differently.

In addition, there are occasions when our research team may encourage investment managers to vote in a way they deem to be in the best interests of shareholders, for example where major corporate events are taking place, such as a merger or takeover. Investment managers are free to decide how to vote the shares held by clients whose portfolios they manage.

Many investments held for our clients take the form of passive or collective investments. These may each hold a large number of underlying companies, but since these are held through a collective investment vehicle any voting on these holdings will be at the discretion of the funds’ managers and not Charles Stanley. As such, there is less scope for Charles Stanley to influence directly the governance of these companies. Our team of collectives analysts carries out regular interviews with the managers of many collective funds. Their ongoing analysis and monitoring approach include ascertaining whether a fund manager complies with the Stewardship Code and their approach to voting shares held in its funds. Compliance with the Code is recorded as part of each fund update report so that Charles Stanley investment managers can assess whether the funds they hold on behalf of clients meet this criterion.

Whilst our autonomous investment model can complicate the integration of stewardship and engagement across Charles Stanley, within our centralised research team we offer investment managers the ability to follow a centralised model portfolios for UK and international equities. Within these models, when assets are being discussed and debated for inclusion or removal, Stewardship and ESG considerations are at the forefront. Financial and non-financial investment rationales are always considered and highlighted clearly in relevant documentation.

From our interactions and discussions on investee companies undertaken in the course of establishing and maintaining our model portfolio service we offer to our investment managers should they wish to follow, there are many examples of escalating our stewardship activities.

How we approach conflicts of interest

Our policy summary regarding conflicts of interest is regularly reviewed and any changes approved by the Board. It is set out in Our Services and Business Terms and available on our website here.

Where Charles Stanley exercises its contractual right to vote the holdings of discretionary investment management clients, the votes would be exercised in the interests of clients.

The Group takes all appropriate steps to identify conflicts of interest between:

  • the Group, including its managers and staff, and its clients; and
  • one client and another client, that arise or may arise in the course of providing investment services.

This includes those conflicts arising from the receipt of inducements from third parties, or by the Group’s own remuneration and other incentive structures. 

Specific situations in which it has been identified that conflicts may arise are set out in the firm’s Conflicts Register, which records those services and activities in which conflicts may arise.

The Group maintains and operates effective organisational and administrative arrangements in order to take all appropriate steps to prevent or manage such conflicts from adversely affecting the interest of clients.

For the purpose of identifying the types of conflicts of interest that may arise, and which may entail a risk of damage to clients’ interests, the Group takes into account whether the Group or a member of staff:

  • is likely to make a financial gain, or avoid a financial loss, at the expense of the client;
  • has an interest in the outcome of a service provided to the client or of a transaction carried out on behalf of the client, which is distinct from the client’s interest in that outcome;
  • has a financial or other incentive to favour the interest of another client or group of clients over the interests of the client;
  • carries on the same business as the client; or
  • receives or will receive from a person other than the client an inducement in relation to a service provided to the client, other than the standard commission or fee.

 The Group’s procedures for approving new business activities, products or services also include consideration of any new conflicts that may arise as a result.

When service providers are engaged with for the purposes of providing Stewardship and ESG, conflicts management procedures are followed, and any actual or potential conflicts identified are recorded and mitigated. This is revisited on an annual basis, to review any existing Stewardship related conflicts and identify any new conflicts which may have arisen in the preceding 12 months.

Inevitably, conflicts of interest may arise from time to time, for example where there is voting on matters affecting both clients and Charles Stanley itself.

Examples of potential conflicts may exist where:

  • Charles Stanley is the manager of a collective investment fund in which the firm’s discretionary investment management clients are invested.
  • The firm’s discretionary investment management clients are invested in shares of Charles Stanley Group PLC. Charles Stanley is a wholly owned subsidiary of Charles Stanley Group PLC, a company whose shares are listed on the London Stock Exchange.

Where there is such a conflict that in our view cannot be readily resolved, the matter would be escalated to senior management for an independent decision on whether and how such shares should be voted.

Our client needs 

As at March 2020 Charles Stanley operated with a total of just over £20 billion of assets under management and administration, of which approximately £13 billion was in a discretionary managed service. Most clients are retail discretionary managed clients, either as part of our traditional bespoke discretionary managed portfolio service or the Charles Stanley in-house model portfolio and fund ranges. There is also a nominal amount under management on behalf of professional or institutional clients.


How we engage actively with companies in which we invest

Whilst we maintain an autonomous business model, investment managers are able to rely on guidance from our in-house research division, which provides specialist advice on asset allocation, stock selection and collective vehicle selection and therefore engagement and monitoring will largely be a function of the centralised investment research process. As a long-established UK investment firm, Charles Stanley has frequent opportunities to meet with the management of actual and prospective investee companies. Monitoring occurs around company financial reporting, in conjunction with news and announcements and when research is being conducted into investment ideas.

We meet regularly with investee companies and fund managers and both capital structure and corporate governance are key areas considered among a wide range of issues such as strategy and investment performance. Where a company does not comply with the spirit of the UK Corporate Governance Code, in our opinion, we will consider its explanation as one factor in forming our overall view on whether the company represents a quality investment opportunity for our client.  Views are clearly expressed in analyst research output, which is made available to all investment managers. In the case of collective investments such as funds, we routinely identify fund managers who are compliant with the Stewardship Code and UN Principles for Responsible Investment and this is detailed in our internal research for investment managers. However, investment managers have discretion over whether to follow the recommendations of the Research team.

