Dimensional Fund Advisors Ltd.
Dimensional believes that good corporate governance by portfolio companies driven by sound governance policies is in the best interests of our clients and will help to maximize the value of their investments. This is why we view shareholder engagement through proxy voting where we have been requested to vote by our client as an important investment function and have a Corporate Governance team within the Portfolio Management department.
The purpose of this statement is to discuss Dimensional's adherence to the 7 principles of the UK Stewardship Code. The information provided is also applicable to our global investment monitoring and engagement activities. As used in this statement "Dimensional" and "we" refer to the activities of Dimensional Fund Advisors Ltd. and its affiliates.
PRINCIPLE 1: Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities.
We strive to maximize shareholder value at our portfolio companies by promoting best governance practices. We believe that better governance practices will be reflected in higher security prices as a result of a combination of lower discount rates, higher cash flows and better risk management. In particular, our efforts include:
Proxy Voting: In 2018, Dimensional voted proxies at over 15,000 meetings.
Dimensional prepares Proxy Voting Policies and Procedures (“Proxy Voting Policies”) which include Proxy Voting Guidelines containing principles on how proxies will generally be voted (“Guidelines”) and generally will instruct voting of proxies in accordance with the Guidelines. Dimensional has determined that, generally, voting proxies in accordance with the Guidelines should be in the best interests of clients. The Guidelines provide a framework for analysis and decision making but do not address all potential issues. The Guidelines are published on our website and are updated at least annually and additionally as needed.
Proxy voting is the act of exercising shareholder voting rights on behalf of clients, and Dimensional views proxy voting as an integral part of its investment management process. As Dimensional believes that stronger corporate governance practices will be reflected in higher security prices, Dimensional seeks to make proxy voting decisions consistent with the goal that boards and management of portfolio companies are focused on protecting and enhancing shareholder value.
When voting (or refraining from voting) proxies, Dimensional seeks to act in the best interests of the funds and accounts we manage. We seek to maximize shareholder value considering the standards of the relevant legal and regulatory regimes, listing requirements, regional stewardship codes, and any social and sustainability guidelines of specific funds or accounts. Dimensional will evaluate management and shareholder proposals on a case-by-case basis.
We expect the members of a portfolio company’s board to act in the interests of their shareholders. Each portfolio company’s board should implement policies and adopt practices that align the interests of the board and management with those of its shareholders. Since a board’s main responsibility is to oversee management and to manage and mitigate risk, it is important that board members have the experience and skills to carry out that responsibility.
Dimensional believes that portfolio company boards are best positioned to address environmental & social (E&S) issues within their duties. If a portfolio company is unresponsive to material E&S risks which may have economic ramifications for shareholders, Dimensional may support shareholder proposals related to E&S issues and may also vote against or withhold voting from directors individually, committee members, or the entire board on such issues. Dimensional may also engage with portfolio companies to better understand the alignment of the interests of boards and management with those of shareholders on E&S topics.1
For sustainability-focused funds, Dimensional may support shareholder proposals aimed at enhancing the disclosure around certain environmental issues. For socially-focused funds, Dimensional may also support shareholder proposals aimed at enhancing the disclosure around certain social issues. In limited circumstances, for all funds, Dimensional may support proposals requesting companies take specific steps to address material risks from environmental or social issues.
To supplement its internal research and analysis, Dimensional has engaged proxy advisory firms to provide information on shareholder meeting dates, research on proxy proposals, voting recommendations based on our proxy voting policies and procedures, and vote execution; however, Dimensional retains final discretion on how to vote. Dimensional’s Corporate Governance Committee reviews the capacity and competency of these firms annually.
The voting history of our UK OEICs and Irish UCITS, as well as our US mutual funds (“Dimensional Investment Companies”), Australian trusts and Canadian funds, is posted on our relevant regional websites. Our Proxy Voting Guidelines are publicly available and copies of our Proxy Voting Policies and Procedures are provided to our clients on request (the Proxy Voting Guidelines and the Proxy Voting Policies and Procedures being together the "Proxy Voting Policies"). Dimensional’s Proxy Voting Policies are also updated at least annually and additionally as needed. These resources are made available so that clients will be aware of how we discharge our Stewardship responsibilities.
