The Bank of England’s UK Money Markets Code, for example, sets out regulatory best practice standards for UK market participants and states that borrowers should not borrow securities for the purpose of accruing voting rights.
Other resources on the importance of robust corporate governance in stock loans include the International Corporate Governance Network’s Securities Lending Code of Best Practice and the European Fund and Asset Management Association’s Stewardship Code.
An EU directive called the Shareholder Rights Directive II adds additional clarity on how a thoughtful and well-managed securities lending program can be entirely in accordance with a thorough ESG program.
There is one final but significant point in the GPIF statement that has been largely overlooked in the coverage so far. That is the fund’s wish to continue to engage in constructive dialogue with investee companies “not only during the annual shareholder meeting season, but throughout the year.” This intention raises a deeper question: are such proactive investors that wish to be intimately involved in the direction of the companies they invest in suitable candidates for securities lending in the first instance? If investors wish to take an active role in the exercise of proxy rights and directly influence corporate governance, arguably lending out their portfolio may run counter to that goal.
The debate following the GPIF announcement has focused largely on securities finance and whether the practice is compatible with responsible governance, to the exclusion of a wider discussion about the suitability of activist investors to participate in stock lending.
While GPIF has concluded that stock lending may be inconsistent with what it views to be its stewardship responsibilities, the fund’s decision should not be interpreted — as it has by some — as a repudiation of securities finance generally.
That is borne out by another line of the GPIF statement: “The stock lending scheme may be reconsidered in the future if improvements are made to enhance transparency.”
Whether the GPIF stock lending suspension is a one-off or the beginning of a wider reexamination of securities lending, market statistics reveal that the number of asset owners making their portfolios available for lending is actually increasing.
Analysis by DataLend shows that the supply of lendable assets being made available by beneficial owners climbed to $20 trillion in 2019 from $19.5 trillion the previous year.
To put in perspective how swiftly lendable volumes are climbing: inventories only crossed the $17 trillion threshold in May 2017, with equities representing the lion’s share of the recent increase, according to data from IHS Markit.
If nothing else, this suggests that as the fee war among the world’s largest investment firms continues to intensify, ever larger numbers of asset owners are coming to recognize the value securities lending can deliver in generating incremental alpha.
Perhaps the most important consideration for governance-minded beneficial owners is the need to establish a structured and detailed securities lending policy. The United Nations Principles for Responsible Investment (UNPRI) Practical Guide to Active Ownership in Listed Equity highlights eight real-world instances of companies with notable corporate governance- focused securities lending policies.
For example, UniSuper, an Australian asset owner, recalls all domestic stock for voting and determines whether to recall international stocks on the basis of cost/benefit.
BNP Paribas Asset Management, meanwhile, monitors the number of shares on loan prior to a vote. If the firm determines too many securities are on loan or the vote is an important one, it will recall stock or restrict equities lending in order to vote on its position.
“Every beneficial owner needs to develop a thoughtful and defined policy on securities lending,” concludes Paul Wilson, managing director and head of Securities Finance at IHS Markit. “Those that have a well-considered, balanced policy in place will be able to reconcile strong corporate governance and appropriate levels of shareholder engagement with the incremental economic returns from securities lending. Such a framework will allow beneficial owners to fulfill their fiduciary duties to investors and beneficiaries.”