From 2017, Danish institutional investors are supposed to follow a new stewardship code holding seven recommendations on active ownership. The code, drafted by the Committee for Good Corporate Governance at the initiative of the Minister of Business and Growth, has been through a public hearing in September. After adjustments, the final version is planned to be published in December this year.

Although final formulations are not in place yet and despite the code’s status of being a piece of quite flexible “comply or explain” soft law, it is expected to significantly influence the way Danish pension funds, mutual funds, banks among others, are conducting their investments. Among the most important changes will be that both asset owners and asset managers are recommended to monitor, be in dialogue with, and vote on all relevant companies in their equity-portfolio. However, the Committee also stresses that it should be up to the investors to decide how, when and on which equities to be active, following a principle of proportionality e.g. based on the share of a company, they own.

Active ownership should be international

The first recommendation in the draft version is that institutional investors should publish a policy for active ownership covering equity investments in Danish listed companies. However, both NGO’s and Danish investor organizations like Finansrådet, Forsikring & Pension and Investeringsfondsbranchen have criticized that the active ownership should be focused on Danish companies only, and not include international companies, where the potential risks can actually be higher. Most larger Danish institutional investors already have a set-up for active ownership without this distinction.

The second recommendation is that institutional investors should monitor and be in dialogue with the companies they invest in, taking into consideration the investment strategy and the principle of proportionality. The Committee does not want to interfere on what issues to be dealt with, when Danish Investors are influencing the companies they are investing in. That is not in line with recommendations of acknowledged international guidelines like ICGN Global Stewardship Principles, issued by the trusted International Corporate Governance Network and the Global Statement on Investor Obligations and Duties, issued by the PRI, the UN Environment Programme Finance Initiative (UNEP FI) and the private Generation Foundation. These institutions recommend that institutional investors should actively engage on issues that are decisive for long term value creation, e.g. environmental, social and corporate governance issues (ESG).

In the public hearing, the Danish NGO’s suggested that investors should follow international guidelines such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinationals.

The third recommendation is that Danish institutional investors should determine when and how they will escalate their active ownership e.g. by collaborating with other investors, meeting chairman of the company board, supporting resolutions at the general assembly and public critique. The investor organizations suggest in their answers to the public hearing that their members should inform the public about how they will escalate, but not when. Similar to the international guidelines, the Danish Committee also recommends that institutional investors should establish a policy for cooperation with other investors in order to achieve greater impact and effectiveness.

Voting on all relevant equities

The fifth recommendation is that Danish institutional investors should adopt a voting policy, vote on all relevant equities in their portfolio, and be willing to inform interested stakeholders, whether and how they have voted on resolutions at the general assembly. The organization for Danish mutual funds would like to change the formulations to make sure that voting is only necessary, when the individual investor considers it to be valuable. Moreover, the organization would also prefer that stakeholders could only ask for voting information on specified individual companies.

The Danish investor organizations are also critical towards the sixth recommendation saying that the policy of active ownership should include a description of how conflicts of interests, e.g. in relation to clients and board members, are identified and addressed. They argue that this is already taken care of in existing internal procedures, and making it public does not create value.

The final recommendation is that Danish institutional investors should report on an annual basis on their activities regarding active ownership, including voting. The Committee emphasizes that it is important to strike the right balance between the level of transparency and confidentiality regarding dialogue with the companies. Not surprisingly, the Danish NGO’s are suggesting more reporting, while the investor organizations in their comments warn about unnecessary new reporting duties.