Monitoring of Service Providers: To assist with our internal evaluation of proxies and operational processing of proxy voting, we utilise services from leading third-party proxy advisory firms. We monitor services provided by these proxy advisory firms to consider whether they have the capacity and competency to adequately analyse proxy issues and can make their recommendations in an impartial manner and in the best interests of Dimensional’s clients. Purchasing research from multiple proxy advisory firms in certain circumstances assists us in monitoring the quality of the research provided by the service providers and also serves as a source against which to check our own assessments. Monitoring of proxy advisory firms may include some or all of the following:
- periodic sampling of votes cast by the proxy advisory firm to seek to confirm that the Guidelines adopted by Dimensional are being followed,
- onsite visits to the proxy advisory firm office and/or discussions with the proxy advisory firm to determine whether the proxy advisory firm continues to have capacity and competency to carry out its proxy obligations,
- a review of the proxy advisory firm’s policies and procedures, with a particular focus on those relating to identifying and addressing conflicts of interest and ensuring that current and accurate information is used in creating recommendations,
- inquiring as to the proxy advisory firm’s compliance with relevant regulatory regimes, including the European Union Shareholder Rights Directive II,
- requesting the proxy advisory firm to notify Dimensional if there is a change in the firm’s material policies and procedures, particularly with respect to conflicts, or material business practices (e.g. entering or exiting new lines of business), and reviewing any such change, and
- participating in the proxy advisors’ annual policy formulation processes.
Dimensional does not use third parties for portfolio company engagement.
Engagement: Our corporate governance efforts include both direct communication with management as well as letter campaigns. In 2018, we contacted nearly 600 companies to better understand their governance practices and to explain our Proxy Voting Policies.
Participation in, and Contribution to, Industry Organizations: In addition to our statement on the UK Stewardship Code, we also have a statement with respect to the Japan Stewardship Code and are a signatory to the UN Principles for Responsible Investment. We are members of the Council for Institutional Investors and the Harvard Corporate Governance Roundtable, among other industry organizations. We actively participate in these organizations by attending their conferences and speaking on panels.
Internal Projects and Research: We conduct our own research on what it means for companies to have good governance policies and practices. Our day-to-day governance activities are conducted by a dedicated team of corporate governance personnel within our Corporate Governance Group which reports to Dimensional’s Corporate Governance Committee. The Corporate Governance Group applies the policies and procedures defined by the Corporate Governance Committee, provides daily monitoring of governance matters and raise issues for further analysis and decision making to the Corporate Governance Committee. The Corporate Governance Committee is comprised of the most senior members of Dimensional, evidencing Dimensional’s commitment to corporate governance. As of December 31, 2018, the Corporate Governance Committee included from our parent entity, among others, the Executive Chairman, the Co-CEO, several Directors, the Co-Heads of our Investment Policy Committee, the Chair of the Investment Committee, the Deputy General Counsel (ex-officio) and the Chief Compliance Officer.
PRINCIPLE 2: Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.
Conflicts of interest may exist in the course of communicating with a portfolio company or voting on a proxy. For example, there can be a potential conflict of interest if Dimensional is actively soliciting investment advisory business from a client or potential client which is also the company soliciting a proxy or if Dimensional retains the services of a third-party service provider which is also the company soliciting a proxy.
To address the limited instances in which a potential conflict may arise, with respect to a proxy vote, Dimensional maintains an explicit policy on managing such potential conflicts which is focused on the principle of preserving shareholder value. The procedures Dimensional follows in the event a potential conflict of interest arises with respect to a vote are set out in a specific section of Dimensional’s Proxy Voting Policies and are summarized below.
Engagements are generally handled by the Corporate Governance Group, and in certain cases portfolio managers are involved. When engaging, Dimensional seeks to handle any communications with portfolio companies in accordance with a standard protocol and consistent with Dimensional’s Proxy Voting Policies regarding conflicts.