As outlined above, where the higher costs of additional engagement appear justified in the context of those aggregate client holdings where we control the votes, we may seek to engage the board or management of the investee company.

From time to time, issuers of securities and their advisers may seek to engage with our firm in relation to a new issue of shares where there may be an element of inside information. All such enquiries must be directed through our New Issues Desk ([email protected]), which has processes for evaluating approaches and coordinating our firm’s response as appropriate.

Our approach to collective engagement with other investors

Where we deem it appropriate and effective, we will seek to engage collectively with other investors, and to escalate our activities in collaboration with them. Any such engagement would be on a case-by-case basis.

Through our membership of the UN Principles of Responsible Investment’s Collaborative Engagement Platform, we have worked with other members to exert influence over industries in which our clients have direct or indirect exposure when we believe there is scope for improvement in the standard of business practice as we view this to be in the long term interests of our clients. A key engagement we have been involved in is the Human Rights in the Extractive Industry initiative where the core aim is to assess how well target companies recognize the degree of human rights risks given the nature of their business, and propose ways in which they can improve disclosure of their human rights practices to encourage better standards within the industry.

Charles Stanley invests in third party funds, and we expect fund managers to comply with the Stewardship Code where appropriate. Our analysts will engage with fund managers at least annually in line with our normal fund due diligence and provide feedback to fund managers where considered necessary or useful for helping them improve their stewardship and ESG practices.

We benefit from our proxy adviser’s pooled engagement service enabling us to participate in escalations with other shareholders on issues we find pertinent. We are also able to instigate pooled engagement issues with other shareholders via the service should we deem greater engagement with the management of investee companies is required. We believe this is the best proportionate solution for Charles Stanley’s autonomous model. As a firm we are unlikely to have significant holdings in many issuers and the pooled engagement service allows us to amplify our voice by collaborating with other shareholders. This is a new service we have engaged with ISS to provide for us in order to participate and create more effective collective engagement opportunities. Once this is more established, we will be able to report on collective engagements and outcomes to which we have contributed.

In general, we welcome any opportunity to work with our peers to engage with companies in which we invest to allow us greater influence in raising governance standards. Please contact [email protected].

How we vote on behalf of our clients

We believe voting is an effective method of engagement and we support our clients in exercising their right to vote where possible.

We use the services of proxy voting service provider Institutional Shareholder Services (ISS) to advise us on corporate governance issues and provide voting recommendations on our top one hundred holdings of equity and fund securities.

Our proxy adviser, ISS has provided us with their benchmark policies for conducting research and generating voting recommendations. We have recently reviewed the services they provide for us in relation to proxy voting and have revisited their policies. In doing so we have reconfirmed that we are happy to continue using their benchmark voting policy, but additionally have signed up to their sustainable voting policy to ensure that our commitment to exercising voting rights are utilised as fully as possible.

The advice of our proxy voting service provider is based on the UK Corporate Governance Code and its own set of voting principles is built on a collection of industry best practice guidelines, which are designed to protect and enhance shareholders’ interests. ISS has a long-standing relationship with many of the UK-listed issuers within its coverage universe and regularly engages with the senior management teams of such issuers. ISS has a set of benchmark policy recommendations and proxy voting guidelines. These comprise four main areas: operational items, board of directors, remuneration and capital structure. There is also another set of guidelines for ESG related matters. ISS conducts rigorous analysis and investigation in line with these policies for the investee companies on which it intends to recommend a vote.

With its knowledge of the UK Corporate Governance Code and a long history of corporate engagement, we believe the provision of advice from our proxy voting service provider enhances our engagement with investee companies. We believe it complements our investment strategy and client needs, and the recommendations they provide are based on values which align to ours.  However, we are not bound to follow the advice of ISS and retain the ultimate say on which way to vote on each item raised at general and extraordinary shareholders meetings, based on what we believe is in the best interests of our clients.

Where we believe it would assist shareholder interests, we may inform the company in advance of our voting intentions.

 It is not the current policy of Charles Stanley to report routinely to clients in relation to their holdings or any other client’s holdings.

On an annual basis by 30th June each year, we report on the implementation of the principles of this policy and disclose publicly our most significant votes during the previous calendar year. ‘Most significant votes’ is defined as the size of our shareholding as a proportion of an issuer’s total voting rights. In practice, we would expect to report on our voting record for at least shareholdings of 3% or more of the issuer’s voting rights. In practice, however, the report will also seek to disclose other potentially useful metrics. Our annual disclosure can be found here.

We regard our clients as the only stakeholder to whom we owe a duty of reporting, where requested. We are happy to disclose and report further details of voting matters on request, at frequencies to be agreed. Such disclosure would relate solely to votes exercised on behalf of the requesting client.

Where clients request a voting engagement, we would direct them to the reports disclosed on our website. We do not provide bespoke engagement reporting for our clients.

Where our non-managed clients ask us to vote on their behalf and request voting information relating to those votes, we are able to provide high level information on number of shares voted and whether for or against the resolutions voted on.

Over the next year we are working on the development of a more detailed voting disclosure on our websites, possibly including interactive tools for clients.

We do not seek independent assurance of our stewardship activities and voting performance, on the basis that the level of engagement and the scale of the firm’s activities for clients would not justify the additional expense to clients.