As proxies that Dimensional receives on behalf of its clients generally will be voted in accordance with the predetermined Proxy Voting Guidelines, we expect that the vast majority of proxies voted should not be affected by any conflicts of interest. Furthermore, as Dimensional is privately-held, we do not have conflicts of interests that may arise from being a subsidiary of a publicly-traded entity.
In the limited instances where (i) the Corporate Governance Group is considering voting a proxy not prescribed or perceived to be contrary to the Guidelines, or (ii) the Corporate Governance Group believes a potential conflict of interest exists, the Corporate Governance Group will disclose the potential conflict to a member of the Corporate Governance Committee. As a matter of practice, the Chief Compliance Officer is also notified. Such disclosure will describe the proposal to be voted upon and disclose any potential conflict of interest including but not limited to any potential personal conflict of interest (e.g., familial relationship with company management) relating to the proxy vote, in which case the conflicted individual will remove himself or herself from the proxy voting process.
If a Committee member has actual knowledge of a conflict of interest and recommends a vote not prescribed or perceived to be contrary to the Proxy Voting Guidelines, the Committee member will bring the vote to the Committee which will determine how the vote should be cast, keeping in mind the principle of preserving shareholder value, or to abstain, unless abstaining would be materially adverse to the client’s interests. An annual report on any such determination is provided to the board of trustees/directors of the Dimensional Investment Companies.
For more information, please see Dimensional's Proxy Voting Policies.
PRINCIPLE 3: Institutional investors should monitor their investee companies.
Dimensional’s investment philosophy is based on the belief that in liquid capital markets, prices reflect all publicly available information. This includes information about a portfolio company’s strategy, financial and non-financial performance, risk, capital structure, social and environmental impact, and corporate governance. Dimensional considers prices, and therefore the information contained in prices, throughout its investment process. In addition to this belief that the data is already incorporated into the price of the portfolio company, Dimensional also monitors these factors and uses this information in different parts of our investment process.
For example, combining prices with certain fundamental variables (including financial performance and capital structure) can inform us about differences in expected returns, and this information is used in our portfolio construction and management processes. Members of the research and portfolio management teams use information from multiple data sources and news feeds to monitor information about portfolio companies’ financial performance and capital structure. This monitoring allows Dimensional to quickly incorporate portfolio company events (such as those driven by a change in a company’s capital structure) by making relevant adjustments to the information Dimensional pulls from a portfolio company’s financial statement data. Dimensional also monitors non-financial and ESG information regarding our portfolio companies as part of our engagement and proxy voting processes, using information from multiple third-party providers. For example, Dimensional monitors our portfolio companies for the presence of certain non-shareholder friendly governance features such as poison pills, staggered boards and excessive compensation arrangements, and through the close evaluation of announced merger activity, or corporate governance related news. Dimensional also believes there should be clear alignment between the company’s strategy and the incentives used in the company’s executive compensation plans, and Dimensional has developed a process to identify portfolio companies where there appears to be a misalignment between the interests of management and those of shareholders as indicated by pay plans that fail to align executive compensation to company performance. Dimensional may engage with these companies or may take action through proxy voting.
Dimensional’s Corporate Governance Group will communicate directly with the board and management of portfolio companies to understand their approach to corporate governance, including management of material environmental and social factors. In all such communications with portfolio companies, Dimensional’s aim is to seek additional information in the interests of protecting and enhancing the value of the investments of Dimensional’s clients. During such conversations, Dimensional makes clear that material non-public information should not be disclosed to Dimensional in the course of such discussions. If the board or management is unresponsive to concerns raised during discussions, Dimensional may vote against appropriate members of the company’s board in accordance with our Proxy Voting Guidelines.
When prioritizing engagements, Dimensional takes a holistic approach by considering a variety of factors, including a portfolio company’s overall governance profile, recent public ESG controversies, the collective holdings of Dimensional’s clients in the company, recent or upcoming proxy votes, and follow-ups from prior engagements.
For instance, many conversations with portfolio companies are prompted when the companies have not provided sufficient information in their disclosures for Dimensional to assess particular elements concerning the company’s proxy, including but not limited to, executive compensation, anti-takeover provisions, board composition and effectiveness, material sustainability factors, and shareholder proposals. In these conversations, Dimensional prioritizes its questions to hear from companies how the board aligns management and shareholder interests, and protects shareholder value.
Portfolio companies have multiple stakeholders, including other investors, employees, vendors, customers, and the communities in which they operate. Decisions made by the board of a portfolio company can impact a variety of stakeholders and the effect on stakeholders can impact the value of the company. As a fiduciary to our clients, we believe that our role is to be an active owner of our portfolio companies, which includes engagement with portfolio company boards and management. As a long-term investor on behalf of its clients, Dimensional is well positioned to engage with portfolio company boards and management to understand how the effects on these stakeholders are being considered and the policies and procedures the portfolio company has adopted to mitigate potential material risks.
Dimensional will consider communicating with other shareholders (and may consider communicating with other stakeholders) when we believe that doing so is in the best interest of our clients, is likely to maximize the value of their investment, is consistent with our policies and guidelines, and is permissible under applicable laws and regulations.
Dimensional's Proxy Voting Policies have been formulated to encourage our portfolio companies to adopt and maintain corporate governance policies that are consistent with our clients' best interests and the preservation of the value of their investments. Proxy advisory firms provide analysis and vote recommendations in accordance with our Proxy Voting Guidelines for portfolios for which we have proxy voting authority. The Corporate Governance Group is available to contact these proxy advisory firms in the event we question the analysis provided and regularly communicates with personnel from these firms. Although Dimensional may consider the proxy voting recommendations, we remain ultimately responsible for all proxy voting decisions. Dimensional also reserves the right to instruct votes counter to the Proxy Voting Guidelines if we believe that the best interests of our clients would be served by such a vote. Our Proxy Voting Guidelines are available on our website.
Dimensional regularly monitors for, and strongly opposes, the enactment or renewal of poison pills and/or staggered boards. We have a publicly stated view in opposition to the implementation of poison pills and staggered boards and generally any management or governance practices that may limit shareholder ownership rights. Dimensional has a practice to notify portfolio companies that enact these types of provisions that it will vote against all of the members of that company’s board of directors, and those same individuals that are directors at other portfolio companies, since the act of adopting any of these provisions is an act that we believe no director representing the interests of its shareholders should endorse.
In cases of mergers, our governance analysts that are part of our Corporate Governance Group will work with portfolio managers to assess whether a proposed merger is in the best interest of shareholders and take appropriate action. Such action may include the selling of shares, voting for or against a merger and/or sending correspondence reminding the board of directors of the portfolio company to consider the best interests of shareholders.
Dimensional also monitors for related party transactions and executive compensation arrangements that are misaligned with company performance, combining internal screens with analysis from leading proxy research firms and, where appropriate, obtaining explanatory information by communicating with portfolio companies. Dimensional has an established track record of voting against compensation arrangements that fail to align pay with performance, and will vote against the re-election of compensation committee members deemed to be not properly fulfilling the role of pay oversight.
We are generally not willing to become insiders and do not seek to control the companies our clients invest in. In our corporate governance discussions, we instruct that we should not receive any material non-public information.
Our clients are long term shareholders that hold companies for many years and Dimensional monitors the outcomes of engagements using internal tracking tools and third-party services. By having long holding periods, it strengthens our ability to monitor and follow up with companies.
Key engagements and proxy votes are reviewed quarterly by the Corporate Governance Committee.
Information on Dimensional’s portfolio company engagements by topic and geographic region is available on Dimensional’s public website.
PRINCIPLE 4: Institutional investors should establish clear guidelines on when and how they will escalate their stewardship activities.
Dimensional uses several escalation mechanisms in the event it has a concern about a portfolio company's corporate governance practices. If Dimensional has concerns that the corporate governance practices of a portfolio company are not consistent with our clients' best interests and the preservation of the value of their investments, we will vote accordingly and have often dissented from the recommendations of management on proxy matters. As Dimensional's clients together can constitute a large shareholding, we believe that our votes have a voice that portfolio company boards and management are sensitive to.
If negative corporate governance practices persist following the exercise of proxy voting in accordance with Dimensional's Proxy Voting Policies, our Corporate Governance Group may follow up directly with management or the company board to ensure that the company understands the importance we place on good corporate governance.
Another method of escalation is that if we think that the actions of the directors of a portfolio company are not in the best interests of shareholders, we may decide to vote against those directors that lost our trust not only in any proxy for the portfolio company but also in any election for directors at any other company they are, or may attempt to be, directors. We then communicate this decision to the portfolio company and its board.
Separately, we also escalate directly through letter campaigns directed to portfolio companies on specific corporate stewardship concerns. In general, our priority is to escalate in situations where we believe a conflict of interest exists between management and shareholders.
On a broader scale, we escalate general governance matters through our participation at industry conferences sponsored by the Council of Institutional Investors, the Harvard Corporate Governance Roundtable, and Society for Corporate Governance, among others. We believe this platform allows our voice to be heard in a broader manner and may have more impact at an industry level.
PRINCIPLE 5: Institutional investors should be willing to act collectively with other investors where appropriate.
Dimensional is open to dialogue with management and dissident groups. While regulatory concerns may prevent us from acting collectively with other investors, we will consider communicating with other investors in relation to specific portfolio companies when we believe that doing so is in the best interest of our clients, is likely to maximize the value of their investment, is consistent with our policies and guidelines and is permissible under applicable laws and regulations. If we believe that other investors have valid concerns, we may communicate with them to understand their concerns; this may help inform our view of company management.
Dimensional also maintains open lines of communication to listen to dissidents and management, maintaining a monitored email address (firstname.lastname@example.org) for dissidents or portfolio companies to contact Dimensional with corporate governance related material or meeting requests. Dimensional also maintains a staff dedicated to corporate governance matters that is available to communicate with dissidents and portfolio company management and also is available to reach out to portfolio companies as necessary to gather information necessary to make informed proxy voting decisions. Dimensional spoke with nearly 600 portfolio companies in 2018 to better understand their governance practices and to explain our proxy voting policies.
Dimensional may join or participate in events with relevant industry groups.
Dimensional is a member of the Council of Institutional Investors, a voice for corporate governance practices for US companies and strong shareholder rights and protections, and the Harvard's Institutional Investor Forum, which co‑sponsors the Harvard Law School Forum on Corporate Governance and Financial Regulation.
We welcome interested parties to contact us at email@example.com.
PRINCIPLE 6: Institutional investors should have a clear policy on voting and disclosure of voting activity.
It is our goal to vote proxies in a manner consistent with the best interests of shareholders in the vehicles that we manage.
Dimensional seeks to vote (or in certain cases, refrain from voting) proxies for its clients in a manner that Dimensional determines is in the best interests of its clients and which seeks to maximize the value of the client’s investments. In certain cases Dimensional may not receive a solicitation or enough information within a sufficient time prior to the proxy-voting deadline, for Dimensional or its service provider to vote. In some cases, Dimensional may determine that it is in the best interests of clients to refrain from exercising the clients' proxy voting rights. Dimensional may determine that voting is not in the best interest of a client and refrain from voting if the costs, including the opportunity costs of voting, would exceed the expected benefits of voting to the client.
The Dimensional funds may use securities lending as a way to increase performance. For securities on loan, Dimensional will balance the revenue-producing value of loans against the value of casting votes. Dimensional does intend to recall securities on loan if, based upon information in Dimensional’s possession, it determines that voting the securities is likely to materially affect the value of a client’s investment and that it is in the client’s best interests to do so.
Shareholder value also lies at the core of Dimensional’s Proxy Voting Policies. While Dimensional believes that portfolio company management generally acts in the best interest of shareholders, we believe there are situations where the interests of management and shareholders diverge. Anti-takeover measures such as poison pills and staggered boards can serve to entrench boards and management teams by making it more difficult for potentially accretive transactions to take place. Another potential area of conflict is related-party transactions: transactions involving a transfer of value from a company to management and/or affiliates can be difficult to evaluate on their merits and negatively impact stock price by increasing the risk associated the company. Executive compensation is another common area where misalignments between pay and performance can result in a loss of value through excessive management payouts. Our Proxy Voting Policies seek to maximize shareholder value by promoting alignment of management and shareholder interests to the greatest extent possible.
Generally, Dimensional analyzes proxy statements on behalf of its clients and instructs the vote on (or refrains from voting) proxies in accordance with its Proxy Voting Policies. Dimensional generally will not instruct votes differently for different clients unless a client has expressly directed Dimensional to vote differently for such client's account. In the case of separate accounts, where Dimensional has contractually agreed to follow a client’s individualized proxy voting guidelines, Dimensional will instruct such vote on the client’s proxies pursuant to the client’s guidelines. Dimensional may take social concerns into account when voting proxies for socially screened portfolios and accounts and may take environmental concerns into account when voting proxies for sustainability screened portfolios and accounts. Dimensional may also take social or environmental concerns into account when voting proxies for other portfolios and accounts that do not have social or sustainability screens if Dimensional believes that a social or environmental issue may have material economic ramifications for shareholders.
Dimensional's Proxy Voting Guidelines are available on our website and our full Proxy Voting Policies are available to our clients on request. We disclose summary voting results for our Irish UCITS, UK OEICs, US mutual funds and Australian trusts on our regional websites. Summary voting results include number of votes cast by region and topic, as well as percent of management and shareholder proposals supported. A complete history of our voting for Irish UCITS and UK OEICs, as well as for the US mutual funds, Canadian funds, and Australian trusts, is disclosed on our regional websites. For separate account clients we provide reports concerning our proxy voting activity as specified in the client's agreement with us and in accordance with application regulation. As stated under Principle 1 above, we utilize the services of proxy advisors to provide supplemental research and different views to complement ours on proxy matters.
PRINCIPLE 7: Institutional investors should report periodically on their stewardship and voting activities.
We disclose our voting publicly each year as detailed in our statement regarding Principle 6 above. We also provide our clients with periodic updates on our voting activities as called for in our agreements with them. To promote more effective discussions with management, we do not typically disclose our interaction with specific companies.
Dimensional also participates in numerous governance-related conferences, roundtables, and organizations, these include the Council of Institutional Investors and Harvard Corporate Governance Roundtable. In addition to preparing our statement with respect to the UK Stewardship Code, we have a statement with respect to the Japan Stewardship Code and are also signatories to UN Principles of Responsible Investing. Participation in these events and organizations serves as an additional forum to advocate to issuers, other shareholders and regulatory bodies for better governance globally.
Corporate governance and Dimensional’s corporate governance policies and outlook is also a frequent topic at various Dimensional sponsored conferences for institutional investors and financial advisors.
We believe that corporate governance is an important part of an asset manager’s responsibilities; as such we devote a significant amount of resources to our corporate governance efforts each year. There are two separate groups involved in corporate governance at Dimensional: the Corporate Governance Committee and the Corporate Governance Group. The Corporate Governance Committee includes many of the most senior officers and directors of the firm, and is in charge of overseeing the Corporate Governance Group, which is itself responsible for the day-to-day execution of the corporate governance function within Dimensional.
Dimensional's Corporate Governance Group performs monthly checks on its proxy voting process. In addition, as Dimensional uses Institutional Shareholder Services (“ISS”) as a research provider and also as a service provider to submit its proxy voting instructions, the Corporate Governance Group, under the supervision of the Corporate Governance Committee undertakes the monitoring of the proxy advisory firms that is described in greater detail in our response to Principle 1 and reports back to the Committee on these efforts. As part of its ongoing due diligence, Dimensional receives a copy of ISS’ SSAE 16 on an annual basis with respect to the suitability of the design and the operating effectiveness of controls used by ISS in carrying out its services.
1. Dimensional can discuss governance matters with portfolio companies to represent client interests, though Dimensional does not, on behalf of its clients, acquire securities with the purpose or intended effect of changing or influencing the control of a portfolio company and is an investment-only investor.